The extent of the demise granted by the lease – and unforeseen issues that can arise

This is an area to which both landlords and tenants/buyers should pay careful attention.

It’s very easy store up problems for the future where the parties don’t think carefully about the true extent of the premises/equipment which is being leased/sold to the tenant (the “demise”), and therefore the true extent of the tenant’s repairing obligation (and the tenant’s rights). Let’s consider a standard lease of a floor of an office block, and reflect on what might be included and excluded in the demise:

1. Windows – This can be a problematic area: in buildings which pre-date the 1960s the windows tend to be fitted into the structure, so in some buildings of this age you may get the windows included in the demise (or at least it may say that in the first draft of the lease). That can be very expensive for a tenant whose repair obligation is to put/keep (and also, of course, return) the floor in “good and substantial repair and condition” but, as a landlord, do you want your windows possibly replaced/repaired at different times on different floors, and maybe with different products – it’s easy to see how that could result in a poor appearance and a consequent impact on value. In more recent buildings, there’s likely to be some sort of curtain walling system, and so in those circumstances it must make sense for the landlord to maintain the repair obligation, and for that to be a service charge item; and yet it’s surprising how many times you’ll see a lease of a floor in a 1980s office building demising the windows to the tenant.
2. Conducting media and plant “within and exclusively serving” the premises – What’s needed here is an informed decision, but how often is a fully-informed decision actually taken on what could be a very expensive item? If, as a tenant, you’re taking a lease for 10 years of space that hasn’t been refurbished for 10 years, do you know whether the air-conditioning equipment on your floor will last the course of that combined 20 years. As a landlord, do you necessarily want to pass this obligation onto the tenant anyway – tenants are generally not particularly diligent at maintaining a/c equipment, and as a landlord it may be better for you to undertake servicing of the entire system in the building, and be able (through the service charge) to keep on top of the cost and upgrade by way repair as and when necessary. That may also make it more appealing to a future buyer.
3. Flooring – Again this can be a major unforeseen expense.  Some leases will include the floor screed in the demise (and therefore the repair responsibility), but where the screed is covered with, for example, carpet tiles, or wood flooring, it isn’t going to be easy to know what state that screed is in when the lease is entered into. For a tenant taking a lease of newly refurbished space, a normal survey isn’t always going to be intrusive enough to give a true picture of the state of the screed, so it’s helpful where possible to see a copy of the landlord’s full building survey from its purchase, as this ought to contain some useful detail. Also, from a tenant’s perspective, it’s wise to be aware of the cost of giving space back with new flooring, but also to note that a lesser obligation, such as one simply to remove the existing floor coverings and make good (which, on the face of it, seems a lot less onerous), could also be expensive, because properly removing tiles and adhesives is not an easy job.           
4. “Hidden areas” – It’s worth considering what goes on above the suspended ceilings (or, perhaps more usually now, what goes on above the point where suspended ceilings would have been in the past), and what goes on below the raised floor system. Are there sufficient rights for both parties to run cables through them – often it will make sense for the landlord to retain these spaces and just grant appropriate rights to the tenant of the relevant floor to use an appropriate amount of the space to run cabling etc. And landlords should be careful to draw the red line so as not to include riser cupboards, unless the lease deals carefully with what the tenant is allowed to do with the space, and allows the use of only a proportionate amount.

While the above deals with a few points which may arise on a “normal” lease (at a market rent) of some office space, there are other specific considerations which might arise on residential blocks or mixed-use buildings.

1. Floor Slabs – While it would be very unusualin a market-rent lease for the slab to be included in the demise, where a mixed-use building is being sold off in parts – the most obvious example being the ground floor commercial element being sold off on a 999-year lease – it may be that the lease will say that the slab is included, and so a buyer needs to give some careful thought to what kind of liability might attach to that. If the wording in the lease suggests that there is no repair obligation on the freeholder (possibly recoverable as service charge), then there may be a direct and considerable cost to the long-leaseholder in the event of a defect. In a new building, however, there would hopefully be some change of recover of costs through professional team warranties.
2. Roofs/Air-Space – If you’re buying a building with an eye to increasing its value by adding an extra floor or two, then there are many things you need to consider, but where the top floor has been sold off on a long lease, then certainly one of those issues is whether the leaseholder of the top floor has rights in relation to the air space, or even whether the top-floor lease, on its proper construction, actually includes the air space, as that could scupper your plans.            

And a final point is to take good care with your plans. The lawyer is the “custodian of the plan”, but the lawyer of course relies on what’s produced by the architects. Plans are all too often almost a hindrance rather than a help, and some time spent at the outset making sure that the plan is very clear (and helpfully annotated) can save a lot of uncertainty further down the line.