Commercial Tenant breaches repair obligations

Commercial Tenant Breaches Repair Obligations

Landlord’s options if a commercial tenant breaches repair obligations.

Making sure a commercial property is well maintained is one of a landlord’s key priorities and it is almost as important as getting in the rent. Under a full repairing and insuring lease the tenant is obliged to keep the property in a good state of repair – but what can you do if you see property repairs are being neglected?

A commercial landlord might assume that it will be straightforward to enforce the repairing obligation, but remedies are more limited than they might expect. A pro-active landlord will engage with their property lawyer at the earliest opportunity to ensure any issues with repair are dealt with quickly and effectively. The challenge is to work out the best action to take, given the particular circumstances.

Injunctions and damages

A breach of a lease obligation is a breach of contract. In contract law, the two key remedies are:

an injunction to force the defaulting party to fulfil their obligations and
damages to compensate the innocent party for any loss. In the context of a lease, these are both of limited use.

It is up to the court to decide whether to grant an injunction (referred to as an order for specific performance) however it is rare for a judge to do this to enforce a repairing obligation.

Damages are restricted by statute, and the most a landlord can recover is a sum to reflect any reduction in the value of the landlord’s interest in the property caused by the disrepair. It can be difficult to establish that there has been a significant impact on the landlord’s investment value, especially if the lease still has a number of years to run and the landlord has no immediate plan to sell their interest.

In addition, if there are more than three years of the lease term left, the landlord needs permission from the court before it can even start a damages claim for disrepair, and the tenant has the right to object.

Forfeiture

The landlord’s right to end a lease early by forfeiting is a valuable tool. Often, the threat of forfeiture is enough to get the tenant to deal with any breach of covenant. Forfeiture for non-payment of rent has been prevented during the Covid-19 pandemic, but landlords can still forfeit for breach of other covenants. In practice, this could be a risk for a landlord who does not really want to be left with empty premises in a poor state of repair.

Right to enter and carry out works

One effective practical remedy is for the landlord to go into the property, carry out the required repairs and recover the costs from the tenant. To do this, the landlord must have a clear right set out in the lease. Your commercial property lawyer will be able to check to see if the lease has the right provisions. It should also make it clear that the costs are payable by the tenant as a debt, rather than damages, to avoid the statutory cap on damages for disrepair.

Exercising a break clause

If a tenant wants to get out of the lease early by exercising a break right, this can be a useful lever for the landlord to make sure that the tenant has fulfilled the repairing obligations.

However, if there is a dispute, the court will look closely at the exact wording of the lease, which will set out some conditions about how the property must be left. As a minimum, it will say that the tenant must give up occupation of the property or it may require the tenant to give ‘vacant possession’. The lease may also say that there must be no material breaches of covenant. These two requirements operate separately and an obligation to give vacant possession alone will not be enough for the landlord to insist on the property being left in good repair.

Giving vacant possession means leaving the property empty, so that the landlord can easily re-let, but it is not always clear how much the tenant must remove to satisfy the test. The Court of Appeal has recently looked at a case where the tenant was unsure, so took out more than the landlord expected, including things like lighting and heating. As a result, the property was left in an unusable state. The court held that the tenant had given vacant possession and any problems with the physical state of the property were a separate issue (Capitol Park Leeds plc v Global Radio Services Ltd [2021] EWCA Civ 995). Cases like this show how important it is for both landlords and tenants to get good legal advice about what is required to comply with a break option.

Dilapidations at the end of the lease

The landlord gets a final chance to enforce repairing obligations at the end of the lease. The tenant must hand back the property in a state that complies with the covenants in the lease, and there is usually a negotiation about disrepair (referred to as ‘dilapidations’). In practice, this generally ends up as the tenant paying an agreed sum to reflect the cost of outstanding repairs. Again, good legal advice is invaluable, both to highlight the best negotiating points for each side, and to make sure that the final settlement is properly documented.