Most tenants will, at some point during the term of their lease, wish to make changes to their property. These may be anything from tenant’s fit out at the start of the lease, to very minor changes during the term, to substantial alterations and renovation works. Commercial leases will nearly always contain covenants restricting what the tenant can do, so for a tenant wishing to carry out works, or a landlord wishing to control what changes are made, the first step should always be to check what the lease permits and prevents. Our landlord and tenant or property litigation teams are available to assist with this.
Fully qualified covenants
A fully qualified covenant is one which allows something to be done only with landlord’s consent, such consent not be unreasonably withheld. In commercial leases it is common to see a fully qualified covenant against non-structural and/or internal alterations.
When is it reasonable to refuse consent?
When a covenant is fully qualified, the landlord has limited control over what the tenant can and cannot do: if he refuses to give consent, a court can determine that he is acting unreasonably. Unfortunately, the majority of cases on what is “reasonable” in the context of applications for consent concern covenants against alienation rather than alterations. However, it is clear that the landlord is able to object on grounds other than those concerned just with a reduction in the value of his property or the cost of reinstatement; aesthetic, artistic, historic and sentimental considerations are all relevant. In determining reasonableness the court will consider the following:
- It is for the tenant to show that the landlord has been unreasonable. This means that the tenant needs to be very clear on what his proposals are, so that the landlord can decide whether to give consent. If the tenant fails to provide full details, the landlord will not be acting unreasonably in withholding consent.
- It is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified if they were conclusions which might be reached by a reasonable landlord in the particular circumstances.
- It may be reasonable for the landlord to refuse consent to works needed to convert premises for a new use, but this will depend on all of the circumstances. For example, it would probably be unreasonable if the landlord knew that the intention of the tenant in acquiring the premises was to use them for that new permitted purpose.
- While a landlord need usually only consider his own interests, there may be cases where it would be disproportionate for a landlord to refuse consent having regard to the effects on himself and on the tenant respectively. For example, the proposed alteration may have a slightly negative impact on the landlord’s neighbouring property, but he may be unreasonable in withholding his consent if to do so would mean that the tenant was no longer able to trade.
- Consent cannot be refused on grounds of pecuniary loss alone. The proper course for the landlord to adopt in such circumstances is to ask for a compensatory payment. This means that where the value of the reversion will be reduced by the alteration, the landlord will be unreasonable in refusing his consent; instead he must allow the works but require a payment from the tenant.
- The tenant is required to obtain consent in order to protect the landlord from the tenant making alterations and additions which damage the property interests of the landlord. With this in mind, a landlord is not entitled to refuse consent on grounds which have nothing to do with his property interests.
- In each case it is a question of fact depending on all the circumstances whether the landlord, having regard to the actual reasons which impelled him to refuse consent, acted reasonably.
What conditions can be imposed by the landlord?
The landlord’s consent will not be unreasonable simply because it is subject to any of the following conditions:
- Payment of a reasonable sum for any damage/diminution in the value of the property or any adjoining land owned by the landlord.
- Payment of legal or other expenses properly incurred in connection with giving consent.
- A requirement that the tenant undertakes to reinstate at the end of the term (but only where this is reasonable and where the improvement does not add to the letting value of the property).
How quickly must consent be given?
There is no obligation on the landlord to notify the decision to the tenant within a reasonable time, unless the lease expressly requires this. However, a landlord should be aware that an unreasonable delay in giving consent amounts to unreasonably withholding consent.
Must reasons be given for a refusal?
The landlord is not under an obligation to give reasons for refusing consent or for imposing particular conditions. Of course, if he fails to do so it is more likely that a court will imply that his withholding of consent is unreasonable, but when producing evidence of his reasonableness at court he is not confined to reasons communicated to the tenant, provided that they were reasons that actually influenced him at the time. However, if the landlord does not give reasons it is very difficult for a tenant to assess the likelihood that he will succeed in obtaining a declaration that consent is unreasonably withheld. When drafting the lease the tenant may therefore wish to impose a positive obligation on the landlord to give reasons if consent is withheld or conditions are imposed.
What remedies are available to a tenant if consent is unreasonably refused?
A fully qualified covenant against alterations does not impose a positive obligation on the landlord not to withhold consent unreasonably. This means that the tenant cannot obtain damages for an unreasonable withholding of consent: if the tenant considers the landlord to be acting unreasonably, he is limited to applying to the court for a declaration that consent is being unreasonably withheld and then proceeding with the works – or taking a risk and going ahead with the works without consent (though note that if he goes ahead without seeking consent he will be in breach of covenant even if consent could not have been unreasonably withheld).
Tenants may therefore want to ensure that their lease contains a positive covenant by the landlord not to unreasonably withhold consent as this will enable a damages claim in the event that consent is unreasonably withheld.
A qualified covenant is one which permits something to be done only with landlord’s consent, with nothing about the landlord having to act reasonably. It is fairly unusual to see a covenant of this kind.
