Full Repair & Insurance
Full Repairing and Insuring Leases
In practice, leases for more than five years are usually “full repairing and insuring” (FRI) leases, with five yearly, upward only, rent reviews. The tenant pays the cost of insurance and service charges and has full repairing responsibility. This is on the basis that the tenant has a long-term interest in the property and that the landlord’s interest is an investment, namely the right to receive the rent.
In the case of shorter leases, the responsibility for repairs may fall on the landlord. This is a matter for negotiation and agreement between landlord and tenant.
Repairs
Responsibility for repairs is a common source of dispute between landlord and tenant. The repairing obligations will be set out in the lease. In the case of a unit that is part of a larger building, there will usually be a management scheme for repairing the common parts under which “service charge” contributions must be made to meet the costs.
An onerous repairing clause can entitle a landlord to serve a “schedule of dilapidations” requiring detailed specified repair works. Leases often provide that the landlord is entitled to inspect the property and specify the required repairing works. The clauses usually state that if the tenant fails to undertake the works within certain time limits, the landlord may enter the property, do the works and recover the costs.
A schedule of dilapidations can prove expensive and onerous for a tenant. In the case of a lease of a second-hand building, tenants will frequently seek to have a schedule of condition attached, so as to limit their repairing obligations in the light of the pre-existing state of repair of the building.
Difficult questions and disputes can arise as to whether and to what extent repairing obligations require a tenant to improve the premises. This is a question of degree and of interpretation in the circumstances. A tenant’s repairing obligations may in practice require an element of improvements and upgrade.
In the case of a newly built property, the tenant’s repairing covenant will normally apply even if the required repair works are due to defects in the building. For this reason, tenants usually insist upon guarantees and warranties from the building contractors and designers. Alternatively, tenants may seek to remove their repairing obligations in respect of inherent, latent or construction defects in the property.
Where the property is part of a larger block with common parts, the landlord or management company on its behalf manages, repairs and maintains the common parts and recovers the cost from the tenants through the service charge. This is because is it is necessary that there is a mechanism to secure repair and maintenance of a structure which benefits multiple owners.
The Landlord and Tenant Acts provide that the maximum amount recoverable by a landlord for compensation for non-repair by a tenant is the amount by which the value of the reversion (i.e. the landlord’s interest in the property) has been diminished. Therefore the actual costs of repairs may be irrecoverable to the extent that they exceed this amount.
There are various schemes of legislation which are of relevance to commercial property. There are obligations to comply with planning permission, building regulations, health safety and welfare legislation and disability discrimination legislation. Depending on the nature of the property and the tenant’s business, other special legislation may apply.
Insurance
The insurance obligations of landlord and tenant will depend on the terms of the lease. There are no implied obligations on either party to insure. There are different types of insurance to consider. The two principal types of insurance are in respect of damage and destruction to the building itself and insurance to cover liabilities to third parties arising from accidents and incidents on the property.
Typically, the landlord will effect buildings insurance as he will own the property. The landlord will, in any event, wish to ensure that the insurance policy is put in place and to ensure that the full and proper cover is provided.
Under a standard longer term FRI lease, the tenant pays the cost of insurance. In the case of a unit in a larger building, the insurance may be included in the service charge. A tenant would ideally wish to be co-insured on the policy, as there will be the loss which it will suffer in event of destruction of the premises and not being party leaves it vulnerable to an insurer’s subrogation claim. However, this is usually resisted by a landlord. It will generally be possible to have a tenant’s interest noted so that it would at least be notified if the policy lapses.
Leases typically contain detailed provisions in relation to the application of insurance monies received in the event of damage and destruction. In longer leases, the landlord is usually obliged to apply the insurance monies towards reinstatement. Usually, the landlord will be obliged to rebuild the building, even if it does not have sufficient insurance monies. This puts an onus on a commercial landlord to ensure that the risks covered and the amount insured are sufficient to enable it to undertake its obligations.
The issue of liability insurance is a distinct matter. Claims in respect of accidents and damage arising on or near property will usually be the responsibility of the tenant. However, the landlord may be liable for damages where the accident is in any way attributable to the state and condition of the building. Usually, a landlord will want an indemnity in respect of claims arising during the course of the lease. A landlord may require specific minimum levels of public and employer’s liability insurance, to which both the landlord and tenant are parties.
