Commercial Leases – What Happens When It's Time to Leave?

Most commercial leases contain 'make good' clauses that require the tenant to:

• remove their fixtures, fittings and chattels and repair any damage; and
• reinstate the premises to the condition that they were in at the commencement date of the lease (except where the self-explanatory "fair wear and tear" exception applies).

The tenant may also be required to redecorate the premises at the end of the term, which will negate the "fair wear and tear" exception.

The end of lease obligations are often time critical and involve large amounts of money. Accordingly, it is important that the parties understand their rights and obligations, that the end of lease clauses are well drafted and that the condition of the premises and the landlord's fixtures and fittings are accurately recorded at the commencement date of the lease.

Care must be taken when drafting the lease to distinguish between the parties' obligations and the default provisions set out in the Property Law Act 2007 (PLA). For example, section 266(1)(b) of the PLA provides that the tenant may remove any affixed trade, ornamental, or agricultural fixtures during a "reasonable period" after the lease has come to an end. Such provisions, if not contracted out of by the parties, have implications for the landlord re-letting the premises and rent flow.

A commercial lease can last for many years and the tenant and the landlord may change over time. Accordingly, it is important to record the condition of the premises and the landlord's fixtures and fitting as at the commencement date of the lease. Regardless of whether you are the landlord or the tenant we suggest that a premises condition report is annexed to the lease to minimise the likelihood of dispute. The 6th edition of the ADLS lease now provides for a 'premises condition report' and a list of the `landlord fixtures and fittings'.

Once the lease has commenced, a tenant should keep the end of lease obligations in mind and budget accordingly. This applies even where the tenant has assigned the lease, as they may remain liable for the cost of reinstatement many years after they have vacated premises. Furthermore, a tenant taking an assignment should seek legal advice as they are likely to inherent the end of lease obligations of previous tenants.

As the end of the lease approaches, the parties should allow time for both negotiations and for the reinstatement work to be carried out. Legal advice should be sought as the tenant's end of lease obligations may appear in several parts of the lease and the quality of the finished work may vary.

It is common commercial practice for the landlord to arrange for a quantity surveyor to carry out an inspection prior to the expiry of the lease. The quality surveyor will prepare a `Schedule of Works' as an independent third party. If the tenant does not carry out the repair and reinstatement work set out in the 'Schedule of Works' the landlord may undertake the work and pursue the tenant for damages. However, the parties will often settle out of court due to the time pressures and the uncertainty of litigation.

In summary, the cost of reinstatement may be significant and the parties should be aware of their end of lease obligations when negotiating a lease. Furthermore, it is important to record the condition of the premises and the landlord's fixtures and fittings as at the commencement date to minimise the likelihood of a dispute many years later.

For further specific advice regarding this article or any commercial matter, please contact Kirsten Murfitt or Michael Newdick of Turner Hopkins.