Leases : Footing the Bill for Repairs

A major source of financial liability in leasing obligations for a tenant rests in repairs and dilapidations.  It has long been the case that a ‘full repairing and insuring’ (‘FRI’) lease will impose a wide repairing obligation on a tenant who, at the end of the tenancy, will often be hit with a large bill for outstanding repairs.

At the stage of negotiating a lease the tenant will want to restrict this as much as possible and even resist an FRI style lease entirely, but if an unrestricted ‘FRI’ lease is accepted does the landlord have carte blanche to recover all assessed repairing costs regardless of what he does next?  The recent case of Gatsby Retail Limited v The Edinburgh Woollen Mill Limited has highlighted the potential pitfalls for a landlord when re-letting.

Repairs Outstanding v Actual Loss

In this case the landlord Gatsby assessed the tenant’s repairing liability on termination in the sum of £170,000 and sought to bill the tenant EWM on that basis.  Before the claim was settled however the landlord re-let to Café Nero and as part of that deal they sought to put the screws on their claim with EWM.  They agreed with Café Nero that they would pay them £110,000 toward their ‘fitting out works’.  The idea was to quantify an incurred loss in their letting to Café Nero and so bolster the claim for ‘reimbursement’ against EWM.

The plan backfired however.  EWM argued, and the court agreed, that the payment to Café Nero was clearly not in respect of dilapidations, being an actual loss suffered by the landlord in repairing the property, but was actually (as the contract clearly stated) a contribution to the new tenant ‘fitting out’ the property and making it suitable for their own purpose.  The cost of repairs was therefore never incurred.  It was simply ignored by both the landlord and the new tenant.

A Risky Business  

Whilst this case contains within it an important lesson for any advising solicitor, it also serves to highlight the basic legal position that the actual loss suffered by a landlord is the key issue and that this is a matter of fact. If no loss is actually suffered then how can there be a claim.  If Gatsby had not re-let, or had re-let on the express basis that the sum was allocated to repairs and dilapidations, the result might have been different.   The case also serves to highlight, yet again, the fact that the implications and context of all legal documentation needs to be carefully considered.

For further advice on this subject please contact our Associate Director John Wellburn on 01383 745779 or jw@businesslaw.co.uk.