FRI Leases Explained: The Problems Commercial Property Investors Must Check

Illustrative image only. It does not depict a specific Realty Packaging property.

A Full Repairing and Insuring lease can reduce the landlord’s direct responsibility for repairs and building insurance. It does not remove landlord risk.

The result depends on the lease wording, the tenant’s financial strength, the condition of the building and the way the shop and upper parts operate together. A property may appear to offer secure tenant rent payments while still carrying material repair, compliance and vacancy exposure.

This article explains the main issues for investors in UK commercial and mixed-use shop-and-upper property.

General information disclaimer: This article is for general information only. It is not financial, tax, legal, planning, valuation, mortgage, surveying, insurance or investment advice. It is not an offer, valuation or recommendation. Capital is at risk. Income and returns are not guaranteed. Obtain independent advice before making a property or investment decision.

Summary of the main points

• An FRI lease can transfer contractual repair and insurance obligations to the tenant.
• The landlord remains exposed if the tenant cannot pay, does not complete works or becomes insolvent.
• The lease must be reviewed with the building condition, schedule of condition, insurance policy and planning position.
• Shop-and-upper buildings create particular risks around roofs, shared access, fire separation, services and structural repairs.
• Dilapidations claims are subject to the lease, the landlord’s actual loss and relevant legal limits, including section 18(1) in England and Wales.
• FRI does not mean every repair or improvement cost can be recovered from the tenant.
• An IRI lease normally leaves more structural and external responsibility with the landlord.
• A proper review should cover Realty Packaging’s Four Pillars: lease structures, planning, building condition and operational compliance.

What does FRI mean?

An FRI lease generally requires the tenant to keep the demised premises in repair and to pay for, or reimburse, the building insurance.

The exact obligation depends on the drafting. It may cover:

• Internal areas, fixtures and finishes
• External walls and shopfronts
• Roofs, foundations and structural elements
• Drainage and building services
• Decoration and maintenance
• Insurance premiums and related charges

A tenant occupying an entire building may carry most of these obligations. A shop tenant occupying only the ground floor may still be responsible for shared structures or contribute through a service charge.

The label “FRI” is not sufficient. Investors should review the repairing covenant, plans, definitions, exclusions, insurance clauses, service-charge provisions and any schedule of condition.

Tenant covenant strength and insolvency

An FRI lease only works as intended if the tenant can meet its obligations.

A tenant may have a contractual duty to repair the roof or maintain the shopfront. That does not mean the works will be completed on time. Cash-flow pressure, trading losses or insolvency can leave the landlord with:

• Unpaid tenant rent payments
• Unpaid insurance premiums or service charges
• Deferred maintenance
• A building in poor condition
• Costs of securing and managing vacant premises
• A dilapidations claim with limited recovery prospects

If the tenant enters administration, liquidation or a company voluntary arrangement, the landlord may become an unsecured creditor for some amounts. A claim for future repair costs does not guarantee recovery.

Before acquisition, assess the tenant’s accounts, trading history, parent-company support, guarantor and rent deposit. Review assignment and subletting rights. An Authorised Guarantee Agreement may be relevant when a tenant assigns, but its value depends on the outgoing tenant’s ability to pay.

Existing defects and schedules of condition

A “put and keep” repairing covenant can create a significant liability for a tenant where the property is already defective. It may require the tenant to put the premises into the required condition and keep them there.

For an investor, this creates two questions:

• What condition was the property in when the lease was granted?
• Does the lease properly limit the tenant’s obligation by reference to that condition?

A schedule of condition should record defects with sufficient detail, photographs and plans. It should be expressly incorporated into the lease. It may limit the tenant’s repairing obligation, but it does not resolve every issue.

The schedule should be compared with the current building condition. A roof leak, movement crack or defective service may have existed before the current tenant took occupation. Evidence is needed before attributing responsibility.

Illustrative image only. It does not depict a specific Realty Packaging property.

Shop-and-upper buildings are not simple

An FRI lease covering a shop does not necessarily deal with the whole building.

