Repair, maintenance and replacement obligations in commercial leases: Who pays?

When repairs or major works are required to a premises or building, disputes can quickly arise as to whether responsibility rests with the lessor or the lessee, and who must bear the cost. Unfortunately, the answer is not always simple. 

Understanding these issues when drafting or negotiating the lease, or before committing to substantial works, can help avoid unexpected costs and disputes.

Start with the lease

A well drafted lease should do more than impose a broad obligation on the lessee to keep the premises in good repair. It should allocate responsibility between the lessor and lessee.

This includes identifying who is responsible for:

• routine servicing and maintenance;
• damage caused by the lessee, its invitees or contractors;
• structural repairs;
• major capital works; and
• work required for safety or legislative compliance.

Responsibility will usually turn on the terms of the lease.

Retail leasing legislation may limit a lessee’s obligations

Where the Retail and Commercial Leases Act 1995 (SA) applies to a commercial lease, section 13 limits the circumstances in which a lessee may be required to incur or reimburse capital expenditure.

Permissible obligations include making good damage arising during the lessee’s possession, certain disclosed fit-out obligations, and disclosed contributions to a sinking fund for major repairs or maintenance.

Accordingly, a lease provision requiring the lessee to undertake structural or capital works will be void to the extent that it imposes capital expenditure beyond those permitted categories.

What happens if neither party is responsible?

If the lease does not impose responsibility on either the lessor or the lessee, the obligation does not automatically fall on one party merely because the work is required.

Neither party may have a contractual right to compel the other to undertake or pay for the work.

The parties may nevertheless need to consider safety and statutory compliance, insurance requirements, disruption to the lessee’s operations, the safety of invitees, the lessor’s interest in protecting its asset, and the consequences of allowing the premises to deteriorate.

In practice, the issue may need to be resolved by agreement, including through cost sharing or one party assuming responsibility.

How we can help

The best way to avoid repair and maintenance disputes is to ensure the lease is properly drafted and negotiated from the outset.

We can assist lessors and lessees with:

• drafting and negotiating repair, maintenance and replacement obligations;
• reviewing and advising on existing lease provisions;
• advising on the application of the Retail and Commercial Leases Act 1995 (SA); and
• resolving disputes.

For more specific information in relation to any of the material discussed in this article, please contact us.