What is a full repairing and insurance lease?
A full repairing and insurance lease, also known as an FRI lease, is typically an agreement in which the tenant is fully responsible for the repair and maintenance costs of the property, in addition to the insurance of the building, throughout the duration of the term agreement.
Essentially, it places the burden of property responsibilities with the tenant rather than the landlord.
Full repairing and insuring leases are the most frequent type of lease for commercial or business premises in England and Wales.
This lease agreement is most commonly seen within the commercial and hospitality sector, relating to property leases of salons, restaurants, bars, pubs, gyms and much more.
They are known to be popular amongst landlords for periods exceeding 5+ years, with some known to be struck in place for up to 25 years.
Strikingly, this lease often includes repairs for the tenant to fix even if something was broken or requiring attention when the commercial property unit was entered into, and not due to any actions of the tenant. This often catches tenants out and highlights the importance of gaining a full and thorough understanding of your tenancy agreement before signing.
The common misconception is that the property unit simply needs to be returned back to the landlord in the same condition as it was in when the tenancy began. So a signed FRI agreement in this case would mean anything that is out of repair is required to be fixed by the tenant during the term of the lease.
Tenant vs Landlord Responsibilities in an FRI Lease
Tenant:
- Repairs and Maintenance – The tenant is responsible for non-structural repairs and maintenance of the property starting from the first day of the agreement through to the very end. In some cases, incidents of minor structural repairs could also be the tenants responsibility e.g. roof leak.
- Insurance – The costs for the insurance also land with the tenant and they may also be required to pay any premiums that are activated throughout the lease.
Landlord:
- Health and safety – The landlord is expected to ensure full legal and regulatory compliance of the building.
- Major structural costs – Some FRI lease agreements may differ, but it is generally regarded as the landlords responsibility to fulfil any costs for major structural damages and repairs e.g. foundations.
- Insure the property – This is not set in stone for all FRI lease agreements, but the landlord may be required to sort out the insurance of the premises, and may then pass over the costs to the tenant.
FRI lease case example
Our team of hospitality consultants have and continue to be on hand to help tenants understand the position they are in so they can operate under full transparency. We see and hear countless different cases which involve a FRI lease, so let’s walk through a real life example…
A full repairing and insurance lease has been signed between the landlord and a new tenant – a bar owner. Upon opening the bar, the tenant found that there was a broken air conditioning unit in the back room. Due to the nature of their operation, this air con unit in the back was not imperative to fix, nor was it something that they felt needed addressing at all throughout the duration of their lease.
This signed agreement was 5 years long and at the end of the term the tenant was surprised to be informed by the landlord that they had breached their full repairing obligation by not fixing the AC unit located in the back room. It was not until they delved into the details of the original agreement that they discovered it would be their duty to fulfil the cost of repairing this issue.
How do the costs differ if the tenancy is shared?
A tenant will not be responsible for the full costs if they only occupy part of the commercial property building. Instead, this will be shared with the other tenants in the form of a service charge.
Advantages of an FRI Lease
A full repairing and insurance lease is not one that solely suits one side of the agreement. In fact, there are distinctive advantages from each perspective, which are listed as follows.
For the tenant:
- Stability: The long-term length of an FRI lease allows businesses to have peace of mind in terms of the stability and security of location at the commercial property. They can then plan future investments for growth without the added worry of a sudden looming relocation.
- Large onus and control: The financial responsibility for any decoration, repairs and maintenance of the premises means the tenant can have the necessary control to design and kit-out the location so it can maximise the potential of performance. The freedom of operation can help bring success at a faster rate without needing the approval or risking interference and delays from the landlord.
- Negotiation potential: Just like other lease agreements, an FRI lease presents the opportunity to negotiate favourable terms with the landlord for your business. Due to the length of this lease, some landlords will be more open to negotiating terms and conditions that encourage the uptake of their owned property, whilst allowing the tenant room to put forward favourable agreements from their side. This could be a low upfront cost to allow for added investment at the beginning of the lease in order to prepare the property as they desire.