Termination and Enforcement Options
When a lease term ends, the tenant is obliged to deliver possession, unless he has an option or a statutory right to renewal. A tenant from period to period, without a fixed term is obliged to deliver possession when it is terminated by notice.
A landlord is also entitled to terminate a lease and seek possession where the tenant has failed to pay rent or has breached any of the other terms of the lease. When a tenant is in breach of his obligations under a lease, the landlord will have a number of means of legal enforcement.
In the case of property subject to monthly or periodic tenancies (i.e. where rent is paid from month to month) a so-called “Notice to Quit” is required. Generally, the notice period is the period of the tenancy. Therefore a weekly tenancy usually requires a weekly letting notice, a monthly tenancy a notice of one month and so on. A quarterly tenancy is generally terminated on three month’s notice. A yearly tenancy requires a half year’s notice, each expiring on a gale day.
The rules regarding notices to terminate tenancies are technical. The notice must be served to expire on a so-called “gale day” which is usually the rent day. If the tenancy has not been validly terminated, then it will be necessary to start the process again. If the landlord accepts rent, there may be deemed to be a new tenancy. It is possible to accept so-called “mesne rates” which is compensation for the use of the property after the lease has terminated. Care needs to be taken not to negate the original notice.
Arrears of rent can be sued for through Court, as a debt collection claim. There would generally be no defence to the claim by the landlord. The tenant cannot generally refuse to pay rent, even if he alleges that the landlord is not in full compliance with his own obligations.
As a lease is a contract, a landlord can sue a tenant for any loss which may fairly and reasonably be considered as arising from a breach of the lease terms by the tenant. Therefore, a landlord can sue for damages for the consequence of the breach. He is entitled to compensation so that he is put into the position (financially) that he would be in if the lease was performed. The rights to recover rent as a debt and sue for damages are additional to the rights to forfeit. The rights may be exercised together with, separately or indeed, after a forfeiture.
Forfeiture
Forfeiture is the landlord’s right to terminate a lease for breach of its terms and conditions. When forfeiture takes place, the landlord re-enters the property and terminates the lease. The right must be specified in the lease. Nearly all leases allow the landlord to forfeit the event of non-payment of rent, breach of covenants or the bankruptcy or insolvency of the tenant.
Forfeiture can happen in two ways. The landlord may issue and serve proceedings for a court order for recovery of possession. Alternatively, the landlord may re-enter the property peaceably. A landlord needs to take care in re-entering without a court order because an offence may be committed if any violence is threatened or there is an element of breaking in the entry.
In the case of non-payment of rent, a demand for rent must be made before forfeiting unless this is changed by the lease. In the case of breach of other covenants, a notice must be served by the landlord specifying the breach, requiring it to be remedied in a reasonable time or if this is not possible, requiring the tenant to pay compensation for the breach if required. This is not required in the case of rent arrears.
A tenant has a right to seek “relief against forfeiture”. A Court will have regard to the circumstances and the conduct of the parties. Generally, the Court will not wish to forfeit a valuable lease on account of a relatively minor breach. It will typically give the tenant a further opportunity to remedy any breach.
Most actions for possession of property are taken in the Circuit Court. There are a number of different types of proceedings depending on whether the lease has been forfeited, terminated for non-payment of rent, or the property is “overheld” after termination of a tenancy. The legal proceedings are broadly similar to those for possession of a mortgaged property.
Miscellaneous Legal Compliance
There are various schemes of legislation which are of relevance to commercial property. There are obligations to comply with planning permission, building regulations, health safety and welfare legislation and disability discrimination legislation. Depending on the nature of the property and the tenant’s business, other special legislation may apply.
A landlord will have responsibility for rates if the property is vacant. A landlord should ensure that there is proper indemnity cover in respect of public liability claims.
A Building Energy Rating (BER) and advisory report must be supplied by the owner to a prospective buyer or tenant of a property when constructed, sold or rented. The BER is an indicator of energy performance covering energy use for space heating and cooling, water heating, ventilation and lighting, calculated on the basis of standard operating patterns. It is accompanied by a CO2 emissions indicator.
The BER is intended to give prospective buyers and tenants information about the energy performance of buildings. The building owner must engage a registered BER assessor to carry out assessments. The BER assessor follows the Non-Domestic Energy Assessment Procedure(NEAP) to calculate the BER and generate the advisory report.
The BER must be accompanied by an “Advisory Report” setting out recommendations for cost-effective improvements to the energy performance of the building. There is no legal obligation to carry out the recommended improvements.