Entering into a Full Repair and Insuring (FRI) lease is a significant commitment that can have far-reaching implications for both the Landlord and the Tenant.
It is important to understand that a Lease is just like any other form of Contract. This particular type of lease places substantial responsibility on the Tenant for ensuring that the Demised Premises are maintained in accordance with the terms of the Lease. Before signing an FRI lease, it is crucial to understand the implications and consider a number of factors:
We would always strongly recommend that you seek professional advice from a RICS Chartered Surveyor before you sign any Lease.
Maintenance Responsibilities of an FRI Lease
Under an FRI lease, Tenants are often responsible for the maintenance, repair and re-decoration of the entire Demised Premises, not just the internal areas. This liability often extends to the roof and associated rainwater goods, drainage and service installations. Before you agree to the Lease, we would recommend that you assess your ability to manage these responsibilities and the associated costs. We would strongly recommend that you instruct as RICS Chartered Surveyor to undertake a full inspection of the property and provide you with a Schedule of Condition
Insurance Cover:
In most cases, the Landlord will arrange Insurance for the Demised Premises. However, the cost is passed onto the Tenant. It is therefore important to understand the type and extent of insurance coverage required and the financial implications for your business. For example, ensure the level of cover suitably protects your interests.
Survey and Inspection:
As a Business owner, it is easy to become focused on the Business Operations, and not necessarily the Business Premises.
We would always recommend that you instruct an RICS Chartered Surveyor to undertake a thorough inspection of the property before you make a Legally binding commitment to occupy. The Surveyor should be well accustomed to the property type that you intend to occupy and be able to identify it’s condition and any potential liability in the long term. This information can then help you to protect your Business interests and avoid any costly repairs.
We would always recommend a Schedule of Condition is undertaken before entering into the Lease and ion most cases, having a Dilapidations Liability Assessment will help you better understand your Financial obligations.
Financial Planning:
Planning your occupation is essential in avoiding any costly errors. Ensure that you have the cash flow to cover any potential repair/maintenance liability without exposing your Business to unsustainable capital outflow. It is also imperative to plan your exit. Again, a Dilapidations Liability Assessment may help you better understand your position.
Ensure Terms Are Right for You
It is vitally important that before you enter into a Lease, you are fully aware of the implications. There is an implied obligation that if your Lease says for you to Keep in Repair, then first you must Put in Repair. More often than not, this is misunderstood or completely ignored. We recommend that you instruct an RICS Chartered Surveyor or Solicitor with Dilapidations experience to undertake a thorough Lease Review. Understanding what you are about to sign is vital.
We recommend that you consider all of the following before you sign anything.
Negotiation of Terms:
Do not hesitate to negotiate the terms of an FRI lease. Consider omitting certain aspects of the Demised Premises, such as the roof, if they are in disrepair before you occupy them. You can also negotiate a cap on Dilapidations-related costs for reinstatement and decoration, for example.
Length of Lease:
It is important to understand the length of the contract. How long is your actual Lease? Is there a break clause? Is this clause dependent on specific performance? Is your Tenancy protected by law? Are you entitled to renew your Lease should you wish to?
Longer leases may provide stability, but they also lock you into responsibilities for an extended period. Evaluate the balance between commitment and flexibility. A 10-year Lease may ensure that you are able to trade for this long, but what if you run into problems after year 3? Would it not be prudent to explore break options?
Exit Strategy:
In most cases, thinking about the exit of a property you’ve not yet moved into can seem a bit odd. However, the importance of planning your exit cannot be underestimated.
Understanding your obligations for returning the property to the Landlord in accordance with the terms of the lease is vitally important so that you can plan. At this point, we would recommend that you always instruct an RICS Chartered Surveyor.
You should also consult with legal and financial experts before signing. RICS Surveyors should be instructed to assist you with the technical aspects of your potential occupation. Leases are legally binding documents and are often complex. Therefore, professional advice can help you fully comprehend the terms and potential risks.