Dealing with repairs at outset
For an occupier it is important to avoid adopting a potentially onerous repairing liability at commencement of a lease.
The most common way an occupier can limit their obligations is by recording the property’s state of repair prior to the lease commencement in a Schedule of Condition. To be effective, this schedule must be agreed by both parties and annexed to the lease. These schedules provide a snapshot of the condition at commencement and are by no means infallible. The level of detail provided by the Schedule of Condition and subsequent deterioration during the term will determine liability in line with the wording of the lease.
A common misconception is that if a particular part of a property is in disrepair at the start of a lease, repairs are not required for that element. This is rarely the case: a tenant is often required to make good or ‘put into repair’ that element. If repair of the element is not possible, many leases require the occupier to renew it.
Repairs: during a lease
An occupier will also need to decide how much it would be prudent to set aside during the term of the lease to finance repairs on termination. Dilapidations is a relevant matter under International Accounting Standard 37. The Financial Reporting Standard 12 allows for future repairing liability to be treated as an expense, which can be included within the profit and loss account of the firm. It will then be excluded from the company’s tax computation until it is incurred.
Repairs: lease break
Some leases allow tenants the option to exercise a break clause after a specified period of time, but before the lease expires, for example an occupier might be able to break a 10 year lease after five years. Often a landlord will put conditions on a lease break such as vacant possession, payment of rent and full or material compliance with the repair and decorating covenants. If a tenant fails to comply with the break conditions, then the option will be invalidated.