Tenant alterations…..fitting in with the Landlord

TC and HJA article 11.7.13

Whether it’s the installation of racking or demountable partitioning, the addition of a mezzanine floor or an upgrade to the electrical system, a tenant’s ability to customise existing or prospective premises is fundamental. This requirement has to be balanced against Landlords’ concerns to regulate the type and extent of alterations. Alterations which are unsuitable or poorly designed may have a negative impact on the Landlord’s investment. Solicitor Hedley Adcock and Consultant Tim Coplestone in the Real Estate Team look at points that both need to consider before they start the building work.

“This is an area where we are increasingly being instructed by tenants wishing to facelift existing premises or simply to reconfigure floor space and by new Tenants on the initial fit out”, Hedley comments. “Commercial lease agreements invariably address the issue of alterations, setting out the extent to which premises can be adapted and what should happen to them at the end of the lease. However, many tenants are either unaware of their obligations or decide to “sin and seek forgiveness” rather than seeking consent and risk their plans being denied by cautious Landlords. Depending on the nature of the premises, the length of occupation and the tenant’s intended use, alterations clauses in the lease require careful consideration.”

Tim notes “Tenants need to think ahead when it comes to fitting out premises or future upgrades. Typically tenants are prevented from making structural alterations to premises altogether. Landlords rarely allow premises to be demolished or extended unless there is an overall benefit. More commonly tenants do not wish to make wholesale changes and simply intend to reconfigure the internal layout.”

To ensure that the Tenant’s proposals are acceptable, most leases allow internal non structural alterations with the prior consent of the Landlord. Since most alterations are regarded as improvements, the Landlord cannot generally withhold consent. However, it is still common practice for Landlords to review specifications, plans and drawings before approving the changes. If the Landlord does grant consent it should be formally documented in a Licence for Alterations and kept with the lease. In certain cases, the Landlord may even require a security bond to ensure any major alterations are completed.

“We are frequently reminding Landlords not to forget to seek any third party consents before it grants a Licence for Alterations. Banks, Superior Landlords and Tenant Guarantors with interests in the property may need to be involved.” warns Hedley. Frequently, banks hold security on investment premises and any major alterations may impact on the value of that security. If the Landlord is itself a tenant, it must check the terms of its own lease to ensure whether it needs consent from a Superior Landlord. And most recently the High Court decided in Topland Portfolio No. 1 Ltd v Smiths News Trading Ltd [2013] EWHC 1445 (Ch that a Tenant’s guarantor had been released from its liabilities completely simply because it had not consented to the Tenant’s alterations.

However, certain works do not always amount to alterations. In Hagee (London) v Co-operative Insurance Society (1992) 63 P. & C.R. 362, replacing plant was not held to be an alteration.

Irrespective of the need for landlords consent, tenants are often unaware that alterations must be removed at the end of the lease. Tenants must hand back premises to the Landlord in the previously unaltered state. “In practice, Landlords may be prepared to let the alterations remain but this should not be assumed.” notes Tim “The cost of taking the alterations out at the end of the lease should be factored in or the Landlord should be asked to expressly waive any requirement for reinstatement at the end. Landlords may be reluctant to do this since they may have to pay out compensation for any increase in value of the building, if the alterations remain.”

For more information and advice on any aspect of Tenant alterations please contact either Tim or Hedley the Real Estate Department on 0121 233 4333.