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A tenant will often want, or need, to alter a building they lease. This may be at the very start of the lease or as their business needs change and develop. A lease will usually have a clause specifically dealing with what alterations are permitted and what happens at the end of the lease.
We discuss the typical form of the alterations clause and what considerations there should be.
‘The Tenant may undertake non structural alterations to the property.’
On the face of straightforward and often when reviewed by the tenant this will be seen as the extent of the requirements of the lease.
The clause permits a tenant to make changes, providing those are not structural. Technical aspects to determine what is structural, a wall being a timber stud is not necessarily ‘non structural’, there are nuances.
Additionally the landlord may need to approve proposals. Approval may need the tenant to submit plans in advance. The landlord will need to act reasonably in giving or withholding permission; this is usually stated in the lease, but could feasibly fall under common law principles.
Seeking permission off the landlord for alterations can be a relatively onerous requirement. Often the landlord will seek professional input from surveyors, so as to confirm the works are acceptable.
There are a variety of reasons why a surveyor may not be happy with is being proposed. A lack of detail may raise question marks as to how competently works may be carried out. There will be aspects fire safety, structural considerations, the impact on other parties and the requirements for future reinstatement works.
At the end of a lease a landlord may claim a loss associated with the cost of returning the property to how it was originally.
As part of the lease clause alterations, there is likely to be a clause similar to the following:-
‘At the end of the lease the Tenant is to hand back the property with all alterations reinstated.’
This is very much paraphrased, but usually there would be something which will impose a requirement to take out alterations.
It is common to find that alterations need only be reinstated if the landlord requests; this is where a problem can arise. There are various court cases which have helped establish the legal position. With regard to the case law there are pros and cons where things can work out quite well for a tenant.
A landlord may leave a dilapidations inspection right until the very last moment, this limits the time a tenant has to react and undertake works. This may be by design; the landlord may simply be seeking to obtain a cash deal, rather than genuinely wanting the works done. In these instances there is case law that can permit a tenant to stay put to undertake reinstatement works requested. This is a relatively complex area though, and certainly should not be relied upon.
The landlord may be required to give the tenant a set notice period in requiring a tenant removes alterations. Usually this is 6 months. This is an important aspect as should a landlord only give 5 months’ notice then it is usual that that right to request those alterations being reinstated will have been lost. A regular error on the part of the landlord is in not giving sufficient notice to a tenant to reinstate.
A schedule of dilapidations being served on a tenant, with explicit items requesting the reinstatement of alterations (if all correct and with some exceptions) does need to be taken as being the requisite notice being given.
At the moment at which a lease ends and an alteration remains in situ then the landlord may have a greater breadth of claim options.
An example, which has come up on a number of occasions, is the installation of a metal grid suspended ceiling with mineral tiles. At the outset of the lease, no such ceiling existed instead it would have either been the soffit of the floor above or it could have been a much older lath and plaster ceiling. It may be that the landlord requested the removal of the suspended ceiling in a schedule of dilapidations , however as soon as that ceiling is left in situ beyond lease end it becomes of the demise.
What becomes part of the building or what are chattels is an important legal aspect, this needs to take into account the nature of what the item is and legal tests such as the degree of annexation. But the crux is that if it is judged part of the building, even if the tenant installed the entire ceiling at their own cost, it must be left in a condition consistent with the lease. So if the ceiling is left in poor repair, the lease requires it to be put into repair, a claim for repair would be included in an updated schedule of dilapidations.
A tenant will often see this as being particularly unfair, they may have taken on a building in poor repair, improved it in many ways, but then pick up a bill for further repairs. The tenant will have the view that newer ceiling with minor damage is far better than the original ceiling. But what needs to be understood is that there is the a potential legal implication.
There is scope to reinstate items before the end of the lease, this gives some certainty over matters, the downside is the landlord may have been happy to see alterations remain, or there may be restrictions on unilateral decisions. Where alterations works have been significant there may be an addendum to the lease, referred to as a ‘licence for alterations’. This would record exactly what works have been carried out, the way in which they would be carried out, what oversight the landlord will have, the payment of surveyors fees and, critically, what reinstatement may have to be undertaken.
