A commercial lease typically outlines who is in charge of repairs, maintenance, and insurance both for rented space and the larger building it’s part of. There are two types of arrangements, each with different repairing responsibilities for tenant and landlord. These are:
A full repairing and insuring lease;
An internal repairing lease.
When landlords or their representatives agree on the main details of a commercial lease with a tenant, they usually provide a document called “heads of terms.” This includes several terms and conditions that might, on the face of it, seem simple and harmless, however, they often require some knowledge that a first-time tenant might not have.
In this article, we’ll cover everything you need to know about a full repairing and insuring lease (sometimes called an FRI lease), including the associated risks and possible solutions for tenants when taking on this repair responsibility.
What is a full repairing and insuring lease (FRI lease)?
A full repairing and insuring lease is a common type of lease for business or commercial spaces in England and Wales. In this type of lease, the tenant is responsible for covering the cost of all repairs, maintenance, and insurance for part of, or all structural parts of the building, including the rented premises’ interior.
As well as being referred to as an FRI lease, these types of agreements are sometimes called ‘clear leases’ because the landlord gets rent without being responsible for any of the building’s upkeep or insurance costs.
FRI leases are more common when tenants rent out an entire building, or the rental period is very short. Usually, in properties with multiple tenants, landlords manage repair in shared areas and recover costs through service charges.
Who carries out repairs under an FRI lease?
Under an FRI lease, tenants usually take care of interior repairs, while the landlord handles external structures and insurance for the premises. That being said, it is the tenant’s responsibility to repay the landlord for these costs.
Do landlords have to find the best price for insurance premiums under an FRI lease?
No, under an FRI lease, the landlord isn’t obligated to find the cheapest insurance provider. They have the freedom to choose any reputable insurance company they prefer.
What are the risks of a full repairing and insuring lease?
Something tenants may not realise when taking on an FRI lease is that they are required to keep the property in repair. This means they must fix things up, even if they were in disrepair before they started the lease.
Many tenants mistakenly think their responsibility only lies in returning the property to the same condition they got it in. But that’s not accurate. Put simply, if something goes out of repair during the lease, or before it, the tenant is responsible for fixing it during the lease term.
When a commercial lease comes to an end, or even afterward, the landlord will check the property and provide a list of repairs called a terminal schedule of dilapidations. This list outlines all the areas that need fixing and calculates the cost of the repairs, including lost rent during the repair period. Usually, the landlord will aim to agree on payment from the tenant rather than have them make the repairs themselves. As you might imagine, this payment can be quite high!
Example
A tenant leased a retail unit with full repair responsibility. When they took on the lease, the shop had a roller shutter but it didn’t work (i.e. it was out of repair). By agreeing to the full repairing obligation, the tenant accepted that it was their responsibility to fix the shutter, but didn't, working on the assumption that because it was broken beforehand it wasn’t theirs to fix. However, at the end of the lease, the landlord demanded the tenant repair the roller shutter at a hefty cost to the tenant.
How can tenants reduce their liability in a full repairing and insuring lease?
The more a tenant thinks about their obligations for repairs at the start of the lease, the better position they’ll be in when discussing the schedule of dilapidations at the end of the lease. A commercial property solicitor can check the lease wording to help avoid the inclusion of difficult terms and reduce liability for damages that may be covered by insurance.
Other ways a tenant may be able to reduce their repair responsibility include:
Arranging an independent survey
The common pitfall of FRI leases outlined above emphasises the importance of a thorough independent survey to identify defects upfront and be used to reduce the tenant's liability in the long run.
Be clear on how the property is defined
How the property is defined in a lease is important, as it says what parts of the property the tenant is responsible for. In some cases, the repairing obligation applies not just to the interior of the commercial property but also to the structure, including the roof.
Being clear on how the property is defined can help tenants know for sure which elements of the property they are responsible for, especially if they’re only leasing a part of the building.
Create a schedule of condition
A ‘Schedule of Conditions’ can act as protection against potential claims from the landlord for future property damage. It’s essentially a photographic record of the property’s condition at a specific time, and it should capture any flaws or issues before the lease begins. What’s more, if it’s attached to the lease, the tenant may only need to fix and decorate the property to match the condition in the schedule at the end of the lease.
Without a Schedule of Condition, there’s no proof of the property’s initial condition.
Negotiate repair responsibility
Sometimes, a tenant can negotiate better terms with a landlord and remove responsibility for fixing things already in disrepair. This can be an effective way to save costs in the future and a viable alternative to having a schedule of conditions.
What is an internal repairing lease (IRL)?
Under an internal repairing lease, the tenant is responsible for maintaining things like internal finishes and fixtures, while the landlord takes care of the building’s exterior and structure.
Tenants are also liable to pay service charges, which cover their share of the repair costs handled by the landlord. This is a common arrangement when renting a commercial space in a larger property with multiple tenants or for short-term rentals.
Get advice on full repairing and insuring leases
Whether you’re a commercial landlord or tenant, you should speak to a commercial property solicitor before agreeing to any terms. Commercial property leases can be complex and wordy, and a skilled solicitor can help you spot any challenging conditions or restrictions that might come back to haunt you further down the line.
At Lawhive, our network of experienced solicitors is here to help both landlords and tenants draft and negotiate the best possible terms for their commercial leases. For more information and a fixed fee quote, get a free case assessment today.