What Landlords and Tenants Need to Know
If you're agreeing a commercial lease, particularly on an older property, the condition of the building is something worth discussing at the beginning rather than leaving until the end.
A property doesn't always need to be handed over in perfect condition to make a good letting.
Sometimes a landlord has a unit that needs work and an incoming tenant has a clear plan for fitting it out and improving it.
That can work perfectly well for both sides.
The important thing is agreeing what condition the property is being handed over in, what work the tenant is taking on and what condition the landlord expects the property back in at the end of the lease.
That's where a Schedule of Condition can come into the conversation.
What is a Schedule of Condition?
A Schedule of Condition is a record of the condition of a property at a particular point in time, normally around the start of a lease.
It will usually include photographs together with written descriptions recording things such as the condition of walls, ceilings, floors, windows, roofs and other parts of the property.
It gives the landlord and tenant a record of what was there at the beginning.
But taking a few photographs on your phone before moving in isn't the same thing as having a Schedule of Condition properly dealt with as part of the lease.
If the intention is for the Schedule to affect the tenant's repairing obligations, the lease needs to reflect that agreement properly.
Why does it matter with an FRI lease?
Most commercial leases we deal with in Scotland are on a Full Repairing and Insuring basis, normally referred to as an FRI lease.
The repairing obligations in an FRI lease can be significant.
Depending on the wording of the lease, a tenant can potentially be required to put a property into a better state of repair than it was in when they took it.
This is one reason a tenant taking an older property may ask for a Schedule of Condition to limit the repairing obligation.
From the tenant's point of view the question is understandable.
Why should we be responsible for improving defects that were already here when we moved in?
But there is another side to that conversation.
A Schedule of Condition isn't automatically right for every deal
If we're acting for a landlord, we also need to understand what they're trying to achieve.
A landlord may have a property that needs work and would rather agree a deal with an incoming tenant who has a viable plan to refurbish and improve it.
In that situation, agreeing that the tenant never has to return the property in any better condition than it was at entry might not reflect the commercial deal the landlord wants.
That doesn't make either side right or wrong.
It means the condition of the property needs to form part of the negotiation.
What is the tenant taking responsibility for?
What is the landlord retaining responsibility for?
What works is the tenant proposing?
What condition is the property expected to be in at the end?
These are much easier conversations to have before the lease is signed than several years later.
What about a rent free period?
This is where the condition of a property can become part of the wider commercial deal.
Let's say a property needs a reasonable amount of work.
The landlord could carry out the works before letting it.
Alternatively, an incoming tenant might have their own plans for the property and be prepared to carry out an agreed programme of works themselves.
In that situation, the parties might agree a rent free period or another incentive which reflects the condition of the property and the works the tenant is taking on.
That can work for both sides.
The landlord gets the property occupied and potentially improved.
The tenant gets some breathing space while carrying out the works and getting the premises ready for their business.
But everyone needs to be clear about what has actually been agreed.
If a rent free period has been negotiated with particular works in mind, those works should be understood before the deal progresses.
Fit out and repairs aren't necessarily the same thing
This is another area where it's worth being clear.
A tenant fitting a new kitchen, installing flooring, building treatment rooms or carrying out a shop fit isn't necessarily the same as accepting responsibility for every existing defect in the building.
Equally, a landlord agreeing to alterations doesn't necessarily mean those alterations can simply be left in place when the lease ends.
There can be separate obligations dealing with repair, decoration, alterations and reinstatement.
That's why the Heads of Terms, agreed works and lease documentation all need to reflect the deal everyone thinks they've agreed.
Can a Schedule of Condition help a landlord?
Yes.
Although Schedules of Condition are often discussed as a way of limiting a tenant's repairing liability, having a clear record of the property's condition at the beginning can also be useful to a landlord.
If there's a disagreement several years later about whether damage was already there or happened during the tenancy, having a proper record is considerably better than everyone trying to remember what the property looked like years earlier.
The important point is that the existence of a Schedule doesn't by itself tell you what the tenant is responsible for.
You still need to look at the lease.
What happens at the end of the lease?
This is where the decisions made at the beginning can become very important.
Towards the end of a commercial lease, the landlord may inspect the property and identify items where they believe the tenant hasn't complied with their lease obligations.
This is generally where dilapidations come into the conversation.
A Schedule of Condition and a Schedule of Dilapidations aren't the same thing.
The Schedule of Condition records the condition of the property, usually around the beginning of the lease.
A Schedule of Dilapidations identifies alleged breaches of the tenant's lease obligations and the works that may be required as a result.
The two can become closely connected if the condition of the property at entry is relevant to the tenant's repairing obligations.
Who should prepare the Schedule of Condition?
For anything other than a very straightforward property, we'd normally expect the parties to consider getting appropriate professional advice.
A building surveyor can inspect the property and prepare a detailed photographic and written Schedule of Condition.
The solicitors can then make sure the lease reflects whatever the landlord and tenant have actually agreed.
Our job at IME is different.
We're looking at the commercial deal.
If the property needs work, that's something we want to understand when we're discussing the rent, rent free period, repairing obligations and Heads of Terms.
If a landlord is expecting the tenant to improve the property, that needs to be understood.
If the tenant is expecting their liability to be limited to the condition at entry, that needs to be understood as well.
Then the surveyors and solicitors can deal with the detail properly.
Get the conversation right at the beginning
We've seen plenty of commercial properties where a Schedule of Condition makes sense and others where the landlord and tenant agree a different approach.
There isn't one answer that works for every property.
The important thing is knowing what you're agreeing to.
If the property needs work, who's doing it?
Who's paying for it?
Has that been reflected in the rent or rent free period?
What is simply the tenant's own fit out?
What condition does the landlord expect the property returned in?
And does the lease actually reflect the commercial deal everyone agreed?
Those are the questions worth asking at the beginning.
Think about the condition you're expecting the property back in before you agree the condition you're handing it over in.
IME has been dealing with commercial property in Edinburgh since 1994, working with landlords and tenants across the city.
If you're considering letting your commercial property, or you're looking for premises for your business, speak to the IME team.
The right deal needs to work for both sides.
Useful information
RICS: Dilapidations in Scotland
Professional guidance covering dilapidations and commercial lease obligations in Scotland.
Law Society of Scotland
Information on finding a Scottish solicitor with commercial property expertise.
Important: This article is a general commercial property guide and isn't legal or surveying advice. Repairing obligations depend on the wording of the individual lease. Landlords and tenants should take appropriate legal and surveying advice before agreeing lease terms.