When an SME takes out a commercial property lease that it will want to carry out works on the premises, likely both at the outset and at other times during the term of the agreement – whether to fit out, upgrade or modernise the property.
Both parties need to make sure the lease is clear on any alterations – a commercial tenant will want to be sure it can adapt the premises to suit the needs of its business, whilst the landlord will be concerned with controlling and protecting its asset.
In this blog, we will look at how the commercial landlord and tenant’s interests may diverge, what the legal obligations on the parties are likely to be and how best to avoid the pitfalls.
How are the perspectives of a landlord and tenant likely to differ?
The landlord’s main concerns will centre around protecting the reversionary value of their commercial property, i.e. the value of the freehold or the landlord’s own lease.
This means that they will often prevent alterations that would make the premises difficult to let or lower its letting value after the end of the term. If it owns other premises nearby, for example in an office block, industrial estate or shopping centre, it will want to ensure there is no adverse impact on its other tenants and that the proposed works comply with the landlord’s overall estate management strategy.
The focus of a new tenant may be the ability to have a commercial property configured to its needs. Fitting-out works will often have to be carried out and the tenant will also want sufficient flexibility to adapt the premises in the future, either for itself or for any potential subtenant.
Where to start when a tenant wants to make alterations
The first port of call when a tenant wants to make alterations, is the lease itself.
If a commercial lease
is silent on the question of alterations, then the tenant is free to carry out any alterations it chooses, subject to other provisions in the lease and some implied restrictions.
However, it is common that commercial leases will include tenant covenants that restrict alterations. The type of alterations allowed will depend, in part, on the nature of the commercial property and on the extent of control that the landlord wishes to exercise. Most commercial leases say no structural alterations are permitted, but non-structural alterations can be carried out with landlord’s consent, not to be unreasonably withheld or delayed.
In practice, this means a landlord should deal with applications to carry out alterations promptly and be reasonable to a tenant request, such as the information it demands and what requirements or restrictions on the works to be carried out.
If the lease contains an absolute prohibition against carrying out any alterations, a commercial landlord must exercise great caution in giving consent to alterations, as this could result in an action for damages for breach of covenant from its other tenants.
How do the proposed alterations interact with other clauses in a commercial lease?
A landlord or property manager need to be conscious of how the proposed alterations will interact with the other provisions in the existing lease. Some examples of issues to look out for are: –
Whether aspects of the works are dealt with elsewhere in the lease and so may need separate consent, such as applying for planning permission.
Compliance with laws – a commercial tenant will usually be required to meet any relevant statutory provisions relating to the carrying out of the alterations, such as Building Regulations and fire safety legislation.
Rent review provisions – where a business lease includes market rent review provisions, the effect of alterations carried out by the tenant on the rent will normally be disregarded. Otherwise, the tenant will not only have paid for the work but is also at risk of paying an increased rent based on better premises than were originally occupied.
Insurance obligations – consideration should be given as to how the proposed works interface with the building’s insurance. Consider whether the insurers should be notified or whether their consent is required.
When a tenant wants to make alterations to its premises, it may seem like a straightforward estate management issue, but there are various legal issues that need to be considered. A landlord and tenant alike need to ensure that a new lease or a lease renewal contains suitable provisions to protect their respective interests and that any works are documented in a suitable Licence for Alterations.
Any agreements made between commercial landlord and tenant need to be properly documented and prior legal advice sought for your specific circumstances.
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