It is not unusual for a tenant to be allowed early access to premises for the purpose of fitting out. Special issues may arise, however, where the grant of the lease is conditional on the developer/landlord constructing the premises, but the tenant's fit out is of such a scale that the main fabric of the building cannot be completed until the tenant's fixtures and fittings have been installed.
Such a situation may arise, for example, where the tenant’s operation utilises large pieces of machinery, such as the large scale kilns which are often used in the ever increasing number of recycling facilities in the UK. In these circumstances, consideration must be given, not just to the installation of the fit out, but also its removal during or at the end of the lease term (however it may be determined), and also the position of any third parties (e.g. chargees) who may be affected.
Installation of fit out
Where the tenant's fit out is of such a scale and nature that the landlord's and tenant's works cannot be progressed at the same time, the landlord needs to ensure that it will not suffer financially in the event that the tenant's works are delayed. The agreement for lease will oblige the landlord to procure the construction of the building within a certain timescale, and the landlord must ensure that, if there is to be a "gap" in the programme for its works, that the tenant is obliged to install the fit out within a specified period, and that, if there is delay, the landlord's target dates (including the ultimate building long stop date) are extended by a period equal to that delay. The rent commencement date under the lease, however, should not also be extended, so that the landlord's income stream from the property is unaffected. The landlord should also consider whether its procurement costs will be increased as a result of the tenant's delay and, if so, it may seek to recover those costs from the tenant.
Effect on warranties from construction team
If the tenant's fit out cannot be removed from the premises without dismantling part of the structure of the building, the lease should clearly set out the procedure for carrying out the required structural alterations and for the subsequent reinstatement of the building. The landlord should ensure, if possible, that those structural works will not affect the rights and remedies which the landlord may have against the original contractor and professional team. The landlord may achieve this by procuring that the original contractor/professional team carries out the work on the landlord’s behalf, or by requiring the tenant to appoint those same parties to carry out the works on behalf of the tenant. If the works are to be carried out by the tenant, the alterations provisions in the lease will apply, but the landlord may wish to reserve the right to supervise the whole process. If the works are to be carried out by the landlord, the lease should provide for the landlord to recover the costs of the works from the tenant.
Relationship with any chargee
The lease will contain a forfeiture provision, but the landlord will need to ensure that, following re-entry, it is able quickly to remove the tenant's fit out and remarket the building. Whether the landlord can do this will be determined, as between the landlord and the tenant, by reference to the lease, but difficulties can arise for the landlord where the tenant has charged its fit out in favour of a third party. Provided that the chargee has brought the existence of the charge to the landlord's attention (whether by written notice, plaques on the fittings, or even, arguably, by registration), the landlord will not have the ability to remove the secured items, and could be forced to enter into a lengthy dialogue with the chargee in connection with their removal.
The landlord can overcome this problem by enquiring about the tenant's financing intentions, prior to entering into the agreement for lease. Where the tenant proposes to charge its fit out, the landlord should require both the tenant's lender and the tenant to confirm (in a legally binding form) that if, within a specified period of time from the landlord re-entering, the fit out is not removed from the premises, then the landlord is free to dispose of the fit out as it sees fit, without any liability to account. The landlord could, therefore, break up the fit out and remove it from the premises in pieces, thereby avoiding the need to dismantle the structure of the building.
If the tenant does not have an immediate intention to charge its fit out, the landlord may wish to restrict or prohibit the tenant's ability to do so in the future, via the lease. A restriction could take the form of a requirement for landlord's consent to the grant of any such charge, with a condition to the giving of such consent that the chargee enters into an agreement with the landlord governing the removal of the fit out, following termination of the lease. A breach of the restriction could lead to a forfeiture action by the landlord, and in the normal course the threat of forfeiture should be sufficient to ensure compliance.
It is also possible that the tenant’s lender may seek to protect itself before providing finance, particularly from the landlord’s remedy of distraint. The lender may require the landlord to waive its right of distraint prior to providing finance, which could result in a stand-off between lender and landlord. One solution could be for the landlord to agree to give the lender a certain period of notice prior to any action to distrain, but preserving all of the landlord’s rights in respect of the fit out in the event of inaction. The lender could be included as a party to the lease for this purpose, or the lender’s security documents could be made expressly subject to the provisions of the lease.
Early access provisions are often a major point for discussion between landlords and tenants, but whilst the landlord may wish to cater for the tenant’s requirements, it should ensure that its own position, in terms of its ability to comply with an agreement for lease, the value of its superior interest and its ability to obtain vacant possession of the premises, are not adversely affected.
The obtaining of vacant possession on the expiry of the term should be a consideration for landlords in all letting situations, because irrespective of the tenant’s intentions at the date of the lease, the tenant may during the term increase the size of its fit out and charge that fit out to a third party, thereby restricting the landlord’s ability to dispose of the property until the fit out is removed. Whilst there does not appear to be a perfect solution available at the date of the lease to the landlord, it could seek to limit the tenant’s ability to upscale its plant and machinery, and to grant security over any items of fit out, via the lease. In practice, however, this is an issue that landlords seldom consider, and may overlook at their peril.