A properly prepared schedule of condition is the perfect complement to a lease on commercial premises, advises Rory Addison Smith who, in his time in practice, has seen tenants count the cost of not having one.
A schedule of condition is a document recording the condition of the premises at lease commencement and is appended to the lease. While it is not compulsory to have one, tenants taking on a lease on full repairing terms without a professionally prepared schedule can be risking future dilapidations claims and liabilities at lease expiry. These can be costly and time consuming activities which can take tenants away from their core business and involve them in lengthy negotiations.
This is an avoidable situation if professional property advice is sought before agreeing lease terms. The purpose of this advice is to identify the current condition of the building and, hence, the anticipated extent of the tenant’s liabilities during and at the end of the lease term. If appropriate, a schedule of condition can then be prepared to limit the tenant’s liabilities. In addition, the schedule will help the tenant to understand repairing and other obligations in respect of the fabric and services of the premises within, during and at the end of the lease term.
For example, short term leases of three to five years are common. Therefore, a tenant entering a five year lease where the roof is in a relatively poor condition could result in the tenant being responsible for its replacement if the roof deteriorates beyond the point of repair.
A schedule of condition can identify ongoing or potential problems and, where relevant – and with the agreement of both parties – defensive measures can be put in place as part of lease negotiations to protect the tenant’s interest.
The structural elements of a building are the obvious starting point to a qualified, experienced property surveyor in the preparation of a schedule of condition in a way they won’t be to a lay person. These elements are often the ‘big ticket’ items when it comes to repair and replacement.
Many fibre cement roofs – a popular material for roof construction in the 1980s – are now coming to the end of their life 40 years down the line. The manufacturing process of metal roof sheets – common in commercial units – can lead to corrosion through exposure to the elements down the years. For example, nesting wildlife can damage roofs and guttering.
Often the exposed steel frame in industrial buildings remains undecorated for many years and the cost of redecorating would be significant. We have recently prepared a schedule on a 100,000 sq ft industrial unit where the decorating covenant was not qualified and the steelwork had not been decorated for some time. In our preparation of a schedule of condition, prior to lease terms being agreed, we identified this and were able to ensure there was no obligation on the tenant to redecorate the steel frame at lease expiry.
Poorly prepared schedules of condition can prove problematic too. Examples of problems we have encountered down the years include: poor quality photographs which do not clearly show pre-existing defects; insufficient number of photographs showing generic views and not illustrative close-ups of individual defects; the absence of original digital photography held on file with reliance on colour copies of original prints which have faded over time; a misplaced or lost schedule of condition.
We have had a number of instances where, notwithstanding that the lease referred to a schedule of condition, on further investigation it turned out that no schedule had ever been prepared.
This is by no means an exhaustive list of why a properly prepared schedule of condition is vital to protect property and lease interests of the tenant but, hopefully, this overview illustrates the importance of understanding the potential liabilities of a tenant on entering into a full repairing lease.
Early professional advice can avoid expensive liabilities at lease expiry.