For the landlord:
- Consistent income stream: Property investors know entering a long term FRI lease will guarantee consistent payments made by the tenant.
- Reduced financial burden: With the tenant being responsible for the internal renovation and maintenance of the property, they will shoulder any costs involved as well as insurance premiums in some cases. Therefore, during the agreement the landlord will be free from any consistent payments related to the property with the exception of fundamental structural damages.
- Attractive asset investment: Tenants keeping the commercial property in high order will help maintain or possibly increase the long-term market value of the premises. Contrastingly, no tenant for a significant period of time could result in a downfall of the property’s condition which would inhibit the attractive nature as an asset.
Disadvantages of an FRI Lease
As with most forms of lease agreements, a full repairing and insurance lease does come with potential drawbacks to consider and take into account before signing on the dotted line.
For the tenant:
- Consistent expenses: Rent, maintenance obligations and insurance fees present a consistent financial expense. Tenants must ensure they have the funds saved in order to meet these costs, as well as, be prepared for any minor structural damage to the property that requires fixing.
- Challenging without experiencing: It can be a financial and emotional burden on the tenant to manage and be responsible for the property that plays a key role in their businesses success. There is a chance that a tenant can enter an FRI lease without fully understanding the task at hand and whether they will suddenly become liable for repair and maintenance costs that they were unaware of at first.
- End-of-term dilapidation: Dilapidation is the financial implications for disrepair that has arisen at the end of the lease as a result of the tenant not meeting their repairing and maintenance obligations. This can then result in big bills and legal disputes.
For the landlord:
- Market volatility: If a landlord is trying to find a tenant for their commercial property during a time where the overall market is down then it could be challenging to find one in the first place, let alone a tenant who is willing to sign an FRI lease with favourable terms in the landlord’s favour.
- Risk of tenant default: If the tenant fails to meet their repair, maintenance or insurance obligations then this will lead to dilapidation and possible legal disputes. On the off chance a tenant is no longer part of the FRI lease agreement, the landlord may have to intervene and deal with a vacancy issue too which will have significant financial impact.
- Risk of negative long-term impact: If the tenant is failing to maintain and repair the commercial property or makes drastic fundamental changes, this could impact the value and difficulty of new tenants down the road. The extensive length of FRI leases gives the chance of greater long-term impact of this fashion.
Tenant vs Landlord Responsibilities in an FRI Lease
Tenant:
- Repairs and Maintenance – The tenant is responsible for non-structural repairs and maintenance of the property starting from the first day of the agreement through to the very end. In some cases, incidents of minor structural repairs could also be the tenants responsibility e.g. roof leak.
- Insurance – The costs for the insurance also land with the tenant and they may also be required to pay any premiums that are activated throughout the lease.
Landlord:
- Health and safety – The landlord is expected to ensure full legal and regulatory compliance of the building.
- Major structural costs – Some FRI lease agreements may differ, but it is generally regarded as the landlords responsibility to fulfil any costs for major structural damages and repairs e.g. foundations.
- Insure the property – This is not set in stone for all FRI lease agreements, but the landlord may be required to sort out the insurance of the premises, and may then pass over the costs to the tenant.
All in all, there is no doubt that an FRI lease presents an exciting opportunity for both parties. Landlords can make a brilliant investment within the commercial property market and a tenant can enter a stable agreement with virtually free rein to kit out their location for everything required to bring success.
We work with various top-level hospitality consultants who operate at the top of their field, namely providing their expertise in restaurants, bars, pubs, hotels and gyms. It is clear there are pros and cons of a full repair and insurance lease, which makes it imperative that tenants and landlords alike receive thorough advice and guidance by an expert.
If you would like to speak to one of our consultants, do not hesitate to get in touch and relay your unique circumstances and we will gladly assist so you can take the correct next step.