Toolkit for the commercial landlord
What is an FRI lease?
The FRI lease is preferred – and often required – by landlords.
It allows the landlord to obtain a clear income stream at no cost to them, without the responsibilities of maintaining and repairing the business premises. For this reason, it is regarded as institutionally acceptable in the UK and will often be the starting point for commercial lease negotiations.
What does an FRI ‘lease of whole’ look like?
Where the tenant has taken an FRI lease of the whole of a commercial property, the tenant will be liable to pay the entire costs of repairs and insurance. Additionally, the tenant will have sole responsibility for maintaining and carrying out repairs to the interior and exterior of the property (including to the roof), even where the tenant may not have caused the disrepair, or where it is a structural defect that needs rectifying. Typically, with a lease of this kind, the landlord’s responsibilities will be limited to arranging the building insurance and recovering the costs of the insurance from the tenant through an ‘insurance rent’.
This differs when leasing only a portion of a commercial or mixed-use property, such as an office in a multi-let building or retail unit in a shopping centre. These are known as FRI ‘leases of part’.
What does an FRI ‘lease of part’ look like?
Under an FRI lease of part, the tenant has full responsibility for repairing the parts of the property which have been leased to them (including internal and external maintenance), while the landlord is responsible for maintaining any other parts of the building, known as the ‘common parts’. Common parts include lifts, staircases, plant rooms, lobbies and corridors, as well as any shared spaces or amenities in the building which have not been let out to other tenants.
While the landlord will be responsible for maintaining and repairing the common parts, they will recover the costs from the tenants through a service charge.
Additionally, the landlord will arrange insurance for the entire building and collect an apportionment of the insurance costs from each tenant.
What should you expect from the tenant?
A well-advised tenant will seek to limit their liability for repairs under an FRI lease. This is because a tenant’s repair obligations are one of their most significant, ongoing liabilities under the lease.
The tenant may attempt to do this by asking the landlord to carry out repairs to the premises before they take the lease, or, by requesting a rent-free period to reflect the costs they will incur to rectify existing damage.
Alternatively, after obtaining their own survey of the property, the tenant may require a “Schedule of Condition”. This is a record of photographic evidence and descriptions of any existing defects at the premises, that the landlord and tenant agree to exclude from the tenant’s repairing obligations. It will be annexed to the lease and will mean that the tenant will only be liable to reinstate the premises at the end of the lease term, to the state and condition it was in at the time of the schedule of condition.
Considerations for the landlord
The landlord should be prepared to compromise with the tenant in circumstances where the repairing obligations on a tenant under the FRI would be onerous (e.g. due to the dilapidated state of the premises) and could risk the tenant walking away from the lease during negotiations. Unless the lease is subject to a contract that has already been exchanged, the landlord and tenant are not bound to enter the lease, and the tenant would therefore be entitled to walk away.
For this reason, incorporating a Schedule of Condition into the lease could be a tactical way of keeping the tenant happy, and may be reasonable where the premises are in poor condition at the time the lease is granted. Where this is appropriate, the landlord should obtain a draft Schedule of Condition from their preferred surveyor as soon as possible. It is recommended that the Schedule of Condition be supplied to the tenant’s solicitor with the landlord’s first draft of the lease, to avoid delays to completion, particularly as the Schedule of Condition will need to be approved by the tenant before competition can take place.
The landlord should look out for any clauses added by the tenant’s solicitors during lease negotiations which transfer the risk of ‘inherent or latent’ structural defects (i.e., defects arising from the building’s construction which are not the fault of either landlord or tenant) from tenant to landlord. These are ‘no-fault’ defects, which the tenant would typically be liable to repair under the FRI lease. If the landlord does accept responsibility for repairing damage arising from such defects, the landlord should seek the advice of commercial property solicitor for guidance on mitigating this risk.
Key Take-Aways
- The Full Repairing and Insuring (FRI) Lease is a landlord-friendly and institutionally accepted form of commercial property lease in England and Wales.
- The FRI lease protects the landlord from irrecoverable expenditure by placing full responsibility on the tenant for repairs and insurance to their commercial premises.
- Tenants often try to reduce their liability under an FRI lease. It is important that landlords know what to look out for during lease negotiations, and that they do not agree to any additional clauses that transfer repair and insuring responsibilities back to them.
Next Steps
If you are a landlord granting a lease of commercial premises, our Commercial Property solicitors will be able to advise you on your obligations under the FRI lease and assist with the next steps.
If you have any questions on any of the above do not hesitate to contact our property team at +44 (0) 207 228 0017 or via the form below.
