An area which is often overlooked, but can become very costly when you come to sell your business, is property repair. There is a misconception among many practice owners that the landlord is responsible for maintenance and repair so long as the tenant continues to pay rent. The purpose of this article is to clarify any misconceptions and provide an informative insight into the expectation of buyers when it comes to repair.
The first place to look when trying to assess your repairing obligations is the lease under which you occupy your properties, in particular the repairing clause. The two main types of lease which practice owners have are either a full repairing and insuring lease or a repairing and insuring lease subject to a photographic schedule of condition.
Full repairing and insuring lease
This type of lease is known as an FRI lease and is favoured by many landlords. The burden of repair, namely the maintenance of the property including its structure, interior and exterior, will all be the sole responsibility of the tenant throughout the term. At the end of the term the property must be returned to its original condition by the tenant including the removal of any alterations and in good and substantial repair and condition, even if this means returning the property in a better state of repair than it was in when you took on the property.
In the context of a sale the purchaser will commonly require either an amount to be held back in respect of dilapidations (amount required to put property into good and substantial repair and condition from the completion monies) or repairs to be undertaken before the sale is finalised, as the purchaser would potentially be required to carry out repairs required as a result of changes caused by the seller.
Lease qualified by a photographic schedule of condition
This form of lease is popular with tenants. The tenant would have a surveyor inspect and photograph the interior and exterior of the property and have them produce a written and photographic schedule which would be annexed to the completed lease. The repair clause in the lease would then be qualified, meaning that the tenant would want to keep the property in good repair and condition but would not need to put it in a better state of repair and condition than evidenced in the schedule.
The schedule serves as a visual reference point in the event of a dispute between the parties in the future. The purchaser who would be taking an assignment of this type of lease would undertake a survey of their own and use the schedule as a reference point to determine what sum should be held back from completion monies or what works should be undertaken before completion.
One thing for the sellers to bear in mind is that although a photographic schedule of condition does not oblige the tenant to improve the property at the end of the term, it does not put any obligations on the landlord to improve it either. If there are items of disrepair it would be to the detriment of the owner who is trying to run or sell their business if these repairs were not carried out.
Schedule of dilapidations
At the end of the term the landlord may instruct a surveyor to prepare what is known as a schedule of dilapidations which estimates the costs involved in putting the property into the condition required by a lease.
The landlord may accept a sum of money in lieu of the repairs being undertaken; however, it is not unusual for such costs to be unrealistic.
Therefore, it would be advisable for the seller to always have an independent survey carried out to verify the sums demanded by the landlord and if required to negotiate with the landlord’s surveyor.
Conclusion
The key things to take away from this article are to keep on top of repair works and to fully appreciate the significance of your repairing covenant under the lease. This will result in a smoother and quicker process if you ever decided to sell your practice.
