Silence is not golden

Most commercial leases will have something to say about what happens if the tenant wants to carry out alterations. If, however, the lease is silent on the topic then the tenant is free to do what they want, subject to two important caveats.

First caveat: Practically speaking, there will always be either a specific or an implied covenant by the tenant not to commit what is known as ‘waste’. In this context, a lawyer would describe waste as ‘a spoil or destruction to houses, gardens, trees or other corporeal hereditaments, to the injury of the reversion of inheritance’. That’s how the judge defined it in a leading case on the subject (Mancetter Development Ltd v Garmanson Ltd & Anor [1985]). Someone speaking in plainer English might describe waste as ‘damage to the property to the detriment of the landlord’. The important point here is that tenants aren’t allowed to do it.

Second caveat: The tenant would only be able to carry out alterations to the premises demised to them – so the works can’t go beyond their boundaries. And that restriction may be more restrictive than it first looks. When it comes to the extent of the demise, most modern leases will go into quite a lot of detail about what is and isn’t included in the demise. Where the lease is of part of a building only (in our case the hip eatery on the ground floor), that detail will normally be restricted to the ‘interior’. In particular, it would be usual for all structural parts of the building to be excluded. So, if there is a structural wall in the middle of a commercial unit then, usually, that wall will not be part of the premises demised to the tenant. The plaster and the wallpaper might be, but not the wall itself. The tenant wouldn’t have the right to do any works to that wall (be that knocking it down, putting a hole in it or even just drilling through it).

Parliament has not been silent either

Alas, now you’ve gone to the trouble of finding the lease (and reading it), we have to tell you that what the lease says in black and white is not the final word on the matter. Parliament has also butted in on the act by passing a number of Acts.

2010

In addition to the Landlord and Tenant Act 1927, account also has to be taken of two aspects of the Equality Act 2010.

The first aspect: landlord must make reasonable adjustments

Under Section 36(1)(a) of the EA2010, a landlord (or their managing agent) may have to make reasonable adjustments in connection with a response to a request from a disabled tenant or occupier. This obligation doesn’t require the landlord, themselves, to make physical alterations but it can impact on the way they must treat a request from a tenant for consent to make alterations.

In Smailes v Clewer Court Residents Ltd [2019] a disabled tenant requested consent to make quite substantial alterations to her flat, to make it more suitable for her needs. The alterations included relocating the kitchen and lounge and creating a new doorway. The lease prohibited these alterations. It was an absolute covenant. The managing agent wanted to refuse. But the Court held that it couldn’t. The Court said that the absolute covenant against alterations in the lease deprived the disabled tenant of a greatly enhanced quality of life in the enjoyment of her home. And this amounted to a significant disadvantage when compared to how a person, who was not disabled, would be able to enjoy the flat. Although the Smailes case relates to residential premises, there is no reason that the same principle could not be applied to commercial premises. But the facts would need to be quite specific. The disabled person in question must be the tenant or someone entitled to occupy the premises. In our example of a hip eatery that is unlikely to include the customers. Instead, it would apply to a disabled restauranteur. So, the sort of alterations that would be caught might include changes to the kitchen to make it easier for the disabled restaurateur to cook.

Second aspect: tenant to make reasonable adjustments

In a number of circumstances, the EA2010 may impose an obligation on a person (who happens to be a tenant) to make reasonable adjustments to their premises. For example, Section 29(7) of the Act imposes an obligation on ‘service providers’ to make ‘reasonable adjustments’ so that a disabled person is not put at substantial disadvantage in accessing the service. So, in our example, the owner of the hip eatery providing the services of a restaurant may have to make reasonable adjustments to make it easier for disabled members of the public to enjoy their restaurant. Reasonable adjustments might include making physical alterations to the restaurant premises, for example replacing a step with a ramp.

So, what if the tenant needs the consent of their landlord to implement that reasonable adjustment? Well, the Act intervenes. Schedule 21 of the Act implies a reasonableness consent regime into leases where the alteration, which is the subject of a request for consent, is required to be implemented because of an obligation under the Act. This consent regime overwrites what the lease says. It doesn’t matter if the lease contains an absolute covenant, qualified covenant or fully qualified covenant, the tenant would still be entitled to rely on the regime implied by the Act and that implied regime means:

• The tenant is permitted to make the alteration with the landlord’s consent.
• The tenant must make a written application to the landlord for that consent.
• The landlord must not unreasonably withhold that consent. But it can grant consent subject to reasonable conditions.
• If the landlord refuses consent (or grants it subject to conditions) then the tenant (or a disabled person with an interest in the alteration being made) can ask the Court to determine whether the refusal or condition is unreasonable.

