What is a Schedule of Condition?

What is a Schedule of Condition?

A Schedule of Condition is a Record of what the property looked like when you purchased it.

We have recently been involved with an experienced business owner who was taking on a new shop lease and had been advised by her solicitor that she did not need a Schedule of Condition – a record of what the property looked like when she took it over. We really don't understand why this advice was given. Whilst we are sure the solicitor had his reasons, and every lease should be considered on its merits, we do feel that, wherever possible, a Schedule of Condition should be prepared, and sitting here now we cannot think of an instance when a Schedule of Condition would not be of benefit to the lessee / tenant / businessman.

Reasons for having a Schedule of Condition Carried out

• It identifies where any changes have been carried out already by the present owner when compared against the agreed alterations (often known as ‘licenses')

This can be of great benefit before you take on the lease, as it allows you to negotiate for alterations and repairs that have been carried out by the present tenant / lessee that you do not wish to take on responsibility for.

This can also be of great benefit in years to come if the landlord, via an interim Schedule of Dilapidations or a Schedule of Dilapidations, tries to make you reinstate the property to that which is recorded within the lease documentation. Remember, it is irrelevant what the property was like when you took it on, it is the lease documentation that is the overriding legal requirement.

• In years to come you will remember (with a smile, hopefully) what the business was like on day one

In our experience most lessees / tenants / businessmen carry out lots of repairs to enable their business to be as profitable as possible (or that is the original aim, until they meet a builder that runs over time and over budget, but that is another story!). These ‘improvements' should have had agreement from the landlord (in the case of most leases that we have been involved with) and a license should be issued.

Over the years we often find that as the relationship between the landlord and the lessee develops, an informal approval may be given in the form of a verbal agreement on the phone, for example, which can be dangerous for both parties when a lease comes to an end, and this is one of the advantages of having management companies who will generally stick more rigidly to issuing licenses (as they often gain fees from them).

The problem arises where perhaps the original landlord retires or sells the property investment to another company who are much stricter with regard to their dilapidations claims. This may be because when they purchase the property it is purchased at a premium with the incentive by the landlord being that they will be able to serve an Interim Dilapidations Schedule or a Final Dilapidations Schedule to the present lessee / tenant / business owner and get him to bring the property up to modern standards (and we can assure you that this happens).

• A record of how the last tenant ‘yielded-up' the property (gave back)

A Schedule of Condition is a very good independent record of the condition of the property when you occupied it / signed the lease.

Although, in theory, you, as the lessee / tenant / business owner, could, on day one of your occupation, carry out a very similar exercise to the Schedule of Condition produced by a Chartered Surveyor, in our experience this rarely happens and / or the photos get lost or misplaced (and with the case of computer files the computer crashes never to recover them again) and no proper record is formulated simply because the business owner has too many other things to do when he moves into a new property. Also, we would argue, that when you have moved into the new property it is far too late to negotiate on who should have carried out repairs and certainly too late to negotiate on the premium and the rent.

A Chartered Surveyor that specialises in dilapidations will set out the document in a standardised format and in our case we provide both a paper document and a word processed pdf file together with, in most cases, a CD of the photos taken, which of course all of which can still be lost, but you could always phone us up to see what we have on record (no guarantees, so look after your copy).

• Useful for Negotiating your way out of a Lease

Lessees / tenants / business owners wish to leave a lease for many reasons, for example your company may be getting bigger or downsizing or could be going bankrupt or you simply could have decided that the area is not where they want to be based or (the Holy Grail!) you may be retiring rich to your holiday home, and then receive a dilapidations claim against you. What does this mean?

First of all we need to explain what ‘yielding-up' is. This is when you come to the end of your requirement to have the lease property and then the landlord expects you to return it in the manner as set out within the lease.

Note this is not as you received the property but as set out within the lease and various case law that define the terms used within the lease; this can be a surprise / shock to the leaseholder / tenant / businessman. Having a Schedule of Condition showing what the property looked like at the start of the lease can help.

 

• Having a Schedule of Condition Appended to the Lease

This is the ideal situation where the landlord has agreed the Schedule of Condition is a fair and accurate representation of what the property looks like and this is appropriately allowed for within the lease, and most importantly the landlord has accepted within the lease that you will return the property in only as good a condition as that which you received it.