The upper parts may be separately let as flats, offices or storage. They may have different access arrangements, services and repair obligations. The documents must be read together.

Check responsibility for:

• Roofs, gutters and external walls
• Foundations and party walls
• Shared stairs, entrances and fire escapes
• Drainage, water, gas and electrical services
• Fire separation between the shop and upper parts
• Refuse storage and access
• External decoration and signage
• Insurance apportionment between occupiers
• Access for inspection and major works

A shop tenant should not automatically bear the full cost of a roof that also serves separately occupied upper floors. Conversely, a landlord should not assume that another lease will fund necessary works.

Unclear responsibility can affect net income, building safety, tenant retention and refinancing.

Structural repairs and deferred maintenance

FRI terms may transfer responsibility for structural repairs, but they do not guarantee proper maintenance.

Tenants may defer roof, masonry, drainage or external works because the cost is high. A tenant approaching a break date or lease expiry may also have limited incentive to carry out non-essential works.

The landlord should retain rights to inspect the property and enforce repairing obligations. The lease may allow the landlord to enter, carry out works and recover the cost as a debt. These provisions must be followed carefully and require legal advice.

During acquisition, commission a building survey and identify immediate works, cyclical works and long-term capital expenditure. Model the outcome if the tenant fails to perform.

Dilapidations and section 18(1)

Dilapidations are breaches relating to repair, decoration, reinstatement or use. They may be addressed during the term or at lease expiry.

A terminal claim may include:

• Repairing damaged or defective elements
• Redecoration
• Removing alterations
• Reinstating shopfronts and fit-outs
• Clearing items from the premises
• Compensating the landlord for loss where works are not carried out

Section 18(1) of the Landlord and Tenant Act 1927 can limit damages for disrepair in England and Wales to the diminution in value of the landlord’s reversion. The cost of works is not automatically the amount recoverable.

The landlord’s intentions also matter. If the property is to be demolished, substantially altered or redeveloped, some claimed works may be superseded. The landlord may not recover the cost of works that would have no value because they will immediately be removed.

The Justice UK Dilapidations Pre-Action Protocol sets expectations for schedules, quantified demands, information exchange and negotiation.

Investors should obtain a dilapidations assessment before relying on a claim as an asset of the investment.

Insurance and uninsured risks

In many FRI arrangements, the landlord arranges the buildings insurance and recovers the premium from the tenant. Other leases require the tenant to insure directly.

Review:

• The insured risks and exclusions
• The reinstatement value
• Loss-of-rent cover and indemnity period
• Rent suspension after insured damage
• Uninsured risks
• Terrorism cover
• Unoccupied property conditions
• The actual retail and upper-floor uses
• Responsibility for excesses and claims

An FRI clause does not make an uninsured event automatically recoverable. The lease should explain who bears the risk and whether either party can terminate if the property cannot be reinstated.

Insurance must reflect the full mixed-use building. A policy arranged for a shop alone may not address residential or office use above.

Owner-level compliance duties

Some obligations remain relevant to the owner even where the lease places costs on the tenant.

These may include fire safety, asbestos management, building control matters, planning compliance, licensing, access and statutory notices. The lease may allocate operational tasks, but an investor should not rely on the FRI label as evidence that the asset is compliant.

Review the EPC and MEES position for the commercial space and each relevant upper part. GOV.UK guidance currently states that covered non-domestic rented property generally needs an EPC rating of E or better, unless an exemption applies.

Energy improvements may involve capital expenditure, tenant access and planning consent. A repairing covenant does not automatically allow every improvement cost to be passed to the tenant.

Redevelopment restrictions and security of tenure

An FRI lease can restrict the landlord’s future plans. Check:

• User clauses
• Alteration controls
• Assignment and subletting
• Landlord access rights
• Break clauses
• Redevelopment provisions
• Rights to terminate or relocate
• The tenant’s statutory security of tenure under the Landlord and Tenant Act 1954

A landlord may have a development plan for the upper floors or the whole building. Existing lease rights can delay or prevent implementation. A redevelopment strategy should be tested against the lease, planning position and possession route.

