A business tenant who satisfies the criteria in section 23 of the Landlord and Tenant Act 1954 (LTA 1954) will have a statutory right to a new lease at the end of their current contractual term. When drafting or negotiating a renewal lease, it is tempting to assume that many of the terms under the original form of lease will continue to be fit for purpose. However, failing to reflect the changing commercial relationship between the parties can cause serious practical and financial issues later on.
A key area for consideration is the tenant’s repair and reinstatement obligations.
A typical commercial lease will require the tenant to keep the premises in “good repair [and condition]” and to return the premises to the landlord in that state of repair at the end of the term. Many leases also require the tenant to reinstate the premises at the end of the term; removing any alterations or additions they have made and remedying any damage caused (i.e. returning the premises to the landlord in the same condition as they received it).
However, unless modified, reference to the standard of repair or condition of the premises under the lease will be to the standard in the current document (i.e. the new lease). This means that the tenant takes the premises as it is at the date of the renewal lease and is only required to return the premises to that state; ignoring what has happened previously. Serious consideration should be given as to whether this is suitable or whether the standard of repair should be assessed at the date of the original lease.
A landlord is likely to want the state of repair assessed at the date it originally let the premises to the tenant. This will be particularly important if the tenant has not looked after the premises.
It will typically be in the tenant’s interests for the standard of repair to be assessed from the date of the renewal lease. However, a tenant who has made voluntary improvements may have increased the state of repair of the premises at the date the renewal lease is granted and, therefore, assessing repair at the date of the new lease will increase the standard they will need to comply with.
Getting it wrong can be expensive. A landlord may find that, at the end of the term, they need to pay for work to be done to the premises to bring it up to a standard where they can let it to another tenant (combined with loss of rent for the duration of those works). A tenant could find that, depending on the additions and alterations made, they are required to carry out extensive renovations to reinstate the premises. This will be especially frustrating for the tenant if they expended money making the alterations they are now being asked to remove. Additionally, if the tenant has taken an assignment of the original lease, and the renewal lease has provided for the premises to be returned to the standard under that original lease, the tenant could be required to remove alterations installed by a previous tenant.
It is important to remember that reinstatement obligations may also be contained in supplemental documents, such as a licence for alterations. The landlord is likely to want any obligation on the tenant to remove alterations at the end of their tenancy to apply to any future tenancies of the premises and, as such, it will be important that this is provided for in the new lease.