Planning for the future

Careful thought at the beginning of a lease agreement can save you thousands in repair charges, says Davey & Co managing director Paul Davey

All too often we are involved too late in the day to advise on the problems caused by repairing covenants and obligations contained in a lease agreement.

The old cliche that time (and money) spent in reconnaissance is never wasted is never more true than when taking on a lease of a property owned by someone else.

If you buy a freehold property and choose not to have a survey done you are taking a calculated risk. At the end of the day no one is going to force you to do work that you would otherwise not do or could not afford to do.

But, if you have a lease agreement, there is an obligation upon the tenant to carry out repairs and a mechanism to force you to do so.

There have been cases when at the end of a lease agreement tenants have been bankrupted by the costs of complying. Generally, the landlord does not care what the end result is providing the pub is repaired. Here's my advice on how to avoid that situation.

1. Repairing covenant

You are thinking of taking on a lease at a pub. The pubco lets it to you for a period and at the end of that period it wants the premises back in the same, if not better, condition as when first let to you. To protect its position it will impose an obligation upon you to repair the building - this is known as a repairing covenant that has force in law.

So, it is vital you understand the implications of the covenant and the all-important way in which it is written. The extent of your obligation to repair has to be defined.

2. Good and substantial

Most current leases use the description that repairs must be "good and substantial". This is the definition that can cost many thousands of pounds as it effectively means you have to make repairs as good as new, even when the building is anything but new.

For example, if you took a lease on a premises that is very old, the obligation to repair "as new" could be so onerous that you would not be able to afford it. So, for older leases and those produced by the fairer landlord, you usually find the terms "good and tenantable" used instead. This is a more reasonable standard and represents the condition that would be acceptable to an average tenant.

Whatever the terms used, you will need to have the meaning defined with reference to the property.

3. Inspections

One issue you need to take on board and

consider very carefully is that the landlord can often carry out an inspection of the premises at any time during your occupation, as well as at the end of the term in order to assess its condition.

The pubco can do this at your expense and can insist that repairs are carried out. In the event of a breach of contract, there is also usually a clause that allows the landlord to enter the pub, carry out repairs and reclaim the cost from you.

4. Landlord

It is important not to fall into the trap of

simply assuming a pleasant landlord at the commencement of negotiations will be the same pleasant chap to deal with at the end of the lease.

Always remember that at the outset the landlord wants to achieve a letting as quickly as possible, but at the end of the lease he wants his building back in good condition so he can re-let it.

The landlord can change during the course of the lease, and a nice mild even-handed man can turn into a hard-nosed uncaring commercial operator, who insists upon the letter of the law and has legal advisers who will pursue the standards set out in the lease.

5. Disputes

Disputes between landlord and tenant are expensive. The process of dealing with a claim for dilapidations is complex and long winded and the fees charged by professional advisers can in some cases be more that the actual cost of the claim.

The defence against a claim is difficult to sustain although there are some circumstances where it might be proven that the reversionary interest of the landlord has not been injuriously affected by the breach. The legal test in damages is generally whether or not there has been a loss in value of the reversion.

Having said that, there is very little the tenant can do to prevent a landlord carrying out repairs either during or at the end of the lease, and the cost of that work is difficult to refute. Your landlord could also refuse to grant consent to an assignment until repairs are carried out, thus holding up any deal to the point where you would probably lose your buyer.

6. Survey

At the commencement of the lease you need to have the state and condition of the building analysed. This will give you a clear idea of the extent to which you are going to have to repair the building and at what cost.

It is also vital to have an understanding of the likely behaviour of the structure and fabric of the building over the period of the lease, as it is more often than not at the end of the lease that the real problems occur.

In some cases, repairing a building is not possible without replacing something - for instance, a roof. The standards applied by courts in these circumstances are very rigid - putting something "as new" means "as new".

When a survey has been done you will have the strength of evidence to negotiate with your landlord to an acceptable position - or walk away. It is far better to walk away before you become ensnared and taking the lease ends up costing you a small fortune.

If the condition of the property is such that the imposition of "good and substantial" is unreasonable, then it is more often than not possible to negotiate an acceptance that the property is repaired to no better standard than shown by a schedule of condition and repair.

7. Schedule of condition and repair

This can be prepared as part and parcel of the initial survey carried out on your behalf and will include photos clearly showing the detail of the fabric and fittings.

This schedule is then agreed with the landlord's surveyor and attached to the lease as evidence. The survey should include an inspection of the exterior, to include chimney pot and down through the chimney stacks, the attendant flashings, the roof, rainwater fittings, main walls, external timber and decorative finishes, drives, paths, hard surfaces, fences, walls and drains; and internally the roof space, to include insulation and tanks, the ceiling, floor, walls and the internal services such as electrics, plumbing and heating. Testing for damp, rot and beetle infestation should also be included.

8. Bond

When taking on a lease, it is common for the landlord to require a bond to be paid, usually a quarter of the annual rent. This money is held to provide a reserve fund to use for repairs if required. It is refunded on assignment of the lease if it has not been required.

9. Value

You can see that a leasehold interest is a complex area of law and has far reaching implications. The repairing covenants and the condition of the premises can have a significant impact upon the value of your leasehold interest when selling on the goodwill of your business. Thus, careful planning at the beginning can save you thousands of pounds later on.

Top tips

l Always have a survey done.

l Take advice from your surveyor as to the implications of the repairing obligations and the impact of these in cost terms at the beginning, during and at the end of the lease.

l Ask your surveyor to draw up a list of repairs under the headings of urgent, next five years, and nice to have; normally, a schedule of condition will include a cost profile.

l Money spent at the start will reap benefits through and at the end of occupation. Ignoring good professional advice could cost you thousands of pounds.

l The landlord can refuse to issue his consent allowing you to assign your lease if dilapidations are not attended to, effectively preventing you from selling your business, so, be warned, this is a serious matter.