When taking a lease of commercial premises, tenants may not appreciate the extent and cost of potential future repairs, particularly when, superficially, the premises appear in good condition. Assessing the scope of the repairing covenant requires a careful consideration of the extent of the premises. The principle of caveat emptor (let the buyer beware) is also the guiding principle, and a tenant is well advised to carefully inspect the premises, typically commissioning a professional survey.
However, what if there are defects in the premises that are not immediately apparent? Similarly, if the premises include equipment such as air conditioning systems, functioning at the outset, but inherently defective in nature, what is the tenant’s position? Understandably, a tenant will be unwilling to take responsibility for repairs (possibly including replacement of expensive equipment) arising out of defects not discoverable on an inspection of the premises. Equally, a tenant would not expect to pay full rent (presumably negotiated at the outset to reflect the availability of air conditioning) if the equipment providing such services stops functioning. Such defects are typically described as “inherent defects”. Whether the tenant is liable for them will depend on an interpretation of what is required to meet the repairing covenant in the lease.
What is an “inherent defect”?
If the need for repair arises out of an inherent defect, a tenant may well think the cost of remedy should lie with the landlord and, historically, it was considered that the need for repair caused by an inherent defect would fall automatically outside a tenant’s repairing liability. However, current thinking is that no such doctrine of inherent defect applies to a tenant’s repairing covenant (Ravenseft Properties Ltd v Davstone (Holdings) Ltd [1979] 1 EGLR 54; (1978) 249 EG 51).
In Ravenseft, external stone cladding had started to detach from a concrete frame of a 16-maisonette building, rendering it dangerous. The principal reason for the problem was the omission of expansion joints in the original construction. At the time of construction, architects and engineers did not realise that expansion joints would be necessary. The only safe way of dealing with the problem was to take down all the stone cladding and replace it with proper ties, including expansion joints (the absence of which the tenants claimed was the inherent defect). The tenants argued that this repair work fell outside the scope of their repairing covenant because it arose out of an inherent defect. The court not only rejected the existence of a doctrine of inherent defect but also rejected the tenants’ contention that they should not be liable for any work under the covenant that ultimately necessitates remedy of an inherent defect. The court adopted a “fact and degree” approach, concluding that the work was “repair” within the meaning of the tenant’s covenant. Forbes J described the test:
“[I]t is always a question of degree whether that which the tenant is being asked to do can properly be described as repair, or whether on the contrary it would involve giving back to the landlord a wholly different thing from that which he demised.”
The onus is therefore on a tenant to make sure the repairing covenant in the lease expressly excludes liability to undertake repairs arising from and to remedy inherent defects. However, even if the lease does refer to an inherent defect, what does that term mean?
Ravenseft suggests that the phrase “inherent defect” does not have a legal definition. Therefore, if a tenant is to exclude liability that results from an inherent defect, the lease must be clear what is intended.
For example, a tenant might think it appropriate that this definition includes any defect attributable to defective design, workmanship or materials, and possibly defective supervision of the building construction, renovation or equipment installation. Such exclusions would be appropriate where a tenant is taking space in a newly built building, or one recently subject to renovation/newly installed equipment, particularly if other protection such as collateral warranties are not available (see below).
However, without a definition, a lease which simply excludes repairs that arise out an inherent defect could give rise to future disputes over interpretation. A possible definition is set out below.
A potential definition of inherent defect for a commercial lease
“any defect in the premises or the building or in anything installed in or on the premises or the building which is attributable to:
i. defective design;
ii. defective workmanship or materials;
iii. defective supervision of the construction or the installation of anything in or on the premises or the building;
iv. defective preparation of the site upon which the premises or the building are constructed.”
REFERENCE: Amending a Commercial Lease (Bamford, 2010, Bloomsbury Publishing)
Is there disrepair?
A tenant’s repairing covenant will only “bite” if its premises are in disrepair. There might be an inherent defect, but that defect must cause disrepair to trigger the tenant’s repairing liability (see, for example, Post Office v Aquarius Properties Ltd [1987] 1 EGLR 40; 281 EG 798-804). On one level, an inherent defect may cause disrepair, but to comply with the covenant, a tenant might need only remedy the disrepair, and not necessarily remedy the inherent defect. A tenant might consider simply “plastering” over the problem, and avoid the need to remedy a more inherent problem, especially if its interest in the premises is relatively short. For a tenant with a long-term interest in the premises, where the defect is likely to give rise to further problems over the course of the lease, it might be that eradication of the inherent defect is the only way forward. The cost of eradication may be high and, by its very nature, not factored into either the landlord or tenant’s budgeting forecasts.
Fortunately for a tenant, it need not go beyond the scope of its repairing covenant, but this will not always absolve the tenant from responsibility for remedying an inherent defect. As Ravenseft demonstrates, a “fact and degree” approach will always need to be applied to determine whether what the tenant is being asked to do constitutes repair.
Tenant protection
From a tenant’s perspective, excluding liability for repairs or costs arising out of inherent defect (suitably defined) in the lease is the preferred approach. This may be difficult to achieve in the case of older properties (where arguably surveys may uncover repairing issues) but is particularly important in the case of new buildings. However, if the tenant cannot insist on exclusions in the lease, how can it best protect itself?
Warranties and insurance
For a tenant taking first occupation of a newly built premises or where the premises have undergone a substantial refurbishment, collateral warranties from the building contractor and professional team should be available and insisted on, giving the tenant an express right to enforce building or design contracts.
Alternatively, in appropriate circumstances, the landlord may be persuaded to procure latent defect insurance cover in relation to the fabric of the building, but the scope of any such insurance (and any limitations, for example, in relation to building services) would need to be considered carefully.
However, if a tenant is taking occupation of previously let premises, warranty cover may not be available as the building contract and deeds of appointment may limit the continued availability of warranties and who can benefit. With the prevalence of shorter-term leases or in cases where the building is subdivided, the landlord may also not wish to provide warranties to multiple parties. In such cases the tenant may only be able to secure an obligation on the landlord to enforce its rights under any building contract or under a manufacturer’s warranty (for example, in the case of newly installed equipment) at the request of the tenant.
Misrepresentation and collateral contracts
If a tenant has concerns over the condition of premises, but cannot negotiate desired exclusions in the lease, can it rely on assurances as to the condition of the property given by the landlord before taking the lease? A tenant’s solicitor can ask the landlord for replies to enquiries although, in practice, the landlord may refuse to give any assurances on this aspect and simply insist on the tenant relying on its own inspection and such survey as the tenant considers appropriate.
Carve-outs
While other options might be available, a tenant’s best protection is to negotiate appropriate carve-outs in its repairing liability for the costs related to inherent defects and spell out clearly in the lease what is meant by this term. If a tenant is taking premises with the benefit of communal areas and services, it should also consider the possible costs recoverable by the landlord for repairing those areas through the service charge.
While a landlord might be reluctant to start limiting the tenant’s repairing covenant, it may be more receptive to a request that the costs of dealing with an inherent defect are excluded from the service charge, particularly where the landlord can rely on manufacturer or other forms of warranty.
It should also be remembered that if a tenant’s repairing covenant can be limited to exclude certain areas of liability, there should be a corresponding obligation on the landlord to repair those elements at its own cost. Otherwise the tenant will be left in the position where no-one is liable for the defects and disrepair or it could find itself meeting all, or part, of the cost through the service charge.
Teresa Edmund is a partner and Ed Glass is an associate solicitor at Bristows LLP