Further detail in this area is provided by the Equality Act 2010 (Disability) Regulations 2010. Those regulation specify five circumstances where the landlord is deemed to have withheld consent, thus entitling the tenant to troop off to Court. The five circumstances are:

• The landlord has neither given nor refused consent within 42 days of full written request for consent (with plans and specifications).
• The landlord thinks an application lacks sufficient plans and specifications but has failed to request missing items within 21 days of receipt of the application.
• The landlord has neither given nor refused consent within 42 days of receipt of the missing items.
• The landlord gives consent within the 42 days, but that consent is conditional on securing consent of a superior landlord and the landlord has not requested the superior landlord’s consent within the 42 days.
• The landlord does not, within 14 days of its receipt, inform the tenant that it has secured the superior landlord’s consent.

Schrodinger’s word

So far in this edition of IT’S THE LAW we’ve used the word reasonable (or a derivative) 23 times. That’s 24 now.

To solicitors, that word means everything and nothing. Or, to be more precise, it means a lot, but we are unable to say precisely what. It all depends on the facts and circumstances of an individual case as to whether a Court, at the end of the day, would say that a landlord had or hadn’t acted reasonably. And we really don’t want to spend 12 months in litigation to find out what the Court says at the end of the day.

So, to guide you, here are some hints that have been given in cases over the years about what Courts might think on the topic of whether a landlord has acted reasonably or not.

• The Court will be trying to ascertain what a reasonable person would do in the landlord’s shoes.
• Where a landlord has refused consent to a request by a tenant to make alterations, you apply a two stage test to determine whether that landlord has acted reasonably. First, you ask what the landlord’s reasons actually were. Second, you ask whether those reasons were reasonable or unreasonable.
• Where a landlord must not unreasonably withhold consent, that usually means it must not unreasonably delay either.
• A landlord can impose reasonable conditions to granting a consent.
• Usually, the reason there is a need for landlord’s consent to alterations is to protect the landlord’s property interest and to ensure the proper estate management of their wider holding. So, it is unlikely to be reasonable to withhold consent on grounds that have nothing to do with those matters.
• It is usually (but not always – see below) for the tenant to demonstrate to the Court that the landlord has acted unreasonably (rather than for the landlord to prove that they have acted reasonably).
• Technically, where the landlord is refusing consent, it is not required to give its reasons to the tenant. But, if it doesn’t, the rule about it being for the tenant to prove unreasonableness may be reversed. So, if they end up in Court, it will be for the landlord to prove to the Court that they were acting reasonably.
• The landlord is entitled to received sufficient (and sufficiently detailed) information about the alterations it is being requested to consent to in order to enable it to make an informed decision.
• If a landlord is refusing consent on the basis that insufficient (or insufficiently detailed) information has been given, it would be safer for the landlord to promptly specify what information it believes it is lacking.
• Depending on what the lease says, it will usually be reasonable for the landlord to require the tenant to pay its reasonable costs incurred in considering an application. That may include legal costs, administrative costs and technical costs (such as an advice from a structural engineer). For complex works, those can be quite significant.
• Although the landlord can recover its costs and although the landlord can require compensation (if the works will cause it financial loss), it can’t charge a premium for giving consent just to make a ‘profit’ out of the tenant.
• A landlord usually only needs to consider whether it would be adversely impacted by an approval and not how beneficial an approval would be to the tenant. But if the adverse impact to the landlord is very small compared to a large benefit to the tenant, that rule may not apply.
• If the landlord makes its decision to refuse a consent based on a number of reasons then usually only one of them needs to be reasonable.

What goes in?

Precisely what goes into a Licence to Alter will depend on what the lease says, what the works are and what is reasonable. Particularly complex or major works will likely mean a more complex and thorough Licence. But, in reality, there are a common set of provisions that most well drafted Licences will include in one form or another. They include the following.

