It did get me thinking though that taking comfort in acronyms isn't the unique preserve of the young and that professionals frequently use abbreviations without a thought for those less familiar with the relevant topic. One of the most beloved acronyms of commercial property lawyers is the FRI Lease, or "Full Repairing and Insuring Lease" to give it its Sunday name. The "I" part, ie regarding insuring, will be touched upon here but is really a fuller discussion for another day. It is however worth giving the "FR" part a bit more thought and to ponder whether there really is such a thing as a tenant full repairing obligation any more in the current market.
Off loading the wind and watertight obligation
In terms of Scots common law, landlords have a duty to keep their premises wind, watertight and safe. Not surprisingly most landlords, aiming to maximise the return from renting out their property, seek to keep overheads to a minimum and therefore try to pass on this obligation to their tenants in terms of a tenants' repairing obligation in the lease.
This is the starting position that confronts most commercial tenants so it is worth considering what sorts of qualification can be made to dilute this potentially onerous full repairing obligation.
Economic realities and shorter lease lengths have changed the negotiating landscape
Over the last few years, the poor economic conditions have resulted in a shift towards the tenant in the balance of power in many lease negotiations, and also in a reduction in the average lease duration. The 25 year FRI lease of the 1980s is virtually extinct. Most leases now are much shorter, often no more than 3 - 5 years, or perhaps 10 years but with a break at year 5.
Such shorter duration leases make it double difficult for landlords to justify pushing the responsibility for maintaining the structure of the building onto the tenant.
Excluding insured risk damage and damage caused by the landlord
Even when leases were commonly for 20 to 25 years and tenants' negotiating positions were not very strong, two tenant qualifications were standard and would generally be accepted by landlords.
The first of these would relate to insured risk damage - which tenants should exclude from their obligations. Alluding back to the "I" of the "FRI" as promised, the normal state of affairs for a commercial lease in a stand alone building is that the landlord will insure the property against damage and the tenant meets the cost of the insurance premium. It seems equitable therefore that if the tenants are paying for the insurance, they should not be doubly penalised if there is damage by an insured risk which will of course be covered by the insurer. Landlords will generally accept such an exclusion - with the important exception that if the insurance payout is withheld because of something the tenant has done, then the tenant will still have to foot the bill.
This exception seems equitable, as indeed does the second commonly made, and accepted, qualification, ie that the tenant should not be liable for any damage that has been brought about by any wilful or negligent act of the landlord or its agents.
Tenants resist liability for latent or inherent defects
A third qualification is also frequently seen in a commercial lease repairs clause, although its inclusion will often depend on the age of the property in question. In a lease of a relatively new building, a tenant may try to exclude liability for any damage caused by a latent or inherent defect - in other words a fault in construction or design of a building - and to push this back onto the landlord.
In older buildings this may be less of a concern - as if there was to be any such defect, it's likely to have become obvious or patent by now.
A landlord will be more inclined to accept this exclusion if it has a legal remedy against the contractor who constructed the building, usually in the form of a right under the building contract or a collateral warranty. It is always worth the tenant asking whether these rights exist and if so to provide that the landlord will take all reasonable actions to enforce such rights or, in certain cases, have them assigned to the tenants.
At a practical level however, particularly for multi-occupancy properties, the best protection for both landlord and tenant is often a latent defects insurance policy - should such be available.
Tenant's liability restricted to returning the property as it found it?
There are other steps which a tenant can take to limit its liability. One such step would be to exclude responsibility for any external elements of the property e.g. roof and external walls - this taking us neatly back to our acronyms by converting an FRI into an "IRI" or "Internal Repairing and Insuring" lease.
Many landlords won't accept such a drastic restriction. If the landlord is insisting that the tenant take on some liability for the structural and/or external parts then the tenant can still do things to make the obligation one that is reasonable from a tenant's perspective.
Best practice (certainly when taking on a lengthy lease of a single occupancy property) would always be for a survey to be carried out which may identify certain existing material wants of repair in a property. The tenant could then seek to exclude such existing material deficiencies from the tenant's repairing obligation. Such might include e.g. damp or dry rot in the basement of a premises.
Whether the property is single or multi-occupancy, another way to limit the tenant's liability is to restrict it to returning the property to the landlord at the end of the lease in no worse condition than it was at the start of the lease, with that condition being documented by a combination of written descriptions and photographs - together known as a "Schedule of Condition". So this would be a refinement of the exclusion only of material wants of repair - to exclude any existing deficiencies, even those of a minor nature.
Whilst these two types of liability restriction sound fairly simple, there are other issues to be considered and covered in a repairing clause that features a material deficiencies exclusion or a Schedule of Condition limitation e.g:-
- Is there a positive obligation on the landlord to do what the tenant does not have to do or does no one have the fix the relevant defect? Placing a positive obligation on the landlord could be particularly important to the tenant if e.g. the tenant does not have to fix a defect in the roof, but when it rains the water is pouring into the tenant's unit; or
- Who is responsible if the condition of the property gets worse during the lease period due to a defect that was already there at the start of the lease? Does the tenant have to fix that deterioration or can it hand back the property at the end of the lease in the poorer condition because the deterioration was caused by the pre-existing defect?
No two situations are the same
Of course, each property and each lease negotiation is different and various factors always will need to be taken into account, for example the relative negotiating strengths of the parties, the demand for the accommodation, the duration of the lease and the nature and current condition of the property.
However, generally at the moment tenants have much more power than they had in the past and in the relatively humourless world of commercial leasing, if that is not enough to make a tenant LOL then not much will.