Alterations and handing back

Posted: August 26, 2015

Alterations

It is vital that if you are taking any lease that the landlord cannot restrict or prevent use for the purposes of your business by denying you the ability to carry out works and alterations. I set out below some basic points to consider.

It is fundamental that either the premises consist of all physical parts of the building of which you require use and to which you want to carry out works or rights are granted to carry out works outside of the premises. This is a technical distinction but it is fundamental as the lease will allow certain alterations to “the premises”.

In terms of rights to carry out works outside of the premises most retailers and office occupiers will at least require a right to install air conditioning apparatus both on the premises and in a suitable plant area outside the premises, and possibly on the exterior of the building. It is vital for restaurant premises that this also extends to air extract, ventilation and refrigerant cooling apparatus.

You will also need an ancillary right to access your external plant and machinery for the purposes of repair, maintenance and replacement. It may sound illogical but a right to install kit does not imply a right of access onto other parts of the building to do so or to maintain it.

In terms of what works can be carried out the basic position is that if nothing is stated in the lease then you can carry out whatever alterations you require to “the premises”. However, you will still not be permitted, in law, to commit “waste”, which is any damage which lessens the value of the property to the landlord, owner or future owner.

Most commercial leases under 25 years contain detailed controls of alterations permitted. Commonly you will be allowed to carry out internal and non-structural alterations only. This is fairly self-explanatory but, if the premises are either restaurant or retail premises care should be taken to ensure you can make changes to the shop front and fascia, as this will be important in terms of signage and branding requirements. Care should also be taken to expressly include rights for the erection for any awnings, flags, antenna and aerials (as well as air conditioning) (above) as you may require.

Usually where you are given a right to carry out certain alterations (for example, internal and non-structural) it will be subject first to obtaining the landlord’s consent. However, if  the lease does not oblige the landlord to act reasonably the law implies only that a landlord cannot unreasonably withhold his consent where those works amount to improvements. In all other cases the landlord has a complete veto. However, the law does view “improvements” as being viewed through the eyes of the tenant.

Retailers and restaurateurs are often keen to ensure that landlord’s consent is not required to alterations to the interior and shop front in line with their corporate colours and branding. However, unless the tenant is a substantial chain the landlord is unlikely to agree this or may require that any fit-out must at least be to the same standard as all other tenant’s outlets. This should be avoided or it may force you to carry out expensive refurbishments or decorations simply because you have made changes to other outlets.

Yielding up

Most modern leases provide in what condition the premises are to be handed back to the landlord, either at the end of the contractual term of the lease or when the lease prematurely comes to an end.

The vast majority of landlords will seek to insist that any alterations or works (even where improvements) are removed at the end of the term and the premises are stripped back to shell and core condition.

This will be costly to you in terms of the physical cost of stripping out any fit out, making good any damage caused, decorating the premises and the actual time taken in terms of loss of use of the premises and payment of rent or, in the case of retail and restaurant premises, loss of trade.

For that reason you will most likely be keen to resist this requirement. Common comprises are below but they are often the subject of negotiation and usually come down to bargaining position:

  1. the removal of only loose items, contents and, in the case of retail premises, shelving.
  2. if you take the premises with a previous tenant’s fitting out works already in situ, it would seem unreasonable to be asked to strip out when you leave.

Leases often provide that, even after the term has ended, the landlord can serve on you a “schedule of dilapidations” detailing any disrepair, lack of decoration or stripping out which you have not carried out and which you were obliged to do under the lease. This schedule will be part of a claim to pay for the costs of carrying out any necessary works that they claim you should have done.

Dilapidations payments are usually the subject of a great deal of negotiation and debate, which could cost time and money, and for which you could pay over the odds. In addition, landlords will seek to charge mesne profits (being the market rent together with lease service charge and other payments that would otherwise be due under the lease) for a reasonable period which it should take the landlord to make good any dilapidations after the end of the term which you should have carried out prior to the end of the term.

The subject of dilapidations is very detailed and is beyond the scope of this article, except to say that it is often to your benefit to carry out these works yourself before the end of the term, as otherwise you could face a hefty bill.

However, it should be noted that (and this is a very general explanation) the landlord cannot claim any damages for failure to remedy dilapidations to the extent that a new tenant would not require a discount on rent owing to the state and condition of the premises. This principle is often particularly relevant where a landlord intends to redevelop or completely refurbish a building where, in that case, there is no loss to the landlord.

For more information please see my book “A Tenant’s Practical Guide to Commercial Leases”.

Stuart Darlington is a partner in the real estate department of Michael Simkins LLP