First and foremost it’s important to detail in some detail the alterations which are being consented to. A full specification, including plans, will be appropriate in most cases. It is essential that all the parties know what is being authorised. General descriptions such as ‘refurbishment’ can mean very different things to different people. Be precise. If flexibility is needed then it may be sensible to build in a quick fire process for the landlord to approve minor variations during the course of the works. But, if such flexibility is included, it is still important to ensure that the process is sufficiently formal that there will be a paper trail – otherwise, in years to come, it may be difficult to know whether variations were approved or not.

There will inevitably be disruption to other occupiers of the building whilst the authorised works are ongoing. Noise, dust, banging, fumes. The landlord would be advised to include an obligation on the tenant to get on with the works as quickly as possible, a firm date by when the works must be started, a longstop by when they must be completed and restrictions on what times of day noisy works are carried out.

Where the lease is subject to rent reviews, the parties should agree and specify how the alterations will be regarded on those reviews. Clearly if they are likely to have a depressing effect on the market rent, the landlord would want that disregarded. If the tenant is paying for the works to be done, then it would expect any increase in the market rent attributable to the alterations to be disregarded. Otherwise it is paying twice.

The landlord is allowing the tenant to carry out works to its building. Not unreasonably, the landlord will want to ensure that the rest of its building (especially its structure) is not damaged or put at risk. So there will usually be clauses about undertaking the alterations in a good and workmanlike manner and ensuring that no damage is caused.

Usually, the landlord will be insuring the building as a whole. Building works can be a risky thing. Workmen can accidentally knock a wall over. You’d be surprised how often blow torches fall over and cause major fires. So insurers have a thing or two to say when works are being carried out. In almost all cases their consent should be obtained before any works are carried out. Whilst most insurers are pretty good about issuing such consents, they do tend to impose conditions to ensure safety and reduce risks. It is essential that the Licence makes it clear that no works can commence until insurer consent is obtained and that any conditions they impose are adhered to by the tenant and their workers. This is one of the most important terms of any Licence to Alter. Don’t forget it!

In addition to buildings insurance, the landlord will want to know that significant contractors have appropriate insurances. The landlord’s requirements in this regard should be specified.

Depending on the works being carried out there may be a significant risk that damage will be caused to common parts or adjoining land. If large quantities of building materials are being moved in, even the best contractors may scratch woodwork or wear holes in stair carpets. If this is a real risk a landlord should insist on an agreed schedule of condition being prepared at the outset to minimise the risk of arguments as to when damage was caused.

The tenant would be expected to covenant to ensure that all statutory requirements are adhered to. More detail is usually required as to how precisely the Control of Asbestos Regulations 2012, the Construction Design and Management Regulations 2015 and the Energy Performance of Buildings (England and Wales) Regulations 2010 are followed.

The Licence should be clear what will happen to the alterations at the end of the term. A common position is a requirement on the tenant to reinstate unless the landlord specifies otherwise at that time.

The landlord will want to be provided with as built plans at the end of the day – so they know, with certainty, what works have been done to their building. They also ought to require the tenant to procure for them copyright in those plans so that, if they need to in the future, they can freely use them. They might need that use to assist in marketing or to design and implement works in the future.

If the works are substantial, it may be appropriate for the tenant ensure that their designers and contractors give collateral warranties to the landlord – so that, if the works are defective, the landlord can make a claim direct. Whether this is appropriate will depend on how likely it is that it will be the landlord’s problem if the works fail.

The Licence should include specific rights on the landlord to inspect the works as they are ongoing, and at the end, to ensure the terms of the Licence are being complied with. Undertaking those inspections is essential. But equally they can be costly. The tenant should be required to reimburse those costs.

If there is a guarantor of the tenant’s obligations under the lease, then that guarantor should be a party to the Licence and there should be a clause to the effect that that guarantee continues and is extended to cover the Licence, in addition to the Lease.

If the works being consented to extend beyond the tenant’s demise, special consideration will need to be given. A common example is if the works include the installation of air conditioning and that involves putting plant on the roof of the building. Generally, unless the lease includes a specific right, there will be no obligation on the landlord to agree to this, or even be reasonable about it. All of the above about being reasonable is only in connection with an application to alter, not an application to site plant on what is the landlord’s roof. If the landlord does, however, agree it needs to ensure that additional covenants are included about noise and disturbance, access to maintain and, probably, an obligation to move the kit if the landlord needs access or possession back for some reason.