Repair & Insurance
General
Repairing responsibilities are critical under a lease. Generally, the longer the lease, the more likely the tenant will have greater repair responsibilities. A longer lease gives the tenant a longer-term stake in the property. He may enjoy statutory rights of renewal, which may endure indefinitely.
From the landlord’s perspective, the lease is in the nature of an investment by the landlord. It is therefore usually appropriate that a long term tenant carries the repairing responsibility.
In shorter-term leases, the repairing responsibility of the tenant may be less. The responsibility for repairs may be apportioned between landlord and tenant. A shorter-term lease makes the tenant responsible for internal non-structural parts, and the landlord responsible for the structure. Alternatively, the tenant’s repairing responsibility may be specified, without placing any responsibility on the landlord in respect of other aspects.
In longer term leases i.e. those which the landlord / tenant would have rights to renewal (formerly those over five years) the market expectation was that the tenant would have full repairing responsibility. Such leases are commonly referred to as full repairing and insuring lease.
Multi-Unit Buildings
In the case of a multi-unit building, the inside only of the unit is typically leased to the tenants. The repairing obligation will usually be limited to this area so that the tenant’s responsibility is inherently limited.
The landlord or management company will be responsible for the repairs of the common parts, which will usually include the structural parts of the building, as well as the internal and external common parts. In this case, the cost of repairs is collected through the service charge.
The tenant should be satisfied that the management company or landlord is responsible for repairing the common parts of the building and has the capacity to fulfil this obligation. There should be a legal mechanism to compel the performance of the obligation.
Default Repairing Obligations
The common law default position provides, in effect, that the landlord has no repairing obligation, in the absence of an express agreement. The tenant must keep the premises wind and watertight in the absence of express agreement.
The fact that the landlord or tenant in fact repairs, does not create an obligation, where one does not otherwise exist. However, it may prove that this is a term of the agreement. Actual repair may imply that this is a repair term of the express or implied agreement.
In the case of a verbal tenancy, the tenant’s implied obligations are minimal. With a written agreement, the contents of the lease will determine the tenant’s obligations. If there is no express agreement on repair, then it is implied that the tenant is to keep the premises in good and substantial repair and give it up in good and substantial repair on termination of the lease. However, this term can be changed by implication.
There are special provisions relating to the repairs of dwelling houses. There are detailed provisions in respect of residential properties setting out minimum standards. These are not considered further here.
Full Repairing and Insuring Lease
In the case of a full repairing and insuring lease, the landlord is in the nature of an investor and the tenant is fully responsible for the building. This type of lease carries significant risks for a tenant. Over and above rent, the tenant may incur significant financial cost in putting and keeping the property in repair.
In the case of a new building with a full repairing and insuring responsibility, the tenant should ensure that is not responsible for the defects in the original building. If it does carry this responsibility, it should at the very least, have direct rights, usually in the form of so-called collateral warranties, from the builder contractors and designers, so that if it is obliged to repair faults in the building, that it will at lease have the possibility of recourse against the builder.
A developer may complete a building and sell it to a landlord who leases it to tenants, on the basis of full repairing responsibility. In this case, there would be no direct right of recourse against the landlord who has developed the property, so that the tenant carries the risk of faults in the building.
In the case of a new leases of an older building, the tenant’s repairing obligations, should be very carefully considered. An older building may carry a considerable risk of liability to spend monies on repairs. It may be possible for the tenant to negotiate that the repair clause is limited so as to exclude existing defects.
Commonly, a schedule of condition is prepared, which is attached or referred to in the lease which identifies existing defects or wants of repair for the purpose of excluding repairing obligations in relation to them.
Terms of the Repair Clause
The wording of the repair clause itself is critical. It will determine the extent of responsibility. A clause may oblige the tenant to “put” and keep the premises in repair. This implies a positive obligation to put the premises into repair and is more onerous than a clause that provides that the premises will be maintained and kept in repair.
Where an assignment of an existing lease is taken, it will not usually be possible to modify the repairing clause because the lease will be already in existence. The tenant takes the property in its actual state and condition and takes the repair obligation as it is unless it can be renegotiated. This would not generally be possible unless the landlord had some specific incentive. Exceptionally, a landlord may agree to change a clause in an existing lease, if it is obtaining some material benefit or a stronger tenant.
The wording of the repairing obligation is interpreted in the light of the circumstances of the building, its age, locality, construction, wear and tear. The interpretation of a repairing clause is a matter for a Court in the event of a dispute.
Where a property is old at the commencement of the lease, the state of repair will be interpreted in this light. The extent of the property included in the letting or lease will be important in relation to the repair obligation. Where the interior, non-structural parts only are included, the repairing clause will take effect with reference to those parts only.
Repair Required
A distinction is sometimes made in relation to repair of the interior and repair of the exterior of a building. This is a crude distinction. It is better to distinguish between the structural parts and the non-structural parts of a building. Where there are multiple units in a building over different floors or at the same level, the structural parts are generally excluded from all leases and are maintained by the landlord or management company.
“Repair” does not generally require upgrading. However, upgrading and improvement may be an inevitable consequence of necessary repairs. Repairs are generally thought of as restoration by renewal or replacement of elements of the building, rather than reconstruction. Reconstruction would not generally be required unless the property is in such a poor state that repair necessarily involves reconstruction.
Sometimes, repairing obligations excludes fair wear and tear. This is intended to remove the repairing obligation in so far as it arises from the reasonable use and enjoyment of the premises.
Other Tenant Obligations
In addition to the obligation to repair the building, most repairing clauses will oblige the tenant to repair plant machinery and equipment. There may be an obligation to replace equipment when plant machinery and equipment are worn out.
Most commercial leases will require that the premises be maintained in a clean and tidy condition. Windows may need to be cleaned at certain periods. It is commonly provided that tenants must redecorate the premises either inside or outside or both, at certain intervals.
It is commonly provided that the premises must be redecorated at or before the end of the lease irrespective of how the lease terminates. This can prove an onerous and expensive cost for a tenant at the end of a lease period and cause an unexpected expense.
Repair Issues
In the case of a newly built property, the tenant’s repairing covenant may 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 that 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.
Insurance
The insurance obligations of the 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 a 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.
Application of Insurance Proceeds
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.
Liability Insurance
The issue of liability insurance is distinct to material damage insurance. Claims in respect of accidents and damage arising on or near the 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 covered parties.