Surveyor inspecting the roofline and shopfront of a London mixed-use property

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

FRI and IRI describe how repair, maintenance and insurance obligations are divided between a commercial landlord and tenant.

A Full Repairing and Insuring (FRI) lease usually places wider obligations on the tenant. An Internal Repairing and Insuring (IRI) lease usually limits the tenant’s repair obligations to the inside of the premises.

The labels are not definitive. The exact wording of the lease controls. Investors should read the repairing clause, insurance provisions, defined terms, plans, schedules and exclusions before relying on the description.

This article provides general information for investors in UK commercial and mixed-use property. It is not legal, tax, surveying or insurance advice.

FRI and IRI leases in plain English

What is an FRI lease?

Under an FRI lease, the tenant is generally responsible for keeping the whole demised premises in repair. This can include:

  • Internal finishes and fixtures
  • External walls and shopfronts
  • The roof
  • Structural elements
  • Internal and external services
  • Decoration and maintenance

The tenant may also be responsible for arranging building insurance or, more commonly, reimbursing the landlord for the insurance premium as insurance rent.

The scope depends on the lease. A tenant taking a lease of an entire building may carry most repair costs. A tenant occupying only part of a building may still have obligations for shared structures or contribute through a service charge.

What is an IRI lease?

Under an IRI lease, the tenant is usually responsible for the internal parts of the premises. This may include:

  • Internal walls, floors and ceilings
  • Internal decoration
  • Fixtures and fittings
  • Internal services, where defined
  • Damage caused by the tenant’s use

The landlord normally retains responsibility for the structure, exterior, roof and common parts. The landlord also commonly arranges the building insurance. Costs may be recovered through a service charge or insurance rent.

An IRI lease does not always mean limited liability. Some leases transfer responsibility for shopfronts, glazing, plant, internal services or specialist equipment to the tenant. The actual drafting must be reviewed.

Who does what?

Issue FRI lease IRI lease Typical shop-and-upper lease note
Internal repairs Tenant Tenant Usually includes finishes, fittings and internal services
External repairs Often tenant Usually landlord Shopfront responsibility must be checked
Structure and roof Often tenant for the whole demise Usually landlord Roof and party-wall responsibility is important
Common parts Tenant or service charge Landlord through service charge Shared stairs and access require clear allocation
Building insurance Landlord insures and recharges, or tenant insures directly Usually landlord insures and recharges Confirm reinstatement value and loss-of-rent cover
Contents insurance Tenant Tenant The tenant normally insures stock, equipment and contents
Decoration Tenant Tenant internally Check frequency and required standard
Service charge May cover retained or shared areas Often used for structure and common parts Review caps, exclusions and apportionment
Dilapidations Wider potential exposure Narrower, but still material Schedule of condition can reduce disputes
Rent level implication May support a lower headline rent May support a higher rent Compare total occupancy cost, not rent alone

What an FRI lease means for an investor

A typical FRI covenant requires the tenant to keep the premises in good and substantial repair throughout the term.

A “put and keep” obligation can be significant. It may require the tenant to put the building into the required condition at the start and then keep it there. This can create an issue where the property is already in poor repair.

The tenant may be liable for:

  • Roof replacement
  • Structural cracking
  • External masonry
  • Drainage
  • Shopfront repairs
  • External decoration
  • Building services
  • Compliance works connected with its occupation

Insurance arrangements vary. In many leases, the landlord arranges the building policy and recovers the premium from the tenant. Other leases may require the tenant to insure directly. The lease should address insured risks, uninsured risks, reinstatement, rent suspension and loss of rent.

A Jervis v Harris-style clause may allow the landlord to enter the premises, carry out works that the tenant has failed to complete and recover the cost as a debt. The clause must be followed carefully. Legal advice is required before using it.

A schedule of condition records the state of the property at the start of the lease. If properly incorporated into the lease, it may limit the tenant’s obligation to returning the premises in no worse condition than recorded. It does not remove every repairing obligation.

Property professionals reviewing a lease and floor plan for a mixed-use property

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

What an IRI lease means for an investor

An IRI lease normally requires the tenant to repair and decorate the interior. The landlord retains responsibility for:

  • Foundations and structural walls
  • Roofs and external walls
  • Common parts
  • Shared access
  • External decoration
  • Building-wide services, where applicable

The landlord normally insures the building. The tenant may insure contents, equipment, business interruption and tenant improvements.

The main advantage is a narrower tenant obligation and a clearer landlord responsibility for major building elements. The main investment risk is that the landlord must fund cyclical works. These may include roof repairs, external redecoration, structural works and fire-safety improvements.

An IRI lease may support a higher headline rent because the landlord provides more repair responsibility. That does not necessarily mean a better investment. The investor should compare rent against the expected cost of ownership.

Shop-and-upper property considerations

Shop-and-upper properties require a review of each part of the building.

A ground-floor shop let on an FRI lease may place responsibility for the shopfront, internal areas and possibly the structure on the commercial tenant. If the tenant occupies only the shop, the lease may instead be IRI, with the freeholder retaining responsibility for the building.

The upper parts may be:

  • Separate residential flats
  • Residential tenancies
  • Offices
  • A single commercial demise
  • Unused or conversion space

The documents for the shop may not explain the full responsibility for the upper parts. Review all leases, licences, tenancy agreements, plans and service-charge arrangements.

