Heads of Terms: Making alterations to the property (Part 7/8)

Our eight-part series highlights the important aspects of negotiating Heads of Terms in a commercial lease and what tenants and landlords should consider and why.

Read the full series:

1. What are they, and why are they important?
2. Negotiating a commercial lease 
3. Alienation and transferability of the lease
4. Rent-free periods and break clauses
5. Service charge and insurance provisions
6. The tenant's covenant to repair
7. Making alterations to the property
8. Final boilerplate provisions in a commercial lease
   
    

Making alterations to the property

We will look at what property alterations a landlord may wish to restrict, what obligations they may want to impose on a tenant who wishes to make changes to the property. 

From the tenant's point of view, we will address what issues they will need to look out for to ensure that they have sufficient flexibility in their lease to make any necessary changes in the future. 

We will consider planning obligations and how making property alterations may affect a future rent review.

Why is it important to deal with making property alterations in the lease?

A commercial lease must deal with the tenant's ability to make alterations to the property. Without any restrictions on the tenant, they are free to carry out any alterations that they choose. 

This freedom for the tenant is subject to the boundaries of the demised property, meaning that the tenant cannot make any alterations to structures beyond the demise. 

There is also an implied obligation on the tenant not to commit waste, where waste is defined as "a spoil or destruction to houses, gardens, trees, or other corporeal hereditaments, to the injury of the reversion of inheritance" (Mancetter Developments Ltd v Garmanson Ltd & Anor [1985] EWCA Civ 2).

For this reason, most commercial leases will contain tenant covenants that restrict what alterations can be carried out at the property. 

Consideration must be given to the type of alterations that will be permitted, and this will largely depend on the nature of the property and the degree of control that the landlord desires. 

The priority for the landlord is usually to protect the value of their interest in the property and prevent alterations that could make the property difficult to let in the future. 

On the other hand, the tenant will wish to ensure that they have the flexibility in the lease to make alterations to the demised property to ensure that it can meet future needs. 

It is common for the tenant to undertake "fitting-out works", which would need to be in line with the lease terms. 

The tenant will also want to consider that it may wish to assign or sublet the lease in the future. It may restrict the marketability of the premises if certain alterations are restricted.

In negotiating the covenants for alterations, the following points should be considered:

• The length of the term – where the term that the premises are demised for is short, then the covenants for alterations are likely to be more restrictive.
• The nature of the particular property, for example, the property's age, method of construction, use and location.
• The extent of the demise. If the tenant only has an internal demise, the alterations clause will naturally be more restrictive.

How can the landlord control alterations to the demised premises?

The most common position in the lease is to restrict or prohibit alterations to the exterior of the demised premises and the demised premises' structure. 

Non-structural alterations to the interior of the demised premises are usually allowed subject to the landlord's consent. 

It is common to include a provision that such consent is not to be unreasonably withheld, however even without a specific provision to this effect, there is an implied obligation on the landlord not to unreasonably withhold consent for an improvement under s.19 LTA1927. As above, the tenant may not make any alterations outside its demise.

The landlord should also consider further restrictions on how any alterations are carried out by the tenant. 

It is common for a lease to require the tenant to carry out any permitted alterations using good quality materials which are fit for the purpose and in a good and workmanlike manner. The landlord may also include a provision that the alterations must be to the reasonable satisfaction of the landlord. 

It is also important for the lease to restrict the tenant's ability to alter the service media serving the property, as this can have an impact on neighbouring premises and the reversionary interest.

Even where consent is not necessary, the lease should require the tenant to notify the landlord of any alterations carried out. The landlord may even go as far as to include a covenant requiring the tenant to provide plans and any other information that could be useful for management purposes. Indeed, such information may be required under the insurance, which is usually the landlord's responsibility.

How can the tenant retain flexibility in the lease?

From the tenant's point of view, they may wish to insist that the lease expressly states that consent should not be unreasonably withheld because not all alterations will qualify as improvements for the purposes of the LTA27. The tenant may also wish to provide that the consent cannot be unreasonably delayed.

It is particularly important for the tenant to consider the alterations for which consent is not required and ensure that any proposed works either do not require consent under the lease or are subject to a licence for alterations. 

The tenant may wish to have the ability to carry out certain non-permanent alterations, such as erecting demountable partitioning, without having to obtain the landlord's consent. As above, where the landlord does agree to this, they may insist on further restrictions on how the works are carried out.

The tenant may wish to consider conceding certain covenants in the lease in order to retain the overall flexibility to make alterations. For example, the tenant may wish to consider accepting covenants require them to:

• Carry out any alterations in a specified manner
• Make good any damage to the property or the common parts as a result of the alterations
• Provide plans and specifications for the alterations to the landlord after they have been completed.

Where the tenant agrees to covenants such as these, the landlord may be more likely to give the tenant a wider scope to make alterations.

How can the alteration provisions interact with other lease clauses?

Rent review provisions

A commercial lease will usually contain a market rent review. In that case, the effect of alterations carried out by the tenant on the rent should be disregarded for calculating the market rent. 

The tenant's solicitor needs to ensure that this is the case as otherwise, the tenant will not only have paid for the costs to undertake the work, but could also be liable for increased rent. This is because the premises are now in an improved state and are therefore more marketable and can attract a higher hypothetical rent.

Signage clause

It is common for a tenant to erect a sign at the premises advertising their business, but they should be careful as to any requirements under the lease. They may not expect to have to obtain permission from the landlord for this. Provisions relating to signage may be included within the alterations clause or dealt with separately, but the obligations should be clearly understood and negotiated if necessary.

Compliance with laws

We have so far only considered the lease implications regarding alterations, but there are, of course, regulatory matters to also deal with, depending on the specific work being undertaken. 

Commercial leases usually contain a clause dealing with the tenant's compliance with laws. This is relevant to the alterations where:

• the tenant is required by statute to carry out certain alterations, include building regulations and fire safety legislation; or
• planning permission is required in relation to the works, and this requires the landlord's consent.

Yield up clause

It is important for the landlord to insist on an obligation on the tenant in the lease to reinstate alterations when they yield up the lease. Without this, the landlord may have to pay compensation to the tenant for alterations that amount to "improvements" under the LTA 1927, and this sum could be a substantial amount depending on the works undertaken.

Insurance obligations

It is also common for a commercial lease to include a provision requiring the tenant to adhere to the requirements and recommendations of the insurers that relate to the premises. In the context of alterations, this could mean that before starting certain types of works at the property, the insurer may need to receive details of the works and provide their consent. Suppose the tenant fails to notify the insurer in these circumstances. In that case, it could result in a breach of the insurance policy and an issue if there is subsequent damage to the property whilst carrying out the works.

Licence for alterations

Whilst most commercial leases will contain a provision requiring the tenant to obtain consent from the landlord before making any alterations to the property, the lease should be considered to see whether consent is required. Where a Licence for Alterations is required under the lease, it is likely that the tenant will need to pay the landlord's legal fees in connection with this. The licence records the works that the tenant proposes to undertake that will alter the property. This protects the tenant's position in relation to the works but allows the landlord an element of control.

Expert legal advice on commercial property leases

SO Legal has commercial property solicitors based in London, Brighton and East Sussex and works with clients across the UK.