The importance of the Schedule of Condition

The parties to commercial leases often live to regret not producing or losing a clear, agreed and finalised Schedule of Condition. It can lead to very costly outcomes.

The negotiation of commercial leases is often complex and time sensitive. Tenants are usually eager to get installed and landlords anxious to get the property let quickly to reduce their running costs.

There’s always the temptation to overlook some important preliminaries. The schedule of condition being one of them. Let’s try and understand what one or other of the parties might overlook, certain preliminary documentation as they rush to completion. 

Often inexperienced small business tenants will be unaware of the importance of this process, but it’s equally of importance to landlords. Commercial tenancies are based on the law of contract, meaning that the drafting (the exact wording) of a lease is of crucial importance. One aspect in particular is the condition of the property at the commencement and the termination of the tenancy.

Unless the condition of the property is clearly established from day one, endless arguments and disputes can arise at the conclusion of the tenancy. That’s because neither party can establish - vis-à-vis the wording in the lease agreement - who is responsible for the cost of dealing with dilapidations.

Unlike residential tenancies, which are controlled by statutory rules, always erring towards the landlord’s responsibility for repairs, commercial tenancies are completely different. Being contractual – in other words, exactly what the parties agreed to – any deterioration (dilapidation) in the condition of the building during a tenancy is often down to the tenant.

Full insuring and repairing lease

Leases of any consequence are usually drawn up as FRI leases (in the US, these are known as triple net leases (NNN). These leases basically pass on full responsibility for virtually everything onto the tenant – they give the landlord a clear investment return unencumbered by unexpected costs. 

For example, if the roof is defective at the commencement of the tenancy, without clear evidence of this, the tenant could find itself paying for a new roof at the end of the tenancy. But when a surveyor has drawn up a proper schedule of condition, agreed at the outset by the parties, all this can be avoided, along with any costs involved in a protracted and expensive legal dispute.

It works both ways of course: landlords also need evidence to show when a tenant has allowed a building to deteriorate through lack of maintenance or when they have carried out alterations in breach of the lease terms.

A couple of quite recent cases highlight the importance and value of a properly agreed Schedule of Condition – see below.

What is the schedule of condition?

This is a record of the condition of a property - usually drawn up by a building surveyor - accompanied by a set of photographs, which accurately captures the true state of a building at the commencement of a lease. 

The schedule of condition has a very simple purpose: to provide a baseline, a record against which a tenant’s repairing obligations can be measured when the lease ends, or even during the term of the lease, if the landlord suspects wilful neglect or unauthorised works.

The document is an important adjunct to the lease for both parties: for the tenant because most commercial leases impose comprehensive obligations to it. Usually stated as “to keep the premises in “good and tenantable repair.” For the landlord as already stated above.

Unless the, “to keep the premises in “good and tenantable repair.” clause is qualified in some way, it means the tenant is obliged to restore the property to a “fairly high standard”, one allows the landlords to put the property on the market tenant ready. It can be re-let easily, and importantly, even if it was in far from perfect condition when the tenancy began. 

From the landlord’s perspective, a properly agreed schedule of condition incorporated into the lease avoids any ambiguity and strengthens the landlord’s case for enforcement of the tenant’s repairing obligations as well as protecting the tenant from unfair costs. 

The schedule helps the landlord plan for a dilapidations claim in advance of the end of the tenancy and gives tenants fair warning of the works that are needed to bring the property to its rightful state of repair.  

With a properly agreed schedule the tenant’s liability may be limited to exactly what it is responsible for under the terms of the lease, and the original condition, enough to restore the property to the condition recorded on entry.

Extended parties to a lease

‍Dilapidations matters are often complicated because of developments during the tenancy and other interests, making the schedule of condition so much more important. Besides the landlord, who holds the reversionary interest in the property, and whose primary concern is preserving the asset value, and the tenant who holds exclusive possession for the period of the tenancy term, with repairing obligations, there may also be a guarantor and assignees.

They also have obligations under the terms of the lease. Unless things are spelled out clearly all sorts of disputes can and often do ensue when a tenant defaults passing on obligations to guarantors, or the lease is assigned to a new party.

Disputes over dilapidations where the schedule of condition issue arises are numerous.

A case in point is Topland Portfolio No.1 Ltd v Smiths News Trading Ltd (2014). In that particular case the landlord’s appeal was rejected by the Court of Appeal but not before a lot of legal costs were expended by both parties on the matter.  

Disputes over repairs

There is no shortage of cases illustrating the folly of not having an agreed and finalised schedule of condition, with two examples below:

Perhaps a more pertinent and more recent case is that of Nicol’s Worsteds Limited v Hlt Stakis Operator Limited (2025) involving the absence of a schedule of condition, a costly and time-consuming dispute.

Here, the tenant was obliged to keep the property in “good and substantial repair and condition” which was qualified by the statement that “nothing herein shall require the Tenant to deliver up the [property] in a better state of repair and condition than that evidenced by the Schedule of Condition.” 

With the expiry of the lease the landlord claimed the tenant had breached its repairing obligations and was seeking damages. The tenant argued that the schedule of condition showed its obligations were limited. However, there was a big problem: The original schedule was mislaid, or at least could not be found, and questions were asked as to whether one had even been agreed in the first place.

The tenant’s argument was that copies of a video survey of the property and an “overview report” prepared, constituted a schedule. The landlord argued there was no agreement that a video and accompanying report constituted the schedule of condition, and therefore that without a proper schedule a limitation on the tenant’s liability “flew off,” which left the tenant fully liable to deliver up the property in a better state than when they first leased it.

Briefly, the outcome of the case was that the video and report were “the only show in town” and therefore in all the circumstances of the case, the judge argued, must have been intended to constitute the schedule, finding in favour of the tenant.

This outcome could have gone either way. Because of the absence of a clearly agreed and finalised schedule of condition the parties were forced into a protracted and costly dispute over what the tenant’s repairing obligations were.

In the case of Dem-Master Demolition Ltd v Healthcare Environmental Services Ltd (2017), which was an important Scottish case involving a missing agreed schedule of condition, again, the court erred on the tenant’s side. A missing schedule does not necessarily invalidate a limitation on a tenant's repairing obligations, said the judge. The court considered evidence produced, which established the building's poor state at lease commencement, thereby capped the tenant’s repairing obligation. 

The tenant had leased the dilapidated premises with an agreed schedule of condition intended to limit their repairing obligations, given the state of the building at lease commencement. However, the schedule itself was missing, leading the landlord to arguing for a higher standard of repair.

The judge in the case, Lady Wolffe, held that the absence of the document was an “evidentiary issue”, not a bar to interpreting the limitation. She found that because the parties agreed that a schedule should exist, they could use other evidence in its stead to prove the condition of the premises at the start of the lease.

Again, this case resulted in unnecessary time and expense.

Don't live to regret it!

The significance of these cases act as a warning for both landlords and tenants. They must ensure that a full schedule of condition is prepared, agreed and finalised at the commencement of all commercial leases, that copies are attached to the lease and counterpart and kept safely by both parties.

[Main image credit: Sam J]