Commercial lease: Do I need a schedule of condition?

What is a Schedule of Condition?

The terms of a lease determine a tenant’s obligations to repair and maintain commercial premises. Broadly, leases are either full repairing and insuring (an ‘FRI lease’) or internal repair only.

FRI leases mean the tenant is responsible for the full cost of repairing and insuring the entire property. That includes the structural parts, such as the roof, walls, and foundations. Conversely, internal repair leases mean the tenant is only responsible for the property’s internal parts, such as the surfaces of the walls, floor, and ceiling. But whichever is in place, it’s crucial for the landlord and tenant to agree on the property’s condition at the outset to ensure clarity over responsibility for repairs, thereby avoiding disputes.

The parties document their agreement in a Schedule of Condition. Ideally, the Schedule should be a detailed written and photographic report prepared by an experienced surveyor, clearly identifying the property’s precise state of repair and condition immediately before the tenant takes up occupation. The Schedule forms part of the contractual agreement between the parties.

Legally, do I need a Schedule of Condition?

While there is no legal obligation to include a Schedule of Condition, entering a contractual relationship without one is very unwise.

Most commercial leases require the tenant to ‘put and keep’ the property in repair. This means that the tenant must first ‘put’ the property into repair and then ‘keep’ it as such. The vintage but still leading authority is the case of Proudfoot v Hart (1890), which broadly states that if the property is in disrepair at the start of the lease, the tenant is responsible for putting it into repair and keeping it that way.

However, a well-drafted Schedule of Condition, referencing the lease’s repairing covenants to the surveyor’s detailed findings on the ground, is the perfect legal tool for delineating the extent of a tenant’s liability. Don’t forget that the balance of power in lease negotiations often rests with the tenant.

In addition to new leases, a Schedule of Condition is also commonly prepared before:

• lease assignment or sub-letting.
• construction work or renovations, e.g. as part of a Party Wall agreement.

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“A good and substantial state of repair and condition”

Many tenants I encounter believe they need only hand back commercial premises in a similar condition and state of repair as when they first took the lease. But, typically, repairing obligations require a tenant to return the premises in a good and substantial state of repair and condition. And that can mean the tenant putting the property into a better state of repair and condition than when they took up occupation. This can have significant financial implications for the tenant and is a particularly bitter pill to swallow if the property was in a poor state to begin with.

This underlines the importance for a tenant (before committing themselves to a lease) of:

• ensuring they thoroughly assess the property’s state and condition; and
• check and fully understand the extent of the repairing liabilities.