Full Repairing and Insuring Lease - Case Study Example

Full repairing and insuring lease The client intends to demolish an industrial unit located on the outskirts of Derby centre and redevelop the property. A manufacturing tenant who still has four years remaining in their 15-year lease currently occupies the unit. The tenant is not aware that the landlord intends to redevelop the property. The tenant intends to remain in the unit for the full period of the lease. The lease is a full repairing and insurance lease, which requires the tenant to continuously repair the premises and keep it in tenantable condition at the end of the lease. The landlord recently visited the premises and noticed that the building was in an extremely poor condition. The roof and the external cladding of the building are visibly damaged and cannot keep rainwater out which will cause consequential damage to other parts of the building. The landlord sees the failure to repair as a breach of the repair covenant and considers this an opportunity to terminate the lease. A full repairing and insurance lease is a lease, which shifts the responsibility to repair the premises from the landlord to the tenant. Most commercial leases are full repairing and insurance lease. The most important thing about these leases is the responsibility to repair and maintain the premises. This obligation implies that the premises should be maintained to a standard that is tenantable. A tenant who signs a full repairing and insurance lease must repair the premises irrespective of the cause of damage to the building. Because the obligation placed on the tenant is always huge, most tenants will try to negotiate to reduce their obligation to repair the premises. When the obligation is negotiated, the resulting lease is not a full repairing and insurance lease. A negotiated commercial lease is often desirable, as the cost for repairs will significantly reduce. “Other issues include repairing and insuring clauses and the type of review clause” (UK commercial property: strengthening economy buoys commercial property, 2000, p.1487). A full repairing and insurance lease means that when the lease period is over, the premises must be reinstated to its original form and shape. If there were any alterations to the building, the tenant is obligated to revert the property to its original condition. The tenant must also cover all the dilapidations in the premises before being released. A full repairing and insurance lease essentially means that the tenant will always have an obligation to continuously repair the premises (UK commercial property: strengthening economy buoys commercial property, 2000). Dilapidations are an issue that has to be dealt with by the landlord and the tenant in most full repairing and insurance leases. The essence of dilapidations is that the landlord should be compensated by the tenant if the obligations set out in the lease agreement are breached. Dilapidations often arise when the tenant contravenes his obligations under the lease. These obligations include the duty to repair and reinstate the building. A schedule of dilapidations, which is issued by the landlord, serves as a record of the breaches in the covenant. The schedule also identifies the remedies for breach. These schedules can either be interim or terminal schedules. Interim schedules are issued at any time during the lease period. Terminal schedules are issued at the end of the lease period. Where a schedule of dilapidation is served, the tenant can either choose to undertake the repairs or enter into a financial settlement with the landlord. Where financial settlement is preferred, the amount of the settlement should be fair and reasonable with respect to the loss arising out of lack of repairs and the landlord’s intention with the buildings. Section 18 (1) of the Landlord and Tenant Act of 1927 limits the level of damages that can be recovered from a schedule of dilapidations. The act stipulates that the amount of damages must not exceed the value by which the premises are diminished by failure to repair or maintain. The act also limits the amount recoverable if the landlord intends to make significant changes or redevelop the property after the expiry of the lease. The limitation on the level of claims from dilapidation ensures that the landlord does not profit from such claims. The landlord can also enforce the lease agreement by serving the tenant with a repairs notice. If the tenant does not comply with the notice, the landlord can re enter the premises and carry out the necessary repairs and then reclaim the cost from the tenant (Hamilton, Cheng Lim and McCluskey, 2006). Remedies available for breach of covenant to repair Since a full repairing and insurance lease is a legal contract, the tenant is tied to the terms of the lease. There is limited room in the variation of the lease unless the landlord and the tenant renegotiate to vary the terms of the lease. A lease is a contract and if the tenant breaches a term in the lease the landlord can bring legal action against the tenant. Lease forfeiture is the most likely action a landlord can bring against a tenant for breach of a lease. Forfeiture allows the landlord to repossess the premises by forfeiting the lease. In order to forfeit a lease, the landlord must give the tenant a valid notice for repossession. The notice requirements are set out in section 146 of the Law of Property Act of 1925. The section provides that a valid notice for repossession can only be served if the tenant has agreed that a breach has occurred. Once the breach is acknowledged by the tenant, the landlord can then serve the notice. A landlord can only forfeit a lease if there is a clause in the lease that gives the right to forfeit. The forfeiture can also result where there is a breach in the lease agreement by the tenant. In order to forfeit, a landlord must observe the appropriate procedure relating to forfeiture. The landlord must not waive this right otherwise the forfeiture will not succeed. “The right to break and other problems with alienation clauses also pose serious difficulties for occupiers” (UK commercial property: strengthening economy buoys commercial property. 