It is typical for a tenant to attempt to reduce their dilapidations liability under a commercial lease by making reference to the state of the property at the beginning of a lease. When this happens, a tenant may often claim that their only obligations under the terms of their lease are to maintain the property in the manner described in a "schedule of condition."
The Schedule of Condition is an accurate property report completed at the start of the lease. The schedule is a detailed record of the condition of the property's situation as of a specific date that can be used as a standard by which its condition can be judged going forwards until the lease expiry. The schedule may be used to identify any repairs required to reinstate the condition of the property to the standard required.
It is recommended that you hire an unbiased building surveyor to create a schedule of conditions. Before signing a lease the opposite party should also agree that the schedule accurately represents the condition of the property. If you seek advice from a chartered surveyor at the commencement of the process then when you issue a schedule of condition, the schedule will usually be more credible in the event of a future disagreement on whatever state of disrepair the property has experienced during the lease.
Many tenants are unaware that the landlord will want the building to be in the same condition at the termination of the lease as it was at the date of the lease commencement. A schedule of the property's condition, which is essentially a baseline of a building's status, should be created and approved at the beginning of the lease in order to avoid any complications.
So far, everything seems simple. However, establishing that not all leases with a schedule of conditions impose the same obligations on the tenant. The Three Most Important considerations are listed below:
Consideration #1. Does the schedule simply limit a tenant's duty to repair, renew, and rebuild, or does it also restrict all of the tenant's duties? If simply limiting, the schedule of conditions' contents won't have any effect on other responsibilities a tenant has regarding the physical condition of a property such as a requirement to beautify the property's interior and exterior on a predetermined interim schedule.
Consideration #2. Is the tenant required to maintain the property in the condition indicated by the schedule of condition or is the tenant only required to prevent it from deteriorating? Even though the Scottish courts have not yet commented on this distinction, it might be significant. The standard of repairing liability established in the lease is often "good and substantial repair". This standard being breached or a similar violation where the commercial property requires to be in better condition is the typical reason for when a tenant is required to make repairs. However, if a tenant is required to keep the premises "in no worse condition than evidenced in the schedule of condition," then it is debatable whether or not this triggers the tenant's obligation to carry out these repairs whenever the condition of a particular part of the commercial premises falls below that indicated in the schedule of condition, even if doing so would not cause the premises as a whole to lose their status as being in "good and substantial repair." This may result in situations where landlords and tenants seek advice on whether terms at the end of a commercial lease have been breached.
Consideration #3. Significant uncertainties can still exist even if a schedule of conditions restricts all duties under the lease term and is expressed that restrictions require the tenant not to improve the premises beyond what is demonstrated and prohibiting alteration. It can be physically difficult to fix the lack of repair if a portion of the premises does not meet the required standard of repair without improving the condition of the premises as a whole. For example, a surveyor may notice scuff marks on a wall which subsequently deteriorate and needs to be repainted. Or the schedule can mention a window frame that is flawed but eventually deteriorates and needs to be replaced. There is, of course, room for discussion in such situations, but there is also a chance that a tenant could be held responsible for the whole cost of the repair, regardless of what is stated in the schedule of conditions.
At the end of a tenancy, a final schedule of dilapidations report is used to evaluate any repairs and required works to return the property to the physical state it was in before the tenancy. This was created using the lease's provision clause regarding fixing conditions. The terms FRI (Full Repairing and Insuring) and IRI (Internal Repair and Insuring) are a key term of the lease. A tenant who signs an FRI lease is entirely liable for the repair and condition of the building, both inside and out. In an IRI lease, the landlord is in charge of maintaining the exterior while the tenant is only responsible for interior repairs and improvements.
A Schedule of Dilapidation enables any repair obligations between the tenant and landlord to be immediately identified, allowing the landlord to continue with the process of reletting the property. If it is ready, the dilapidations schedule can be served on the tenant in advance of the end of a lease. This will provide a guide to dilapidations allowing the tenant to carry out reinstatement works prior to returning the property to the landlord. In the event that it is created after the end of the lease, the Schedule of Dilapidation will serve as the foundation for the landlord's compensation claim against the tenant.
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