Posted: Thursday 2 August 2012
Short Full Repairing and Insuring Leases – Why?
By Hugh Angus
A few months ago I wrote a short blog questioning whether a full repairing and insuring lease was really the best document for a short-term lease. In the Estate Gazette on 21 July Darina Kerr and Alan Wernham of Dundas & Wilson discussed the topic.
Let us remind ourselves what a full repairing and insuring lease means. The tenant is responsible for repairing, maintaining, renewing and rebuilding the property. The only risks that are retained by the landlord are those which are to be insured against by the landlord to the extent that cover is available. Shortfall has usually been the landlord’s responsibility. In more modern leases if there is damage by an uninsured risk either party may be able to terminate. If there is damage by an insured risk the property is to be reinstated in substantially the same form.
Here are some reasons why I think a short lease should rarely be on full repairing and insuring terms.
- The cost of rectifying uninsured damage may be too great for the tenant to bear, so in reality the landlord has not transferred the risk.
- For tenants the property is not their core business or skill and they would rather that risk was kept by a landlord even if in a more landlord-friendly market there was a price for that.
- How often will either party want reinstatement? A tenant would rather find somewhere new to trade from. The landlord might prefer to use the insurance proceeds to improve and redevelop that or another property.
- It may not ever have been practical to reinstate. The most common example of this that I see is in traditional Scottish tenement buildings. Rarely do the titles make reinstatement a practical option without the agreement of and co-operation from the owners of all the interests in the tenement at the time of destruction. On the occasions we have been involved in this situation no-one has wanted to reinstate in exactly the same form, which was just as well as that would have been in breach of building regulations.
Of course the move to shorter leases with the landlord taking on more repairing obligations leads to different issues.
- Just as a lease making a tenant responsible for repair does not mean a property is repaired so making the landlord responsible does not mean the landlord will comply.
- There are insolvencies among landlords as well as tenants.
- The Government moved away from the internal repairing leases because of the practical difficulties in forcing landlords to carry out their maintenance obligations. Although that risk is lower in a short-term lease it is still there.
- The choice of landlord as well as property could become important. There would be the opportunity for more landlords to build up a brand.
- Landlord’s returns would have a greater income component – how would lenders view this?
- As with any market change, will the rewards come to the early adopters or those in the second wave?
