It is vitally important that both landlords and tenants of commercial premises understand the law relating to alterations and improvements of premises let on a commercial basis.

One of the most common disputes between commercial property landlords and tenants has to do with alterations made to the premises.

Most leases require a landlord’s permission to make alterations, and this should be done through a process known as an application for a ‘Licence for Alterations’.  It should be perfectly clear who is responsible for reinstating the property to how it was at the start of the lease and whether the alterations or improvements affect the rent on any rent review.

To minimise the risk of disputes over alterations in the future, both parties need to make sure the lease is clear on this issue.  Tenants want to be sure they are able to adapt the premises to suit their needs, and landlords will want to make sure that their asset is protected, and returned in a lettable state at the end of the lease.

Leases usually prohibit alterations to the exterior or to the structure of the building. Non-structural and interior alterations tend to be allowed provided the landlord’s consent is obtained.

If the tenant alters the premises in contravention of the lease then that is usually a breach of contract. It is far better to seek consent and understand whether the works you intend to carry out need to be reinstated at expiry of the lease, rather than incurring the costs you may be liable for if things go wrong.

Leases of commercial properties usually restrict alterations to the property as the landlord is concerned that at the end of the lease the property will be in a satisfactory state to enable the property to be re-let.

However, what the lease says is not always the end of the matter as the Landlord and Tenant Act 1927 (LTA 1927) gives Tenants three additional rights:-

  1. Where the landlord’s consent is needed for improvements, that consent is not to be unreasonably withheld.
  2. In certain circumstances, the tenant can carry out improvements even if forbidden to do so by the lease.
  3. In certain circumstances, the tenant can obtain compensation at the end of the term for improvements that have been carried out.

Consent not to be unreasonably withheld

The landlord can, as a condition of giving consent, require a tenant to pay a reasonable sum for any damage to or diminution in the value of the property and also require that the tenant reinstates the property at the end of the term.

It is for the tenant to show that the landlord has unreasonably withheld his consent to the proposals which the tenant has put forward. Further, consent cannot be refused on the grounds of monetary loss alone as in those circumstances the landlord could ask for a compensation payment.

The right to carry out improvements

The Act gives the tenant the right to carry out improvements even if forbidden to do so by the Lease. A court can authorise improvements if they are calculated to add to the letting value of the property at the termination of the tenancy and are reasonable and suitable for the character of the property. A tenant must serve the appropriate notice on the landlord

The right to compensation

Compensation is payable for improvements made by the tenant which at the termination of the tenancy “add to the letting value of the holding”.

To obtain compensation the tenant must have served a valid notice of its intention to carry out improvements and no objection is received from the landlord for 3 months or a court has authorised the improvement.

In practice

In practice the right to compensation rarely arises in commercial leases as the lease obligations often require a tenant to remove fixtures and any alterations that they have made to the property before the end of the lease. This means that on termination of the lease there are often no improvements which add to the letting value of the property.

Rob Cooke is a Director at Lupton Fawcett specialising in all areas of property litigation and Landlord and Tenant law.

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Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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