Background
In recognition of the fact that the vast majority of the school estate is far from in good repair and condition, the standard 125 year academy lease reflects a moderated tenant obligation. Rather than being obliged to put and keep the school premises in “good and substantial repair”, the academy trust is obliged only to “make good any damage it [the academy trust] causes to the Property and/or any deterioration to the condition of the Property that may arise from the Term Commencement Date [the conversion date]”.
Whilst a tenant is legally obliged to comply with a repair obligation during the term, it is common practice that this covenant is only enforced at the point of lease expiry or termination. This is often referred to as a dilapidation liability and landlords and tenants will typically negotiate an amount of money that will compensate the landlord for the lack of repair by the tenant. Regard will usually be had to what the landlord intends to do with the property after it is handed back with the view to the landlord having funds so that any remedial work can be done before the next tenant takes up occupation.
Impact of School Closures
Given the length of the academy lease, few will have been concerned when the lease was entered into about what that conversation will look like in 125 years’ time. However, as we are now beginning to see some of these leases terminate because schools have closed, this conversation is being triggered now. The early signs are worrying, however.
At least on 2 occasions now, we have been advising MATs who have been presented with a considerable dilapidations bill by the local authority. Needless to say, the MATs have had no budget for any capital sum to be paid. The conversations have been troubling because they start from the premise that the school buildings will be returned to the state they were in at the start of the lease and will be used for the purposes of another school. The latter is probably unlikely (at least in the short term) and there is no evidence of the former from which to base any discussion.
This leads to a conversation which is not easily resolved. A trust may be reluctant to hand back premises in order to avoid crystalizing a liability and yet will not be keen to continue to be responsible for safeguarding premises and upkeep (in theory to mitigate any future liability). The LA may also be unsure how to approach the conversation, particularly if they have a new use in mind.
We have raised the issue with the Department for Education and await further guidance.
Schedule of Condition
Whilst these conversations are taking place, it might be prudent for academy trusts now to consider whether it is sensible to compile or evidence the current schedule of condition (on a “better late than never” basis given its unlikely a schedule of condition was agreed and attached to the lease when the lease was entered into).
The challenge with this is the cost as to produce such a document will be significant. Even for small retail premises the cost can run into the thousands if a surveyor is instructed to carry out the task.
It’s unlikely any estate management strategy will be detailed enough to serve as a schedule of condition, although it is better than nothing (provided there is a mechanism for saving the information for the decades ahead!).
The issue highlights ongoing concerns about the state of the education estate and the lack of funds available even for adequate routine maintenance not to mention long term lifecycle replacement.
It’s certainly a matter that will become increasingly important when schools convert and join established academy trusts.
Foundation Status
One option for schools looking to avoid a dilapidation liability is to avoid having to take a 125 year lease – no lease no liability. This is only feasible if the school is a foundation or voluntary school, where the school site is owned freehold by the governing body or site trustees. Although less popular in recent years because of the move towards academisation and joining a MAT, it is still legally possible for a community school to become a foundation school (either with or without a foundation). The process involves the governing body consulting and making its decision. Local authority consent is not needed although they will be a consultee.
Once a proposal is implemented, the legal ownership of the land passes automatically to the governing body (or the foundation body). A transfer deed (TR1) must be signed only for Land Registry purposes. The governing body will then transfer the freehold interest to the academy trust when the school converts. Indeed, we have advised a number of MATs when acting as the foundation body if the foundation proposal is to act as the preface to an academy conversion process.
For further advice on this issue or assistance with becoming a foundation school or with academy conversion or transfer, please contact the author.