Home Business Commercial Premises What is an FRI lease?

What is an FRI lease?

A full repairing and insuring lease, known as an FRI lease, is a commercial lease which gives the tenant sole responsibility for the maintenance, repair, and insurance of the property for the duration of their tenancy contract.

This means that for the duration of their tenancy, the tenant assumes full responsibility for the upkeep of the building’s interior, structure, and sometimes exterior. Under an FRI lease, the tenant is required to leave the premise either in a “tenantable condition” or in the same condition as it was at the beginning of the tenancy depending on the terminology of the lease agreement.

FRI leases are often seen as favourable for landlords of commercial properties as they relieve the landlord of any responsibilities regarding the maintenance of the building. The requirement that a tenant leave a property either in its original state or in a tenantable condition can result in tenants bearing the wait of expensive repair and maintenance costs which would otherwise have fallen on the landlord.

FRI leases are common in the commercial property letting market. Despite general rules applying across FRI leases, the complexity in determining which party is responsible for what in an individual agreement can lead to confusion and disputes. It is therefore essential that both landlords and prospective tenants understand the terms, risks and potential areas for negotiation in this type of lease.

Tenant duties and risks:

Tenants on an FRI lease are under the legal obligation to repair any damage to the property, irrespective of the cause of the damage. This means that the tenant is constantly and continuously responsible for any wear and tear or damage which occurs to the property whether it is the result of negligence on the behalf of the tenant, negligence on the behalf of the landlord, or a problem which could not have been predicted by either party such as a hidden structural defect, fire or flood damage.

A common cause of disputes is whether the tenant has met their contractual duty to maintain the property in accordance to the terms of the lease. In FRI leases the duty to ensure the property is of “tenantable condition” can be more stringent than tenants expect. Landlords using FRI leases may successfully argue that tenantable condition is of a much higher standard then would normally be deemed necessary by a court and require substantial investment by the tenant.

In addition to the duty to repair and maintain a commercial property to a tenantable condition, FRI leases can have clauses enforcing the reinstatement of the building at the end of the lease. If reinstatement is included in an FRI lease the tenant is obligated to restore the property to its original condition. Any changes the tenant made to the premises, from introducing branding or a new colour scheme to changing door locks or more expansive alterations, would need to be undone.

With both the responsibility to maintain and tenantable condition and property reinstatement, if the tenant begins the lease without undertaking a Schedule of Condition, a type of property survey documenting the condition of the property prior to the start of the lease, they can find themselves in disputes with the landlord over what condition the building was in at the start of the tenancy.

Insurance: Unless the landlord has already taken out insurance on the building, either as a whole or concerning a specific risk, the tenant is responsible for taking out insurance on the building or filling any holes in the existing insurance policy. FRI lease tenants must insure that the insurance policy is comprehensive, detailed, and covers both the building and contents. Use of a specialist insurance broker can help guarantee the property is covered in all eventualities.

If the landlord has taken out insurance on the property, any damage which is covered by the insurance policy does not have to be repaired by the tenant. What the landlord has and has not insured against can be found in the building’s insurance policy, clarifying what the tenant is liable for.

Risks with old buildings:

Tenants who are renting a commercial property which is over 20 years old should be particularly aware of the following potential issues for which they would be responsible:

  • Problems with the building’s roof. Repairing and maintaining the roof can be one of the highest costs to FRI lease tenants. A range of roof related issues can occur in commercial buildings, from problems with the chimney to leaks, and issues with the roof can lead to wider damage to the building and additional costs. In addition to being expensive to repair, rooftop issues are often time consuming and disruptive to the tenant’s business
  • Damp. Whether due to condensation, rising or penetrating, if damp develops during a tenancy the tenant will need to cover its treatment, removal, and repair any damage caused
  • Subsidence. Faults in an old buildings subsidence can lead to widespread damage to the building through cracks or structural movement and can end up very costly to repair
  • Building services. FRI tenants can be required to maintain and service the buildings lifts, air conditioning or heating systems
  • Asbestos. Should asbestos be discovered in the property the tenant will be responsible for its safe removal
  • External spaces connected to the building. FRI tenants are often responsible for the care, maintenance and repair of car parks or gardens attached to the property. Examples of potential costs include hiring a gardener or repairing broken fences

Risks with new buildings:

Although new buildings are less likely to incur some of the costlier repair and maintenance issues, for example asbestos removal, there are risks with newer properties which tenants should be aware of. Under an FRI lease, tenants can be made responsible for building defects which have not yet been discovered. New builds can have design or construction defects which are not known when the FRI lease is signed but which the tenant would have to address and remedy when they become apparent. Hidden design and construction related issues can be particularly expensive to resolve.

FRI lease negotiations and dispute prevention:

Although FRI leases have inherent risks for tenants, there are protective measures which can be
negotiated with the landlord to ensure a fair balance of responsibility and protect the tenant from excessive costs.

Before signing any FRI lease, tenants should carefully consider the nature of the property, from small shop to an office in a large building, the buildings age and location etc, and evaluate whether it is in good condition or at high risk of damage and maintenance issues. Prospective tenants should insist on a property survey to inspect the state of the premises.

If the landlord and tenant agree it is advisable to incorporate a schedule of condition into the FRI lease contract to serve as a record and proof of the buildings condition at the start of the lease and ensuring the mitigation of future dilapidation related to the buildings condition pre-lease.

Utilising a property survey, any instances of disrepair or structural issues in the building can then be raised with the landlord and used to negotiate either a reduction in rent or omission of responsibility to repair the identified pre-existing issue and any which arise because of it.

Multi-let FRI lease tenants should aim to negotiate terms which ensure they only pay for repair and maintenance issues in their part of the building. In multi-let buildings, landlords will sometimes retain responsibility for the repair and maintenance of public and communal spaces. In such cases the contract should clearly state the parameters of the landlord’s responsibility, for example whether they will be responsible for any damage which occurs in the tenant’s area as a result of failure to maintain a communal space.

Other points which can be considered for negotiation include:

  • Setting a cap on the tenant’s contribution to the properties repair and maintenance
  • Setting a cap on any service charges associated with the building
  • Terms allowing the tenant to alter the property in accordance with their needs without the requirement to restore it (no reinstatement)
  • Permission to sublet the property without financial penalties
  • If the property is a new build, exclusion of any tenant responsibility to repair any damage or undertake remedial work on any design or construction defects which may be discovered during the tenancy

Although landlords may be reluctant to agree to terms negating elements of tenant responsibility, negotiating terms with the tenant increases the likelihood of successfully acquiring tenants and of those tenants committing to long term lets.

Another alteration to traditional FRI leases would be what is known as an “effectively FRI lease” whereby the tenant has reduced responsibilities for aspects of the properties repairs, for example only being responsible for internal repairs. In effectively FRI leases the landlord retains responsibility for the property’s structural maintenance and repairs but recovers the cost from the tenant.

Why seek legal advice?

Before entering into an FRI lease both landlords and tenants should make sure they have a full understanding of their roles and responsibilities regarding the buildings maintenance and repair. There is potential for both parties to incur high costs which could be avoided, or to find themselves in costly legal disputes. Undertaking a detailed property survey before beginning any negotiations of signing a contract if strongly recommended. Landlords and tenants alike should also consider seeking legal advice prior to signing an FRI lease to ensure they are protected from future costs, penalties, or legal disputes.

 

Lawble
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