Specific points include:

  • Fire separation between the shop and residential areas
  • Shared stairs and entrances
  • Roof access
  • Party walls
  • Drainage and service runs
  • Electrical and gas supplies
  • Refuse storage
  • Fire alarms and emergency lighting
  • Repair responsibility between the freeholder and residential occupiers

An unclear or unfair lease can affect net income, capital expenditure and refinancing. A lender may also assess the tenant’s repairing covenant and the condition of the building when reviewing security.

Financial impact for an investor

The following example is illustrative. It is not a valuation, quote or guarantee.

Assumptions:

  • Purchase price: £500,000
  • Annual rent: £60,000
  • Interest-only borrowing: £500,000 at 6%
  • Annual interest cost: £30,000
  • Void and arrears allowance: £3,000
  • No allowance for tax, transaction costs, management fees or capital growth
Item IRI scenario FRI scenario
Annual rent £60,000 £60,000
Landlord structural and external repairs (£8,000) £0 in year one
Sinking fund for future FRI works £0 (£4,000)
Insurance and unrecovered property costs (£2,000) (£1,000)
Void and arrears allowance (£3,000) (£3,000)
Net income before finance £47,000 £52,000
Interest at 6% (£30,000) (£30,000)
Cash surplus after interest £17,000 £22,000
Net income yield on purchase price 9.4% 10.4%

The FRI scenario has lower expected landlord expenditure in year one, but the sinking fund recognises that roofs, structure and external elements still have an economic cost. A tenant may defer repairs, become insolvent or leave the property in poor condition.

The FRI rent may also be lower in practice. If the FRI rent were £57,000, the net income before finance would be approximately £49,000 after the same allowances. The resulting net yield would be about 9.8%.

The correct comparison is therefore:

Rent less landlord costs, voids, insurance, service charges, capital expenditure and finance.

Dilapidations at the end of the term

Dilapidations are breaches of obligations relating to repair, decoration, reinstatement or use. They are commonly assessed at the end of the lease, although landlords may also address breaches during the term.

The process may involve:

  1. A schedule of dilapidations identifying breaches
  2. A quantified demand setting out the landlord’s claimed loss
  3. A tenant’s response, often using a Scott Schedule
  4. A diminution valuation where relevant
  5. Negotiation, mediation or another dispute-resolution process

Under an FRI lease, the potential claim is broader because the tenant may be responsible for the structure and exterior. Under an IRI lease, the claim is narrower but can still include internal repairs, decoration, reinstatement and alterations.

Landlords cannot automatically recover the full cost of every proposed work. The claim may be limited by the landlord’s actual loss, the value of the reversion and the proposed future use of the property. Section 18(1) of the Landlord and Tenant Act 1927 can be relevant to repair claims.

Investors buying a reversion should commission:

  • A building survey
  • A schedule of condition review
  • A current or terminal dilapidations assessment
  • A review of break-clause conditions
  • Advice on the tenant’s covenant and likely ability to pay

The timing matters. A break clause may require strict compliance with repairing, decoration and reinstatement obligations before the break date.

Insurance, MEES and EPC

Confirm who arranges the building insurance and who pays the premium. Review:

  • Reinstatement value
  • Loss-of-rent cover
  • Public liability cover
  • Uninsured risks
  • Terrorism cover
  • Rent suspension
  • Unoccupied property requirements
  • Tenant contents and business-interruption insurance

MEES and EPC obligations also affect lease risk. From April 2023, let commercial properties generally need an EPC rating of E or better, unless an exemption applies. The Government has also indicated a 2030 target of EPC B for new commercial lets, subject to policy development and applicable rules.

Check the EPC position for the shop and each residential upper separately. Determine who is responsible for energy-efficiency works. A normal repairing covenant does not automatically allow recovery of every improvement cost. The lease should address access, alterations, energy data, compliance and cost recovery.

Investor due-diligence checklist

Before acquisition, confirm:

  • Whether each lease is FRI, IRI or a hybrid
  • The actual repairing and insurance clauses
  • The definition of the demised premises
  • Responsibility for the roof, structure and shopfront
  • Common-parts and service-charge provisions
  • The tenant’s financial strength
  • Rent, rent reviews and payment history
  • Break clauses and lease expiry dates
  • Assignment and subletting rights
  • Insurance arrangements and premium levels
  • EPC and MEES compliance
  • Fire-safety obligations
  • The condition of the shop and upper parts
  • Residential tenancy or lease arrangements
  • Planning and permitted use
  • A building survey and valuation

Mixed-use high-street shop-and-upper property with commercial frontage and residential upper floors

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

Realty Packaging’s Four Pillars

Realty Packaging reviews commercial property through four connected areas:

  1. Lease : income, repairing obligations, insurance, breaks, rent reviews and tenant covenant
  2. Planning : permitted use, development potential and restrictions
  3. Building condition : repair, structure, roof, services and capital expenditure
  4. Operational compliance : fire safety, EPC, access, licensing and management

FRI and IRI terms sit within the lease pillar, but their effects extend across the other three. A repairing obligation may influence building costs. A planning strategy may make current repairs obsolete. An EPC requirement may require access and improvement works. Operational failures may affect insurance and tenant retention.

For investors pursuing commercial property investment in the UK, the lease should be analysed as part of the whole asset. A high headline rent does not compensate for an unclear repair obligation or an unfunded roof replacement.

Sources

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