Introduction to FRI leases for commercial property

In recent blogs we have talked about diversifying portfolios as an option for investors looking to increase yield. One possible sector for consideration is commercial property, but it is important to be aware of key differences between letting out a residential and a commercial property, for example the lease agreement.

For many landlords who own residential buy to let properties, the standard method for renting out the property is a Standard Assured Short Hold Tenancy Agreement that would be for a period of one to three years. The tenant’s rent would typically include the maintenance and insurance for the property. For commercial properties, however, there are a number of different types of agreement to consider. One such option is a Full Repairing and Insuring (FRI) Lease.

So, what is a Full Repairing and Insuring Lease?

This is a lease in which the tenant takes on all the costs for repairs and insurance for the property being leased from the landlord. Experienced tenants who take on this type of lease would ensure that the property is structurally sound to minimise the repairs liability, obtaining a survey report on the condition of the property at the start of the lease to facilitate this. Anything requiring attention can then be raised with the landlord before the lease starts or it may be possible to limit the repairing covenant in the agreement by referencing a ‘Schedule of Condition’ to be attached to the lease from the outset. The lease term would be for a minimum of five years – another attractive reason for an investor to want to add such properties to their portfolio.

In some cases, FRI leases can be obtained for properties that are residential. For example, blocks of flats have been known to operate with FRI leases. Typically housing associations will be tenants of these properties, agreeing terms for a five-year period and housing tenants that they deem suitable. The advantage for the landlord is that they can benefit from guaranteed income for this extended period of time (compared with a Short-Hold Tenancy Agreement).

For landlords and tenants alike, it is important to obtain suitable legal advice when agreeing to FRI leases. However, for commercial investments, it could be another way of maximising yield in the current market.