• Lease where the Landlord Refuses to Append a Schedule of Condition

This type of lease is becoming more common and should instantly have any potential tenant / lessee / businessman cautious of the lease; although it has to be said in some prime locations there is nothing else available but a full repairing and insuring lease without the Schedule of Condition attached and it is very much a catch 22 situation.

We believe that whilst the Schedule of Condition may not be appended to the lease if your solicitor forwards this to the landlord it will put you in a far better position when you do come to yield-up (give back) the lease, and it will give a good realistic picture of what the property looked like at the start of the lease. Whilst we do not know the legalities behind it, we feel that most reasonable landlords would prefer to be negotiating on the basis of a Schedule of Condition, albeit that it wasn't appended to the lease than nothing at all and they are prepared to be fair.

Remember, this is our opinion and not a legal opinion.

Real Life Examples

Learning from other people's misfortune

We were involved with a client of ours who was purchasing the freehold of a lease property which enabled him and us to sit back and watch the negotiations take place between a national tenant / leaseholder and a local developer. The landlord did not have any records of the condition that the property was in originally whilst the national tenant had kept good records and was therefore able to negotiate from a position of strength and reduce the original dilapidations claims considerably.

Unfortunately this had a secondary affect on the landlord selling the property to our client as we too were able to negotiate that the property had not been yielded-up (given back) in the condition set out within their own lease document, which they'd had to carry out negotiations on and therefore the price was reduced further. The lesson to learn from this is that the landlord benefits from keeping good accurate records.

Having a Lease for a Short Time can be a very Expensive Mistake

A tenant that we were asked to represent recently had moved into a public house on a full repairing and insuring lease without having a Schedule of Condition carried out or indeed a Structural Survey. After only a few months they realised that the business wasn't suitable for what they required and wished to yield-up (give up) the lease. Much to their surprise and horror they were served with a Dilapidations Notice. They argued that the property was in a far better condition than it had been originally when they had taken it on only a few months ago, but the landlord argued that it was irrelevant what the condition of the property was a few months ago as he wished the property to be brought up to the standard set out within the lease, which had a ‘put and keep' clause within it.

More of what a ‘put and keep' clause is:

This is where you have to ‘put' the property in good order and ‘keep' it in good order.

The landlord's claim was over £100,000 which, whilst being bullish, was very difficult for us to negotiate against as the owner did not have an original Schedule of Condition. In the end we put together an argument based on builders' invoices (although we were advised that a lot of the work had been carried out for cash) and negotiated / argued that many of the items being identified could not have possibly occurred within the last three to six months, although we knew legally, due to the type of lease, that we did not have ‘a leg to stand on', so to speak.

The result was a reduced dilapidations claim from the landlord but we believe this could have been reduced further if a Schedule of Condition had existed. Whilst this lease did not allow a Schedule of Condition to be appended to it if the tenant / leaseholder / businessman had had a Schedule of Condition carried out it would then have allowed them to negotiate from this.

The lesson of this is to always have a Schedule of Condition carried out and ours are included with a Structural Survey, whereas many companies charge for both.

Negotiating a Schedule of Condition to be Appended to the Lease is Hard Work for the Solicitor

We say this tongue in cheek, but we find that many solicitors accept the leases as they are presented to them or negotiate mainly on the legal niceties / nasties of the lease document, as this is their specialist area; they leave the Schedule of Condition because the Dilapidations Notice is so far away. However, we feel, that a good Schedule of Condition, from day one, particularly if it is appended to the lease, can be a negotiating tool to reduce the rent and the premium and will also be an excellent negotiating tool when you come to yield-up (give back) the lease. We would comment that you will not appreciate just how expensive and time consuming building work can be until you have had a Dilapidations Notice served upon you.

Break Clause

It is relatively common for many leases to have a ‘break clause' where the lessee / tenant / business owner can break the lease contract. This is particularly useful if a business is expanding or contracting or the markets that it works in are changing or the general overall market is changing. Nevertheless it is still best to protect yourself by having a Schedule of Condition carried out. In our experience many ‘break clauses' still allow the serving of a Dilapidations Notice.