Alterations to Premises
Whether taking a new lease or an assignment of an existing commercial lease, an incoming tenant might need to make alterations or improvements to the premises to meet the needs of his business. In the case of a new-build, the premises will often be deliberately left in an unfinished state so that they can be fitted-out to suit the requirements of the first tenant.
The following are some of the issues that need to be considered when thinking about alterations:
- The place to start is always by considering the terms of the lease. A commercial lease should impose restrictions on the alterations that the tenant may make to the premises. For example, offices leases usually ban the tenant from making structural alterations, but permit the making of non-structural alterations with the landlord’s consent.
- If the landlord’s consent to alterations is required, that consent may not be unreasonably withheld. The landlord may not reasonably refuse consent simply because the alterations will diminish the value of the premises or any of the landlord’s neighbouring premises. However, he is entitled to demand a reasonable sum as compensation for such damage.
- Consent to alterations will normally be given in the form of a Licence to Make Alterations. When seeking consent, the tenant will often be obliged to supply to the landlord plans and drawings detailing the proposed works.
- Often the lease itself or the form of licence put forward by the landlord will require the tenant to reinstate the premises at the end lease. This may or may not be appropriate. In the case of the lease, it may be possible to negotiate a variation of its terms.
- When negotiating a new lease, the issue of alterations needs to be considered in the context of any rent review provisions in the lease. These should provide that all improvements carried out at the tenant’s expense are to be disregarded on rent review. Otherwise, the tenant may find that come the next rent review, having borne the cost of an improvement, he also has to pay an increased rent reflecting the increased value of the premises due to that improvement.
- Under the Landlord and Tenant Act 1927, the landlord may have to pay compensation to the tenant in respect of improvements carried out by the tenant, provided the tenant follows the correct procedure. These provisions, which cannot be excluded by the terms of the lease, may be invoked even if the lease contains an absolute prohibition of alterations and improvements.