PITFALLS OF A SCHEDULE OF CONDITION
Tenant’s regularly fail to understand the liability they create when they sign a commercial lease.
All too often at lease expiry tenant’s say ‘the space is in better condition now than when we took occupation…..’ Often that is correct, but tenant’s fail to understand the terms of their lease.
Most commercial leases require tenants to ‘put and keep’ a property in repair. Under the law of dilapidations to ‘keep in repair’ means that a tenant must first ‘put’ the property in to repair in order to then ‘keep’ the property in repair.
The main case that the courts tend to go back to is Proudfoot v Hart (1890) which, broadly stated that if the property was in disrepair at the start of the lease, then the tenant would be under a responsibility to put the property into repair and keep it that way.
Schedules of Condition
So how does a tenant protect themselves from having to ‘put’ a commercial property into repair?
The answer is for a tenant to record the condition of the property at lease commencement and then not to be obliged under the terms of the lease to ‘put’ the property into any better state of repair during or at lease expiry. In order to do this a report is prepared which is called a ‘Schedule of Condition’.
This limitation would need to be agreed by the landlord at the outset of negotiations and can often be a highly negotiated point.
What is a Schedule of Condition?
A schedule of condition is a record of the condition of a property at a certain moment in time.
The report does not comment on the cause of a defect, nor is its purpose to advise on the remedial works required. A schedule of condition is merely a statement of fact.
The report is usually prepared by a Building Surveyor with assistance from a Mechanical and Electrical Consultant depending upon the type of property. The report contains both photographs and text describing the condition of the property at the time of the inspection. Although there is no set format, the surveyor will decide on how it should best be drafted to suit its purpose.
In most cases, the schedule of condition will be prepared by the tenant at their cost and agreed by the Landlord.
The document is then attached to the lease as a record of the condition of the property. The tenant’s repairing obligations in the lease should then be drafted to ensure that the tenant is not obliged to ‘put’ the property into any better condition than evidenced by the schedule of condition.
Sounds simple, but there is a lot which often goes wrong.
If a commercial property is not in full repair at lease commencement, then a schedule of condition will help to significantly reduce a tenant’s potential dilapidation liability both during and at the end of their lease.
Under the terms of a commercial lease a tenant has repairing, redecorating and reinstatement obligations, in addition to any specific obligations.
It is important that a tenant understands these obligations and how a schedule of condition can limit dilapidation liabilities.
Here are some common pitfalls:
• Often, although referenced in the lease a schedule of condition is never prepared.
• Equally, it is common to find that when a schedule of condition has been prepared, it has not been referred to within the lease.
• When a schedule of condition has been prepared and is referred to in the lease it is often not attached to the lease nor is it adequately referenced so a copy can be obtained from the party responsible for compiling the report. To ensure that a schedule of condition can be traced we advise solicitors to correctly reference the report in the lease, i.e Schedule of Condition prepared by [Company] dated [date]
• Often schedules of condition have been inadequately prepared and do not record the condition of all property elements. For example, the condition of mechanical and electrical installations which fall under a tenant’s repairing obligations are often overlooked and site areas and roofs are often not inspected.
• Frequently on longer leases the schedule of condition is only available in black and white and as a consequence the photographs contained therein are of limited value. If the report is referenced in the lease both parties should retain electronic copies.
• The level of detail contained in the schedule of condition should be commensurate with the length of lease. Shorter leases require more detail reports, longer leases may only require photographs.
• Where a schedule of condition contains photographs, we sometimes find that there is no record of where the photograph was taken. We encourage our clients to have plans / sketches appended to the report so the location of defects is abundantly clear making reference to their location much easier in the future.
• Schedules of condition can sometimes be incorrectly referenced in a lease by a solicitor. A schedule of condition should limit a tenant’s repairing and their redecorating obligations.
• Often, leases are drafted which contain ‘specific obligations’ on a tenant which sit outside of the drafting of the repairing or redecorating obligation. This will give raise to a dilapidation claim in the future, for example an obligation to clean or a specific obligation to replace the floor finishes at lease expiry. Tenant’s can be fooled in to thinking their liabilities are limited to a schedule of condition when their lease contains specific obligations.
• A claim for dilapidations will arise if it can be shown that further deterioration has occurred during the term of the lease. A schedule of condition will record the condition at a moment in time, but tenants and solicitors need to accept that all building elements deteriorate over time and despite a schedule of condition further deterioration can occur which will give rise to a dilapidation claim.
• A tenant needs to understand the condition of the property at lease commencement, and not simply record the condition. For example if the roof is leaking at lease commencement and this is recorded in the schedule of condition, this will be of little benefit if a tenant needs the property to be wind and watertight.
• Some building elements will deteriorate rapidly, for example cut edge corrosion on an industrial unit roof. If left unattended for 5 – 10 years it is quite possible that complete roof replacement could be required over this period. A schedule of condition in these circumstances will not protect a tenant. We encourage our clients to thoroughly inspect the property, by way of a building survey for larger properties, to identify building defects which may need attending to by the landlord before a schedule of condition is agreed.
• Most schedules of condition are based on a visual inspection only, therefore other hidden defects may not be revealed and recorded. We often recommend intrusive inspections of mechanical installations and test certificates be appended to the schedule of condition to record the condition of the building services. Defects with mechanical and electrical elements can often amount to as much as 40% of a landlords claim.
Whilst a Schedule of Condition can limit a tenant’s repairing obligations, tenant’s still need to appreciate the need to undertake periodic maintenance to prevent further deterioration and that building elements will deteriorate over time. A schedule of condition will not absolve a tenant from all their repairing obligations.
Dilapidation disputes are quite common. OBI are trained at preparing schedules of condition, we also understand the law of dilapidations.
If you require any further information, please contact a member of the OBI Building Consultancy Team.