Introduction
Securing new office space is a major decision for any business. One of the most critical factors impacting your budget and liability lies hidden in the small print of your lease agreement, namely, the repairing and insuring covenants.
These acronyms define exactly who is responsible, the landlord or the tenant, for the upkeep, maintenance, and repair of the demised premises and the wider building structure.
Key Takeaways
- The FRI (Full Repairing and Insuring) lease places the heaviest burden on the tenant, making them liable for the insurance, maintenance and repair of the entire building, including the structure.
- The EFRI (Effective Full Repairing and Insuring) lease means the landlord organises the repairs and insurance but reclaims 100% of the costs from the tenant through a service charge.
- The IRI (Internal Repairing and Insuring) lease is generally preferred by tenants because they are only responsible for internal, non-structural repairs within their demised office space.
FRI: Full Repairing and Insuring Lease
The FRI (Full Repairing and Insuring) lease represents the heaviest burden of responsibility for the tenant in commercial property. It transfers nearly all liability for the property’s upkeep directly to the occupier.
How it Works
The tenant is liable for the maintenance, decorations, and repairs for the entire building, including the exterior, roof, and structural elements. The tenant is also typically liable for arranging and paying for the building insurance (or reimbursing the landlord for the premium).
Key Features and Considerations
This type of lease is most common for single-let buildings where one tenant occupies the whole property.
- Tenant Control vs. Risk: While the FRI lease gives the tenant full control over maintenance standards, it means they take on all the financial risk. This includes the potentially massive, unexpected costs of major structural repairs, such as a roof replacement, which can occur at any time during the lease term.
- Limiting Liability: For tenants, it is crucial to seek to limit this liability with a Schedule of Condition attached to the lease. This document records the exact state of the property at the start of the lease, ensuring the tenant is not responsible for repairing pre-existing defects.
EFRI: Effective Full Repairing and Insuring Lease
The EFRI (Effective Full Repairing and Insuring) lease is now the most common lease type in commercial property. It’s a modern mechanism that shifts the control of building repairs and maintenance to the landlord while ensuring the cost remains entirely with the tenant.
How it Works
Under an EFRI lease, the landlord organises and initially pays for all necessary building works, maintenance, and insurance. The landlord then recovers 100% of these actual costs from the tenant via two charges:
- Service Charge: Used to recover the costs of repairs and routine maintenance.
- Annual Insurance Rent: Used to recover the building insurance premiums.
Non-Profit Cost Mechanism
A key feature is the mechanism that ensures fairness and prevents either party from profiting from the service charge:
- Reviews and Adjustments: Regular reviews are carried out to ensure the service charge reflects the genuine expenditure.
- Surcharges and Refunds: Tenants may be charged a surcharge if the costs of major, unexpected repairs exceed the money collected. Conversely, tenants must be refunded during periods of low maintenance.
This guarantee means the landlord acts only as the manager of the upkeep, ensuring the tenant ultimately pays the exact cost of maintaining the building.
Benefits and Considerations
This structure is most common in multi-let buildings (where costs are split between all occupiers) but is increasingly used for single-let properties.
The primary benefit for the landlord is that they gain control over the quality of the work, ensuring the long-term integrity of their asset. For the tenant, the main advantage is that they do not have to manage complex repairs or contractor selection.
However, the tenant must be aware that while they are still, effectively, paying for full repairs, they have limited control over the timing or choice of contractor. The tenant can protect themselves by agreeing a Service Charge Cap.
IRI: Internal Repairing and Insuring Lease
The IRI (Internal Repairing and Insuring) lease is generally the preferred structure for office tenants looking to minimise their exposure to structural risk, however it’s rare to see an IRI lease in todays market.
The tenant is only responsible for the internal, non-structural repairs and decorative upkeep within their specific demised space.
The Landlord retains financial responsibility for the exterior, structure, roof, foundations, and all common areas (lifts, reception, stairwells, etc.).
Comparison
| Lease Type | Tenant Liability | Typical Use | |
| FRI | High (Entire Building) | Single-Let Building | |
| EFRI | High (Cost paid via service charge) | Multi-Let or Single-Let | |
| IRI | Low (Internal only) | Rarely Used |
Canning O’Neill’s View for Tenants
Before signing any lease, particularly an FRI, it is paramount to have a full building survey conducted and to insist on a Schedule of Condition. This will legally limit your repairing obligation, rather than having to improve the building or repair pre-existing defects.
If you are currently negotiating your office lease and need expert advice on the finer points of Repairing Covenants, Service Charges, or Dilapidations, Canning O’Neill is here to help you secure the best possible terms for your business.
FAQ
What are Repairing and Insuring Covenants?
These are the legal clauses in a commercial lease that define who is financially responsible (landlord or tenant) for the maintenance, repair, and insurance of the office space and the wider building structure.
What is the difference between a Full Repairing and Insuring (FRI) Lease and an Effective Full Repairing and Insuring (EFRI) Lease?
The main difference is control. In an FRI Lease, the tenant directly manages and pays for all repairs. In an EFRI Lease, the landlord manages the repairs but reclaims 100% of the cost from the tenant via a service charge.
Which commercial lease type carries the highest financial risk for the tenant?
The Full Repairing and Insuring (FRI) Lease carries the highest risk, as the tenant is directly liable for all structural defects and major, unforeseen repair costs.
What is the best way for a tenant to limit their liability in a Full Repairing and Insuring (FRI) lease?
Insist on a Schedule of Condition (SOC) being attached to the lease. This document legally records the property’s condition at the start of the tenancy, ensuring you are not responsible for repairing pre-existing defects.
How can a tenant reduce their financial risk under an Effective Full Repairing and Insuring (EFRI) lease?
The primary method is to negotiate a Service Charge Cap. This sets a maximum annual limit on the amount the landlord can claim back from the tenant via the service charge, helping to control unpredictable maintenance costs.
