First impressions matter. The physical appearance of a business matters, so it is important that a Tenant can control how it looks. However, as I have mentioned here, commercial property leases tie together many, very complex issues and liabilities that go far beyond the amount of the rent. The issue of alterations can become tricky and advice on risk management in commercial property leases should to be done only by a qualified solicitor who is subject to regulated standards and knows how to get you the best deal.
As someone who has been both a partner in a law firm and in-house at one of the top property companies in Europe, I can assure you that commercial property leases can be kept simple. However, they are only kept simple when the lawyer deeply understands what is going on. Getting it wrong or missing something out creates problems and solving problems is more expensive than doing it correctly in the first place.
Paying attention to the lease from the outset
Alterations may sound like a process that is only complex from a design, engineering or building perspective but the legal issues can also be complex, so it is important for Tenants to be prepared well in advance.
As Grant Cordone said, “If you don’t control your environment somebody else will.” In commercial property leases, it is usually the Landlord that retains control over the environment by insisting that no alterations can be done to the property without the Landlord’s consent. I have mentioned before here that a commercial property lease is uniquely unregulated, but this is one exception: where a commercial property lease states that alterations cannot be carried out without the consent of the landlord, section 19(2) of the LTA 1927 adds a proviso that in the case of improvements such consent cannot be unreasonably withheld. This proviso cannot be excluded. While this may appear to give the Tenant a considerable degree of control, it has led Landlords to make alterations clauses increasingly complex as they juggle the competing demands of financial and environmental risks, planning law and other similar issues. A commercial property lease typically includes a complete prohibition on structural alterations, while permitting non-structural alterations, subject to the Landlord’s prior consent.
Additionally, a commercial property lease will usually impose a full ban on any alterations that could impact the environmental performance of the property. Furthermore, any alterations must strictly adhere to the detailed plans submitted to the Landlord, with no deviation permitted, even in cases where minor adjustments were required to obtain planning permission.
Moreover, anything that is not inside the property would also not be subject to reasonableness (whether structural or not). For example, installing air conditioning or cabling would often be entirely at the discretion of the Landlord to refuse. However, it can get worse: in some office buildings and shopping centres, the immediate Landlord also has a long lease and does not have any control over some or all of the structural parts of the building or even the airspace above the roof.
All this can be quite a problem for Tenants because the appearance of the office or shop is a powerful marketing tool, but also the cabling may be important for the tenant to enable more use of technology. Finally, it may be that alteration are needed to implement a new business model. Here are two examples:
- An office or shop business is sold and the new owner needs to refit the premises in line with its own corporate standards. In an unfavourable lease, it will be entirely the Landlord’s decision whether to allow the changes.
- A restaurant is struggling and therefore changes its business model to faster food. That requires less staff but a different fit out and different machinery. However, it was entirely the Landlord’s decision whether to allow the changes.
- A shop is robbed twice in a month because the landlord installed substandard glass. The tenant wants to stop the robberies by installing much more secure glass. However, it was entirely the Landlord’s decision whether to allow the changes.
Licences for Alterations
Most Licences for Alterations will be relatively short documents. However, it is crucial to understand that even though they may be designed to look simple, such licences are bringing together many complex issues in a disguised way. It is also usually the case that the more complex the alterations and/or the property, the more complex the process and the required licence will be.
Tenant’s Liabilities and costs
Any possible risk has to be borne by someone. If it is not borne by the Tenant it will be borne by the Landlord. The list of costs and liabilities is therefore lengthy, and note these are partly in the Licence for Alterations and partly in the Lease. An unfavourable lease could lead the Tenant to have to pay for items that will have a wide variation of costs. Among the simplest items that the Tenant may be made responsible for covering the costs are the Landlord’s surveyor and legal costs, and the Superior Landlord’s legal costs. Higher ticket items may include a series of deposits paid to the Landlord to cover compliance and possible damages.
The Tenant would also incur further liabilities for things you have only a tenuous connection to! Unfortunately, far too many commercial property leases contain a clause whereby the tenant indemnifies the Landlord for an unlimited amount and remoteness of costs and expenses as well as any reduction in the value of the building arising out of or in connection with any works carried out.
Can you start the Works before the Licence for Alterations is granted?
Unauthorised alterations should certainly be avoided.
Firstly, it is important to note that commercial property leases will almost certainly state the Landlord’s consent to alterations can only be given in a properly executed deed. Therefore, if a Landlord appears to allow alterations in an informal way, for example orally or in an email, it would not actually be a Landlord’s consent and the alterations would still be unauthorised alterations.
If there are unauthorised alterations, this can be cured by obtaining a retrospective Licence for Alterations but the Landlord could require the Tenant to remove the alterations or could remove the alterations themselves and make the Tenant pay the costs. In extreme cases the Landlord could even terminate the lease using the remedy of forfeiture.
At EM Law, we are experts in all types of commercial property transactions. Should you require assistance in leasing, financing, acquiring or disposing of an interest in a commercial property, contact me, James Williamson.
