A landlord who lets property to a tenant will want to know that they will get the property back at the end of the lease in a fit state to quickly re-let. Controlling the tenant’s right to make alterations is a key aspect of this. As Yildiz Betez, commercial property expert with Thackray Williams explains, landlords need to understand their rights and obligations and make sure tenant alterations are properly documented.
‘A commercial tenant will want the ability to adapt a property to fit the needs of their business and these may change over time’, says Yildiz, ‘but that does not mean that a tenant should be given a free rein. Restrictions need to be put in place to ensure that a property is not altered in a way that has an adverse effect on a building’s structure or on its energy efficiency, and you do not want to get back a building that is laid out in a way no other tenant will want.’
Alterations clause in the lease
The alterations clause in the lease will set out what the tenant can and cannot do, and on what basis. A typical clause will prohibit some types of alterations altogether, for example structural changes or work that alters the external appearance of a building. It is also now common for leases to prohibit alterations that adversely affect the building’s energy performance rating. This is likely to become more commonplace with the new restrictions contained in the minimum energy efficiency standards, introduced with effect from 1 April 2018, and which will in most cases prevent a property being let out where its energy efficiency rating is allowed to fall to below E.
Other types of work will usually be allowed with the landlord’s consent, including internal, non-structural alterations that the tenant may want to make to enable the tenant’s business to function and to create the right atmosphere.
‘The issue to look out for when it comes to tenant alterations based on landlord’s consent is the possibility of the alteration amounting to an improvement’, explains Yildiz, ‘because in these circumstances you may be subject to a legal obligation not to withhold consent unreasonably and in certain circumstances may be forced to allow the works to be carried out, even where the lease says they are prohibited.’
Alterations which amount to an improvement
Whether an alteration amounts to an improvement is a question of fact, but broadly speaking any alteration which improves the value of the property from the tenant’s perspective is in theory at least capable of amounting to an improvement.
The consequence where proposed works will be an improvement depends on whether the tenant seeks consent under the terms of the lease or takes advantage of a separate statutory process, and how you and the tenant decide to deal with the issue.
If the lease says the tenant can carry out alterations with your consent, you will be under an obligation not to refuse consent to an improvement unreasonably. You will be able to insist that certain fees and expenses are paid; that a charge can be made for any damage or diminution in value caused; and, in most cases, that the premises must be reinstated at the end of the lease term. If the tenant is paying for the works, the costs of them will usually be ignored when settling the new rent.
If the lease says that no alterations are allowed, the tenant may still notify you of their intention to carry out improvement works. If the works will increase the letting value of the property, the tenant could get a court order which could enable them to go ahead with the works against your wishes. If you do not object, you can choose to carry out the works yourself and charge the tenant an increased rent. Where the works are carried out by the tenant, you may become obliged to pay compensation to them at the end of the lease.
‘Landlords can get caught out here’ explains Yildiz, ‘because the tenant’s initial notice does not have be in any particular form and may just be given by way of a letter. This is why it is always advisable to speak to your solicitor when a request to carry out alterations or improvements is received.’
The importance of documentation
If you agree to alterations or improvements being carried out, it is important to document this in a formal written licence which should include:
- a detailed description of the work, including plans and specifications;
- any conditions about how the work is to be carried out;
- a statement about how the alterations will be treated on rent review; and
- a statement about whether the tenant must remove the alterations at the end of the lease.
Your priority will be to get the property back in a lettable state and you need to take steps when you are negotiating consent for the works to ensure that this is achieved.