In a claim from some years ago a landlord failed to provide a copy of the Licence for Alterations, with no knowledge of the documents and no clear evidence of what, if anything had been altered during the term, a significant portion of the claim was lost. The loss of claim was in excess of £75,000. The blame was squarely with the landlord.
A common refrain from a tenant, in opposing removing alterations, is ‘they add value’. This will be off the back of the tenant having carried out the alteration for their own benefit, for an identical tenant the alteration may be useful, but it may well discourage many other tenants. The value of the alteration needs to consider how broad a spectrum of potential tenants is a building suitable for.
When the building is being vacated as part of a lease break then removal of alterations may or may not be a requirement. Removing partitions may not be requested by the landlord, but if left in they could prejudice a ‘vacant possession’ requirement.
The need to comply with a break clause will often limit the scope of negotation of removing alterations.
Alterations will have to made be in accordance with the Building Regulations, so the change of an office layout may vary fire escape routes and distances. There will be other regulatory and legal requirements and there may be separate standards sought by the landlord.
Putting aside the standards from the legal perspective, which is discussed in a separate guide, we need to consider what reasons a landlord may want to impose certain standards. The reasons generally should entirely be down to maintaining the good repair of the building or it may be to seek the general improvement of the building by avoiding low quality alterations.
It is not uncommon that at the end of a lease a tenant takes a new lease on the same property, with all parties remaining the same. After a five year lease a tenant may be established and have every desire to remain in situ. Depending on what protections are in place, there may be a legal right for a new lease to be granted. In some instances the lease will simply roll over and for many years a tenant will continue to pay the same amount of rent, occupy the same extent of the building and there will be no problems.
Sometimes a new lease will be agreed, alterations may be forgotten and not documented. A landlord should consider alterations in granting a new lease; how they will be dealt with under the new lease, what happens to them. Conversely if forgotten about then at the moment the old lease ends the nature of the building has changed, those alterations have become part of the building.
Many times tenants remain in buildings, with consecutive leases being granted. Alterations may have been missed in the past by a landlord, their solicitors and surveyors. This can result in significant losses to a landlord as those liabilites for removal would rest with the landlord.
When a lease is renewed it is not unusual for a Schedule of Dilapidations to be completed, with a copy annexed to the new lease, recording the alterations. This can then, if correctly constructed, retain the landlords option to request reinstatement at the end of the new lease.
Where a lease rolls over then the reinstatement right would continue for the landlord, irrespective of how long ago the original lease ended. There can be problems with leases being allowed to roll over, so formalising matters with a new lease or licence is the ideal. Importantly a tenant will only have to give three months’ notice to vacate, when holding over, in this situation where the landlord has to give six months notice to reinstate alterations this can be problematic.
The assignment of leases is a consideration. The assignment of a lease is where one tenant signs a lease over to a new tenant. The lease remains exactly as it is but from a legal perspective the tenants have changed. This is a particularly important as understanding the liabilities which come with the lease is crucial. Alterations can be a major part of the lease hold liabilities. It may be that repair of buildings has been considered, but alterations not considered at all. This is an acute problem where companies are bought and historic liabilities are taken on. For large scale deals then the liabilities that can come with a lease are considered in great detail, a dilapidations liability assessment would be carried out to establish the cost.
Conversely where a landlord changes, often records can be lost and where alterations have been carried out to a building the details may be lost, all to the benefit of the tenant.
The alterations clause will comprise of just a few lines, but will govern what a tenant can do to a property and what happens at the end of the lease.
The above should provide some insight into alteration clauses, it should demonstrate there is a good deal of complexity to the subject and professional advice can be invaluable.
Dabinett can help with avoiding problems with alterations, either at the time of negotiating a new lease of at the end of the lease, or the managing of alterations during the term.
If you would like to discuss your needs please do not hesitate to contact us.
