what is a full repairing and insuring lease?
If you are thinking about leasing a commercial premises in Ireland there are a number of key areas you need to consider before going ahead.
Depending on the length of the term of the lease, typically where it is for more than 5 years, the tenant will be offered a full repairing and insuring lease (“FRI Lease”) by the landlord. This is a lease in which the tenant takes on all of the costs for repairs and insurance for the property being leased from the landlord.
A landlord's solicitor typically drafts the lease and by in large they tend to be heavily drafted in the landlord's favour. It is for this reason that if you are considering taking a commercial lease that you always engage a solicitor to review it on your behalf.
Below are a number of areas to watch out for in the FRIlease:
The common misconception that we often see is that a tenant believes that they only have to give the property back to the landlord in the same condition in which they took it. This is not always the case and the terms of the repair and yield up clauses in the lease should be reviewed carefully. A landlord friendly FRI lease may require the tenant to take on complete responsibility for repairs, even if:
- that tenant was not responsible for the state of repair of the property from the outset of the lease; or
- if the disrepair already existed when the lease was granted.
The FRI lease of an entire building normally requires the tenant to repair both the interior and the exterior of the property. In a multi-let property such as a Shopping Centre, the tenant is likely to be indirectly responsible for a portion of the exterior repairs by way of a service charge.
When taking a lease of an old building, it is advisable for tenants to have a full survey of the premises carried out and have a schedule of condition attached to the lease. This involves a surveyor preparing a report of the condition of the premises (typically including photos) and which is appended to the lease.
The lease is then amended to contain a clause that the tenant is not liable to put the premises in a better state of repair than is evidence by that schedule of condition.
2. yield up
As the lease approaches its end or even after the term has ended, generally a landlord will inspect a property to serve a schedule of dilapidations on the tenant. This schedule lists all items of disrepair in the property and will quantify the cost of carrying out the repairs, including a calculation of lost rent for the period during which the repairs are carried out.
Given the potential expense and the necessary work which a schedule of dilapidations may place on a tenant, this can often be a contentious issue. The landlord’s intention will be to agree a payment in lieu of repairs and it is not unusual for this figure to be quite high. There are no hard and fast rules if they have not been included in the lease however it will involve the landlord's surveyor and the tenant's surveyor negotiating a settlement.
Clearly, the more a tenant has considered its obligations at the beginning of the lease, the better placed they will be when it comes to handing back the property and agreeing a dilapidations payment (if any)!
In a full FRI lease, the landlord effects the insurance on the property and then recovers the insurance premium from the tenant. The tenant should be wary of risks that the landlord is insuring against and whether the building is insured for reinstatement value or cost. If the building burns down, is there an obligation on the landlord to reinstate it? Do the tenant's rental payments stop in this instance? Is the tenant tied into the lease until such time as the property is reinstated? What happens if the landlord can't reinstate the property? These are all questions which the tenant should consider.
A tenant should also consider insuring against public liability, employers liability, plate glass and contents which are not typically dealt with in the FRI lease.
4. break option
A break clause in a lease is a provision entitling either party to determine the lease prior to expiry of the contracted term usually by the service of notice in advance (although landlord friendly leases typically have a lot more conditions). The terms of a break clause are a matter of commercial negotiation between the parties and their advisers however it should be noted that break clauses are always construed very strictly, and if (as is usually the case) the break clause is subject to the fulfilment of certain conditions, the Court will usually treat those as conditions precedent which must be strictly complied with for the break clause to be exercised validly. For example, if a tenant was to serve a break notice late, the landlord may have an argument that the break option is no longer exercisable thereby requiring the tenant to continue with the lease to its expiry.
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We have extensive experience in dealing with all matters relating to commercial leasing acting for both landlords and tenants. For specific legal advice on commercial leases and any other Landlord and Tenant issues, then please get in touch today.
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