What happens at the end of a commercial lease if there is no
condition report? That would depend on the terms of the lease. In the R.E.I.V. 2016
lease this is dealt with in clause 10 and the L.I.V. 2014 lease in clause 5.
Both 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 then further action may be initiated in court or at V.C.A.T. All the
more reason to have some sort of record.
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 fitout, air
conditioning or those found in item 1.4 of a standard disclosure statement.
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.
When would you not want to prepare a condition report? Often
this is not needed if the premises were leased as a bare shell and is to be
returned as such or the premises are in poor condition and agreement is made
for the tenant to renovate. 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. Often when a building is slated
for demolition, there is no need to prepare a report however, as often occurs,
the premises do not end up being demolished, are re-let and the tenant and
landlord are in dispute over how the property was left. If a report is made, it
can always be discarded if demolition proceeds.
When is a condition report useful other than at the end of a
lease? Unlike residential properties, commercial properties are often modified
by tenants such as new or amended fitouts, particularly food related. 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.
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.
A thorough condition report can catch out changes that have
been made without consent or where the tenant asserts on vacating the premises 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.
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 agents file. 
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