Commercial Condition Reports; A valuable record often overlooked

By Nick Bacon June 18, 2019

Condition Reports are standard practice in the Residential leasing market, however there is no specific requirement for these in the Victorian commercial leasing market. The Retail Leases Act 2003 makes no mention of them, and current Commercial Leases, such as the REIV or LIV, are silent on the matter.

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What happens at the end of a commercial lease?

Both the REIV and LIV Leases require the tenant to remove its fixtures and fittings and make good any damage. The R.E.I.V. lease requires the property to be returned to the condition as at the initial commencement date whereas the L.I.V. lease emphasises a clean condition. If the parties do not agree on the state of the premises at commencement, then legal action may be initiated. All the more reason to have some sort of record such as a condition report.

What type of condition report should be used?

That would depend on the type of property. A small shop would generally be satisfied with external and internal photos, a list of the owner fixtures and fittings and any general items that are a feature of the property such as fit-out or air conditioning etc.

Videos can be useful if the premises are substantial and there are companies that can prepare detailed condition reports on HVAC, electrical distribution, data cabling and the like if the intention is to have a corporate office for example returned to its original condition at lease end or if the tenant intends to make substantial alterations.

In the residential context, a tenant acknowledges the state of the premises and a report is agreed to by both parties. It is up to the individual owner if they want to seek agreement from the tenant or merely keep a copy for their own records for commercial premises. I have had tenants ask for a condition report at the commencement of a lease but it is rare. Property owners also rarely ask for this unless a problem arises, by which time it is often too late.

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When would you not want to prepare a condition report?

You may question the need for one if the premises were leased as a bare shell and are to be returned as such, or the premises are in poor condition and agreement is made for the tenant to renovate, or if the building is slated for demolition. Be sure to amend the Lease so that the tenant is not obliged to return the premises to its original condition if the landlord wants to retain the improvements made by the tenant.

However, in all these circumstances nothing is ever certain. It would be better to simply have a report prepared regardless. Worst case it is never referred to in the future, but at least it will be there if you end up needing it for some unforeseen reason.

When is a condition report useful other than at the end of a lease?

Unlike residential properties, commercial properties are often modified by tenants with custom fit-outs. A condition report and subsequent recording of the changes after the tenant has moved in and refitted will assist tracking alterations to the premises. This could evolve over many years with the same or new tenants following the sale of a business.

A thorough condition report can catch out changes that have been made without consent or where the tenant asserts upon vacating that the premises were taken in poor condition and that their changes actually constitute an improvement. That may or may not be the case. Undocumented changes without permits may actually be illegal and require expensive restoration.

Landlord’s fixtures and fittings such as floor coverings are often contentious. Were they in good condition at commencement  and can the landlord prove it? Was there pre-existing damage or is it fair wear and tear? Without good photographic evidence the proof required may not exist, leading to dispute.

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Commercial Condition reports may eventually find their way into standard leases or legislation but in the meantime a report with basic photos and a description of the state of the premises and fixtures and fittings should be on every commercial agents’ file.

At GormanKelly, we prepare a Condition Report for your property and ensure any make good obligations have been met at the expiry of the Lease as part of our standard property management service to you.

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Nick Bacon

Written by Nick Bacon

Since 1988 Nick has seen vast changes in Australian commercial property, but through his energy, passion and adaptability, he always ensures his clients benefit from the most responsive and up-to-date guidance on how to maximise the leasing potential of their assets.

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