Do not assume that a dilapidations claim will fund redevelopment. Section 18(1), supersession and the landlord’s actual loss may limit recovery.

FRI versus IRI

An Internal Repairing and Insuring lease usually limits the tenant’s repairing obligations to the interior. The landlord commonly retains responsibility for the roof, structure, exterior and common parts.

IRI may provide a clearer allocation of risk, but the landlord must budget for:

• Roof and structural works
• External decoration
• Shared services
• Common parts
• Building insurance
• Compliance upgrades

FRI may reduce direct landlord expenditure, but the rent may reflect the tenant’s wider obligations. Compare the total cost of ownership rather than the headline rent alone.

Read our related guide: FRI vs IRI Leases: How Repairing and Insurance Terms Shape Your Shop-and-Upper Returns.

Structure, capital allowances and tax planning

Ownership structure can affect borrowing, tax reporting, administration and exit planning. Investors may consider an individual ownership structure, a limited company or an LLP. The appropriate option depends on the investor’s objectives, funding, tax position and proposed activity.

Capital allowances may be relevant to qualifying fixtures and integral features in commercial property. They should be reviewed during acquisition and documented correctly. The treatment of repairs, improvements, financing costs and tax-advantaged strategies requires specialist advice.

Do not assume that an FRI lease, company structure or tax relief makes an investment low risk. Tax rules can change, and relief may depend on detailed conditions.

Practical investor checklist

• Obtain every lease, licence, deed of variation and side letter.
• Confirm whether the arrangement is FRI, IRI or a hybrid.
• Review the demise plan and responsibility for roof, structure and shared areas.
• Check the tenant’s accounts, guarantees, rent deposit and payment history.
• Commission a building survey and review deferred maintenance.
• Compare the schedule of condition with the current property condition.
• Obtain the insurance policy, reinstatement valuation and claims history.
• Review EPC, MEES, fire safety, asbestos and licensing matters.
• Check break clauses, renewal rights and security of tenure.
• Assess redevelopment restrictions and planning permissions.
• Obtain a dilapidations assessment, including section 18(1) considerations.
• Model vacancy, insolvency, capital expenditure and unrecovered costs.
• Review ownership structure, capital allowances and tax issues with advisers.

Illustrative image only. It does not depict a specific Realty Packaging property.

Realty Packaging’s Four Pillars

Realty Packaging reviews mixed-use commercial opportunities through four connected areas:

• Lease structures: rent, repairs, insurance, breaks, covenant strength and security of tenure.
• Planning: permitted use, development potential, restrictions and redevelopment routes.
• Building condition: roof, structure, services, defects, deferred maintenance and capital expenditure.
• Operational compliance: fire safety, EPC, licensing, access, insurance and management.

An FRI clause sits within the lease pillar, but its effect reaches all four areas. A repairing obligation can affect capital expenditure. Planning intentions can affect dilapidations recovery. Compliance works can affect insurance and tenant operations.

Our approach is to test the income, building, planning context and potential before presenting an opportunity. Investors can also use the investment criteria page to define the type of mixed-use asset they wish to review.

Conclusion

An FRI lease can transfer contractual repair and insurance obligations. It cannot transfer every practical risk.

The landlord may still face insolvency, vacancy, deferred maintenance, insurance gaps, compliance duties, structural disputes and limits on dilapidations recovery. Shop-and-upper properties require particular care because different occupiers may rely on the same roof, structure, services and access routes.

The correct investment decision depends on the complete evidence: lease documents, tenant covenant, building condition, insurance, planning and compliance. Review these areas together before relying on the FRI label or projected tenant rent payments.

For support, contact support@realtypackaging.co.uk, Rachel on +44 20 4513 2218, or visit www.realtypackaging.co.uk.

Draft article. Not for publication without legal, technical and editorial review.