Do you have a Condition Report for your commercial property?
Don’t always assume that your lease will protect you when it comes to making good the property.
We spoke with Andrew Charlton from The Condition Report Company about the importance of having a Condition Report as a commercial property Tenant and what can happen if you don’t. The Condition Report Company provides condition reports, dilapidation reports and make-good services for the purpose of providing independent, clear and precise supplementary evidence and advice on commercial real estate.
Does a Tenant legally need to have a condition report?
No, there is no legal requirement to have a condition report carried out for commercial and industrial leases. It is viewed by regulators, somewhat flippantly in our opinion, that businesses entering into a commercial lease will have the business acumen to manage the process in a manner that reduces their exposure to any property risk. Our experience over 12 years in business is that this is not necessarily the case and we see weekly examples of tenants who are very surprised at their make good obligations at the end of a lease, because the lease has not been properly explained and the property condition has not been adequately documented at commencement
At what point in a lease should a Tenant have a condition report done?
Condition reports should always be done (the inspection at the very least) prior to lease commencement. The most important point in time when having a condition report prepared is between the landlord completing their works and the tenant taking possession. This is the ideal moment for having the inspection carried out. Of course in the real world, this rarely happens, with landlord works and tenant fit-out often happening concurrently. It’s not a huge problem if works are ongoing, both parties just need to make sure they work with the condition report consultant to highlight what are landlord and what are tenant issues/fittings
What information is in a condition report?
The Condition Report Company carry out a thorough inspection of the property, covering all parts of the leased premises, taking many (often hundreds) of digital photographs of the site, including both general and defect photos. All photos taken are included in the report, along with a location guide for the photos so it is clear where each photo has been taken. A schedule of building features as well as fixtures and fittings located throughout the building is completed. A table of fire services located within the property is included. And finally our reports have a tenant and landlord sign-off page so that the report can be technically acknowledged by both parties to the lease.
How will having a condition report help a Tenant?
A condition report will clearly spell out the detail and dilapidations within the property at lease commencement, creating a baseline for make good. They are especially effective if the lease makes reference to the condition report and refers throughout the make good clauses lines similar to “back to the condition as demonstrated in the condition report”. Ideally the lease will reference bringing the property back to original condition and avoid sweeping make good clauses that require significant redecoration regardless of the original condition. Particularly in properties that are not in fantastic condition at commencement, all the tenant ends up doing is paying for improvements to the landlord’s investment.
A great example was the tenant client of ours who was in the food manufacturing business. The landlord was suggesting to them at the end of the lease that it was their method of business that had caused rust to the roof sheeting and had put in a claim for the replacement of the entire roof. But fortunately the tenants had their condition report that showed that the roof was already rusty, saving them a good deal of money.
If the tenant has significantly improved a property with their fit-out, the condition report can be a good tool to assist in lease renewal negotiations. With the baseline at commencement established, it is difficult for the landlord to justify a higher rent based on an improved property when it was the tenant works that improved it.
If circumstances change and the original lessee is looking to assign the lease or sub-let part of the property to a third party, then the original lessee’s obligation have been benchmarked. It would be a good time to do an updated condition report too, so that it’s clear what the assignee/sub-tenant has inherited.
What is the difference between a condition report and a dilapidation report?
That varies a little bit depending on who you’re talking to. But essentially the difference in our view is that a condition report is as described above, whereas a dilapidation report is a simpler document that is designed to only really highlight dilapidations within a property.
Should a Tenant leave it up to the Landlord to prove the state of the property before they took on the lease?
Absolutely no. You are best to be involved in the process to ensure that the evidence that is put together has been agreed upon and signed off by both parties.
Should a Tenant get their own condition report done or can they use one the Landlord prepares?
We always recommend that the best outcomes happen when the tenant and landlord agree to share the cost of one report, jointly commission a provider and both have the opportunity to review the report and provide any necessary feedback prior to both parties signing off on the report as accepted. The other advantage to this approach is that if you share the cost of the condition report, it becomes very cheap for both parties.
If the landlord is preparing one, try to ensure that you have the right to review it prior to it being finalised. You will want to make sure you are in agreement with the condition report consultant as to the state indicated in the report.