Commercial Tenancy Agreements – FRI Lease
A commercial tenancy agreement (business lease) will set out, among other aspects, who is responsible for maintaining, repairing and insuring the premises and the building in which it is located. It is important to ensure the details of repair and insurance provision are included in the Heads of Terms as the obligations of both the landlord and the tenant will vary depending on what is agreed and the eventual wording of the lease.
Advice from an experienced commercial property solicitor is crucial when negotiating a business lease as the terms and suitability will be affected by various factors, including length of the lease, strength of the market, age, type and condition of the property, flexibility that may be required in terms of an early exit route and the negotiating positions of the landlord and tenant.
The full repairing and insuring lease
A full repairing and insuring lease (also known as an FRI lease or FRI tenancy) obligates the tenant to repair or pay for repairs to the parts, contents and structure of the premises as stated in the terms of the lease.
This type of lease may also be referred to as a ‘clear lease’ as the landlord’s income from rent is clear of insurance and maintenance costs relating to the premises.
Full repairing and insuring leases are most commonly used for stand-alone buildings, with no shared infrastructure. In a larger building with multiple units to let, an internal repairing and insuring (IRI) lease is generally more appropriate. However, some multi-let units may have FRIs in place, for instance, if a landlord owns a row of similar units for individual letting.
Tenant obligations under a full repairing and insurance lease
Repairs: An FRI lease for a single building, typically means that the tenant is responsible for all aspects of its maintenance and repair.
In a multi-let commercial property, an FRI lease may obligate the tenant to repair and maintain the internal area of the unit, including windows, doors etc. as stated in the lease. The landlord may be responsible for common areas and commonly used systems, such as car parks, security alarms, external paths and access areas, etc. The upkeep costs of these may be recovered by the landlord as part of the service charge.
The lease will typically specify ‘good and substantial repair’ or ‘good and substantial repair and condition’ and what this constitutes will vary depending on the individual premises, its age and location.
Insurance: In most cases, the landlord will take out insurance for the whole building and the tenant will reimburse the landlord for the cost, either for the whole building or for unit’s portion of the larger building. The landlord may choose any insurance policy, so long as the provider is reputable.
Gaps in cover may occur if it is not possible for the premises to be insured against a particular risk, for example, terrorism, flooding etc., so it is important to ensure the lease includes provisions relating to damage caused by uninsured risk.
Leasing a premises in disrepair
Under an FRI lease, tenants are responsible for any and all repairs, including those required at the outset of the occupancy, as determined by the lease. Commercial tenants are therefore encouraged to inspect a premises fully and instruct a building surveyor to assess the cost of potential repairs. The cost of any unrepaired defect may be recoverable by the landlord at the end of the tenancy.
If a property in disrepair is to be leased for a short period only or it requires considerable and costly repairs before it can be occupied, flexibility and negotiation are key.
As part of lease negotiations, a detailed ‘schedule of condition’ may be drawn up to ascertain the limits of the tenant’s obligation in relation to repairs. It may be agreed that the tenant must leave the property clean, tidy, and in no-worse condition than at the commencement of the lease (excluding damage not included in the schedule of condition which will need to be repaired).
The advice of an experienced commercial property solicitor will be invaluable in such circumstances.
Repairs and maintenance during the term of the lease
Tenants carrying out repairs or maintenance under an FRI lease must ensure that any changes likely to occur as a result of the work do not fall outside of the scope of the repairing covenant as agreed in the lease.
If repairs and maintenance are outside the covenant, reversion may be necessary at the end of the lease and the landlord may seek to recover costs.
Similarly, a landlord may not undertake unnecessary or unjustifiable maintenance work or upgrading which falls outside of the repairing covenant and then seek to recover the costs through the service charge. The case of Tedworth North Management v Miller [2016] UKUT 0522 (LC) shows that ‘modernisation’ is not repair.
Negotiating a business lease
Wellers’ commercial property team has the expertise, knowledge and authority to assist with the full spectrum of matters relating to property leases.
Our commercial property solicitors in London and the South work with a broad range of clients including property developers, commercial property portfolio owners, and institutional and individual investors – we can also assist international clients with their commercial property interests in the UK.
Please contact us for advice regarding any of the above on 0208 464 4242 020 7481 2422 or email enquiries@wellerslawgroup.com