2000, p.1487). The tenant can also apply for a relief from forfeiture from a court to prevent the landlord from forfeiting the lease. Where the reason for forfeiture is failure to pay rent, the landlord must first demand the rent. If the demand is not meet within a reasonable time, then the landlord can proceed with the forfeiture. When the forfeiture is due to a breach, the landlord must serve the tenant with a notice under section 146 of The Law of Property Act. “Section 146 requires the landlord to notify the tenant of the intention to forfeit the lease” (Crosby, Gibson and Murdoch, 2003 p.1492). The notice served by the landlord must notify the tenant that the landlord intends to forfeit the lease. The notice must also clearly state the breach in the contract. If the breach can be remedied, the landlord must give time to the tenant to remedy the breach and where necessary provide compensation to the landlord. The notice also allows the tenant to seek relief where they feel the forfeiture is unfair or unreasonable (Crosby, Gibson and Murdoch, 2003). The test to determine if a breach is remediable or not was set out in Expert Clothing service and sales Ltd v Hillgate House Ltd. The question in this case that if the tenant was given reasonable time to remedy the breach and compensate the landlord, would the remedy effectively cover the loss suffered by the landlord? Some breaches are considered irremediable and the landlord can forfeit the lease immediately. The Leasehold (Repairs) Act of 1938 provides that if a lease was for a period of more than seven years and there are more than three years remaining in the lease, then the tenant can serve a counter notice to the notice stipulated by section 146 of the Law of Property Act. A counter notice makes it difficult for the landlord to forfeit the lease. How a tenant may defend a forfeiture claim The tenant has a right to seek relief from forfeiture of a lease by the landlord. Before the landlord can exercise the right to forfeit, he must comply with the provisions of section 146 of The Law of Property Act. The landlord must serve the tenant a notice specifying the breach alleged, and if possible require and give the tenant reasonable time to remedy and compensate the landlord for the breach. Upon receiving the notice of forfeiture, the tenant can seek relief. A tenant who is eligible for relief must hold a continuing lease prior to the notice. The tenant can make the application for relief as soon as the notice for forfeiture is served. The courts will usually grant a relief where the tenant remedies the breach and is willing to remedy any future breaches. Where the tenant has remedied the breach, he may also be required to compensate the landlord. The courts are, however, reluctant to provide relief where the tenant has persistently breached the lease or where forfeiture had been issued in the past. Relief is not only limited to where the breach is minor and the court can grant relief even where the breach is serious as established in Central Estates (Belgravia) Ltd  v Woulgar (No2) 1972 3 All ER 660. The courts can also grant relief where the breach is not capable of being remedied as held in Scala and District Property Co Ltd v Forbes (1974) QB 575. Summary and conclusion Full repairing and insurance leases are contracts which give rise to remedies incase of beach. The tenant is obviously in breach due to failure to repair the premises as required by the contract. The landlord can serve a notice to the tenant to repair the premises and allow the tenant reasonable time to carry out the repairs. If the tenant fails to repair the tenant fails to repair the leaking roof and the exterior cladding, then the landlord can reenter the premises and conduct the repairs charge the tenant for the cost of repairs. The landlord can also forfeit the lease if the tenant does not carry out the necessary repairs after the notice is served. It is worth noting that the tenant can seek relief from forfeiture or provide a counter notice to the landlord. The counter notice is applicable in this case because the lease is for a period of more than seven years and there are more than three years remaining on the lease. The option available for the landlord in this case is forfeiture. However the landlord must first serve the tenant with a notice before forfeiting the lease. The problem with this approach is that the tenant is likely to repair the premises. Considering the landlord intends to redevelop the property, this option might not be appropriate. This is because the amount of repairs will be capped by section 18 (1) of the Landlord and Tenant Act. The most appropriate approach that should be adopted by the landlord would be to renegotiate the lease with the tenant before forfeiting the lease. Bibliography Crosby, N., Gibson, V. and Murdoch, S. (2003). UK Commercial Property Lease Structures: Landlord and Tenant Mismatch. Urban Studies, 40(8), pp.1487-1516. Hamilton, M., Cheng Lim, L. and McCluskey, W. (2006). The changing pattern of commercial lease terms. Property Management, 24(1), pp.31-46. UK commercial property: strengthening economy buoys commercial property. (2000). Facilities, 18(3/4). Read More