In a commercial lease which states that works which amount to “improvements” cannot be carried out without the consent of the landlord, a proviso is automatically added by the Landlord and Tenant Act 1927 (“1927 Act”) to the effect that such consent cannot be unreasonably withheld. “Improvements” in this context includes all alterations which improve the property from the tenant’s point of view, by increasing their value or usefulness to the tenant and notwithstanding the fact that they actually diminish the value from the point of view of the landlord or a third party. This essentially means that any qualified covenant against alterations in a commercial lease takes effect as a fully qualified covenant (subject to the same rules of reasonableness as apply to any other fully qualified covenant).
An absolute covenant against alterations is one which prevents the tenant from making any changes to the property. The existence of such a covenant will not prevent a tenant from applying for consent, but it will be open to the landlord as to whether or not he agrees to waive the prohibition. He will be free to completely ignore the application or to impose whatever conditions he chooses. In commercial leases it is usual to see an absolute covenant against structural and/or external alterations.
Consent to improvements under the Landlord and Tenant Act 1927
Even where the lease contains an absolute covenant against alterations, and the landlord refuses to consider a tenant’s application for consent, the tenant may nonetheless have the right to carry out these alterations if they amount to “improvements”. This right is contained in section 3 of the 1927 Act and applies to all leases of property used for a “trade or business”. Whilst this right is rarely exercised in practice, it is good to be aware of it as it is a useful negotiating tool when requesting that a landlord provides consent to alterations which would otherwise be prohibited by the lease.
There is no express definition of “improvements” in this context but it is narrower than for qualified covenants and only catches works which are calculated to add to the letting value of the property at termination of the tenancy. This means that something which the tenant wishes to do to the property which makes it more useful to him but that does not increase the value of the property to the market as a whole will not constitute an improvement. In addition any “improvement” must be reasonable and suitable to the character of the property and must not diminish the value of any other property which belongs to the landlord or any superior landlord.
To benefit from the provisions of the 1927 Act the tenant must follow a specified procedure. He must serve the landlord with a notice of his intention to make the improvement, accompanied by a specification and plan showing the proposed improvement. The landlord has three months in which to object to the proposed works. If he fails to do so then the tenant has the right to carry out the works in accordance with the plan and specification, even if such works are prohibited under the terms of the lease. The landlord also has the option of offering to carry out the works himself in return for a reasonable increase in rent. However, a tenant is under no obligation to accept this and may withdraw the notice, in which case the landlord has no right to carry out the work or increase the rent (and the tenant also has no right to carry out the works).
If the landlord does object within the time limit then the tenant is entitled to apply to the court for a declaration that the improvement is permitted. This declaration can be made based on the plans and specification as provided or with such modifications or conditions as the court thinks fit. Once he has the declaration the tenant can proceed with the works. When the works have been completed the tenant can apply to the landlord for a certificate that the works have been duly executed (which is essential if the tenant wishes to claim compensation for the improvements). If the landlord fails to supply this within one month the tenant can apply to the court for it.
Note that a tenant may want to make use of this procedure even where the works would be permitted by the lease, or permitted with consent, because it brings with it the right to compensation.
The majority of commercial leases also contain restrictions limiting the tenant’s ability to apply for and implement planning permissions. This is closely linked with the tenant’s ability to carry out alterations and can potentially act as a greater curtailment on his ability to carry out alterations than the actual covenant against alterations. For example, an absolute covenant against applying for planning permission will effectively prevent the tenant from carrying out any alterations that would need permission, regardless of whether or not the landlord cannot unreasonably withhold his consent to the alterations. The important point for tenants is to always check this when negotiating the lease and before applying for consent.
The licence for alterations
The way in which alterations are actually carried out is usually governed by a separate licence for alterations rather than being set out in the lease itself (or in an agreement for lease to enable fitting out works before the lease is entered into). The detail of the licence will depend upon the type of works being carried out and the nature of the property, but the key points to cover include:
- How are the “works” defined? In there a plan and specification? Is there any scope to update these as the work progresses?
- Ensure that consent is given for everything that the tenant needs to do, including any application for planning permission.
- Is there a time frame within which the works must be started and completed?
- Is the tenant being given permission to do the works, or is there an obligation to do them?
- What requirements must the tenant comply with before works can start – are any other licences or permissions needed, must insurers be notified, are updated plans required?
- Construction (Design and Management) Regulations 2007 – if the lease doesn’t contain adequate provisions ensure the licence does.
- Must the works be carried out in a particular way, using a specified standard of materials?
- Does the landlord want the ability to inspect the property? What information will the landlord need as the works progress?
- Does the landlord want the works to be reinstated at the end of the term? If so, is this an absolute obligation or can the landlord decide nearer the time (in which case, how much notice must he give)?
- What impact will the works have on rent review? It may be that the lease provisions already cover this but thought should always be given to how the works and any reinstatement obligations will impact on review.
- What happens if the property is destroyed – who is responsible for insuring and reinstating the alterations? The lease may cover this but if not make sure you think about it at this stage.
- Does the licence amount to a variation of the lease (either because it is consent to doing something which there is an absolute covenant against or because some other change is incorporated into the licence)? If so make sure it’s executed as a deed and consider including any tenant guarantors.