What is an FRI Lease?

A full repairing and insurance lease (FRI) is one of the most commonly used types of commercial lease agreements in the UK. Under these lease agreements, the maintenance and insurance cost of the property is undertaken by the tenant as well as the cost of the rent. Whilst it may sound like a very straightforward procedure, it is often accompanied by a substantial load of hidden costs, particularly if the client doesn’t understand the extent of their obligations at the start of the lease.

Tenant obligations under an FRI lease

Under an FRI lease, the tenant takes on much more than just the obligation to pay the rent. They take on the obligation to maintain the property in a way that is set out by the lease. This can include both internal and external parts of the building, including but not limited to, the roof, foundations and walls. The term ‘full repair’ means that the tenant must keep the property in good repair throughout the lease term, even if the property

was already in disrepair to begin with. As well as this, the cost of insuring the property also falls upon the tenant. This usually takes the form of reimbursing the landlord through what is known as "insurance rent". This is because arranging the insurance in the first place usually falls upon the landlord.  The tenant usually has no say on which insurer is used, what is covered under the insurance or the insurance cost  (unless this is already negotiated in advance). While it may sound simple, these costs often come as a surprise to many unsuspecting clients who assume that they are only responsible for paying for the damage they cause. In practice, many tenants could wind up having to pay for expensive repairs or insurance premiums that they had no say in.

The risk of unexpected costs

The potential for unanticipated costs remains one of the biggest challenges associated with this type of lease agreement. Tenants often enter these with the assumption that they are simply expected to keep the property clean and functional, but the realistic obligations can extend much further.  The term ‘good repair’ can often mean the tenant is liable for issues that predate their contract; things such as a leaking roof, damp or cracked walls. Small businesses often find it very difficult for small business owners who hadn’t taken them into account when budgeting for business expenses. This is why understanding and negotiating lease terms prior to entering the agreement is so critical.

The importance of a schedule of conditions

One solution to this unexpected repair liability is by agreeing to a ‘schedule of condition’ before the lease is signed. This consists of a detailed written and photographic record of the condition of the property prior to the tenancy agreement. If properly incorporated into the lease, it serves as evidence of the initial state of the property,  therefore restricting the future obligations of the tenant. This means that they would only be liable to maintain the property’s condition rather than improve upon it. Without a Schedule of Condition, tenants may have to go out of their way to put the property into good repair, regardless of whether they used that part of the building or not. An example is if the external walls of the property are cracked before occupation, the tenant might be required to fix them. A Schedule of Condition, therefore, remains a simple but highly effective tool that can prevent costly disputes down the line, especially when the lease is coming to an end.

The end of a lease - dilapidations and reinstatement

The ending of a lease usually means the tenant is served with a dilapidations claim by the landlord,  usually in the form of a ‘Schedule of Dilapidations’. This lists the repairs, reinstatement works and redecorations that the landlord believes the tenant has failed to carry out during their contracted lease period. To put it simply, it’s a bill (quite often a large one) for the condition the landlord believes the tenant should return the property to. This can cover everything from damaged plasterwork and paint to whole structural repairs and even the removal of internal fixtures and fittings. The lack of clear limitations in the lease could mean that the tenant must return the property in "good repair", which could mean improving it to a condition far beyond what it was initially in. To avoid this, tenants should keep records of any repairs or maintenance carried out during the lease, be clear about their obligations from the first day and carry out any necessary reinstatement works before the lease term ends.

FRI in multi-let and standalone properties

The type of structure also has a bearing upon the FRI lease. In a standalone building, such as a single retail unit or a warehouse, the tenant is usually responsible for the whole structure, both inside and out. In these cases, the maintenance risk usually falls entirely upon the client, and the cost of upkeeping the property’s condition can be substantial if issues arise. Multi-let properties, such as office blocks or shopping centres, are usually the responsibility of the landlord to upkeep. However, the costs are still passed on to the tenant in the form of service charges, which can cover roof repairs, external cleaning, communal lighting, etc. Whilst the tenants of the property are not paying for their upkeep directly, their ‘share’ of the upkeep still falls upon them indirectly. Therefore, it is important that the service charges are carefully reviewed and a clear breakdown is analysed. Landlords may also include separate internal repair obligations for each unit, meaning each tenant could still be fully responsible for maintaining their allocated space.

Regardless of the situation, the key takeaway is the same: tenants should not assume they are only liable for what they see.  They should always check the lease wording and service charge clauses to fully understand the extent of their obligations.

How tenants can protect themselves

Even though FRI leases place significant obligations upon the tenants, the associated risks can be mitigated through prior preparation and negotiation. One of the most significant steps a tenant can take is having the property professionally surveyed before entering into the lease. These will bring forth any existing defects and potential issues such as structural damage, roof problems and outdated utilities. A clear picture is therefore presented to the tenant, making clear what responsibilities they will be taking on and therefore allowing them to negotiate favourable terms before the lease begins.

Insisting that a Schedule of Condition be attached to the lease would also prove very beneficial. This would prevent the tenant from being responsible for any long-standing damage that had already existed prior to the contract, meaning they will not be responsible for bringing the property to a state that was better than what they received it in, a problem that is very common.

Carefully negotiating repair and insurance clauses in the lease can also be very beneficial. Major structural repairs, such as the roof or foundations, can be excluded. Alternatively, limiting repair obligations to ‘reasonable wear and tear’ could also save the tenant from significant costs. Requesting that insurance agreements and, in multi-let buildings, service costs be displayed transparently could also prove very beneficial down the line.

Finally, and most importantly, tenants should seek legal advice before finalising the agreement. Solicitors well-versed in commercial property will be able to identify potential traps, explain what is and isn’t standard and negotiate changes in a way that significantly reduces the liability of the tenant.

Conclusion

In conclusion, the key to protecting yourself as a tenant is proper preparation: get a survey of potential risks, negotiate terms, incorporate a Schedule of Condition and place a lot of importance on seeking legal advice. With these safeguards present, an FRI lease can be a workable and fair agreement that benefits your business instead of acting as a liability. If you're negotiating a commercial lease and want expert legal advice, our solicitors can help review your agreement and ensure your interests are protected.