Reconfiguring office space: what alterations can you make?


In this video, Emma Cork and Alexandra Holsgrove Jones discuss what alterations you can make to reconfigure office space.

  • What does the lease allow?
  • Does the landlord have to respond to a request to carry out alterations within a set timeframe?
  • What does the Lease Code 2020 say?
  • What if the lease prohibits all alterations?

 

Reconfiguring office space: what alterations can you make?

Transcription

Alexandra Holsgrove Jones:

Welcome to another of our TLT Taster Sessions on current issues affecting the real estate sector.

Alexandra Holsgrove Jones:

I'm Alexandra Holsgrove Jones, senior professional support lawyer in TLT's real estate group and I'm joined today by Emma Cork, legal director in TLT's property litigation team.

Alexandra Holsgrove Jones:

The coronavirus pandemic has made businesses look at how they're using their space. In some cases, they may want to downsize and surrender or assign a lease or sublet parts or all the premises.

Alexandra Holsgrove Jones:

In other cases, they may want to retain the space, but use it differently. And this is likely to require alterations to the premises. In this session, we're going to be looking at what alterations a tenant can make, in what circumstances it would need landlord's consent, and what the impact of alterations could be on other lease provisions.

Alexandra Holsgrove Jones:

So, Emma, what should a tenant's starting point be when considering alterations to premises?

Emma Cork:

The lease is always going to be the starting point. What does it allow the tenants to do and is the landlord's consent required? It's very unusual for a lease to be silent on the issue of alterations. However, if this were the case, the tenant will be able to carry out whatever alterations it chose so as long as it didn't commit what's called waste. This effectively means that the tenant can't permanently alter the nature of what's being demised to.

Emma Cork:

It is also important to remember that the tenant can only alter the demised premises themselves. They can't do anything that strays outside the boundaries. This is the case whether or not the lease specifies what alterations can be carried out.

Emma Cork:

So for example, alterations that involve installation of air conditioning equipment on the exterior of premises where the tenant has an internal only demise are not permitted under the terms of the lease. The landlord would have to agree to alterations being carried out that go outside the demise. And this would have to be specifically documented with the tenant being given rights of access to areas outside the demise for things like repair and maintenance.

Alexandra Holsgrove Jones:

So what is normal market practice in relation to alterations clauses in a lessor part of a building for office use, for example?

Emma Cork:

It would be common in a leaser part of a building, for office use, to absolutely prohibit external or structural alterations and permit internal non-structural alterations with the landlord's consent. There may be a provision allowing the tenant to install and remove demountable partitioning without landlord's consent. But in these cases, tenants will probably have to notify the landlord and their insurer of the changes. So in all likelihood, a tenant that wants to reconfigure a space will need landlord's consent.

Alexandra Holsgrove Jones:

Now the new lease code came into effect on the 1st of September this year with the status for RICS members of a professional statement, rather than a voluntary code as was the case with the 2007 lease code.

Alexandra Holsgrove Jones:

The 2020 lease code differentiates between leases of whole and leases of part and sets out that in a lease of a unit in a multi-let building a landlord may require that it's consent for internal nonstructural alterations is to be obtained, and that such consent is not to be unreasonably withheld or delayed, and may prohibit any alterations that adversely affect the character, value, structural stability, statutory compliance or energy efficiency performance of the building or its business services.

Alexandra Holsgrove Jones:

So tenants with leases of part are going to have to continue to obtain landlord's consent for alterations. Working on the assumption that the tenant needs to request landlord's consent to alterations, what can a tenant do if the landlord doesn't respond or is, in the tenant's view, unreasonable in its response?

Emma Cork:

Well, landlord's consent has to be obtained. The lease will generally provide that it must not be unreasonably delayed or withheld. However, unlike qualified covenants against alienation, which are covered by the Landlord And Tenant Act 1988, a landlord will not be obliged to respond within a reasonable timeframe, unless this is set up in the lease clause.

Emma Cork:

The best a tenant can do is set out what it considers to be a reasonable period for response in its request for consent. The parties may choose to comply with the Alterations Protocol, which was created to minimise the scope for dispute so the applications for consent to carry out alterations and sets out such things as the information that should be provided by the tenant to the landlord as part of its request.

Emma Cork:

However, there's no obligation to comply with that protocol. If a landlord is unreasonably withholding consent, the tenant has two options. A claim to court for an order that the landlord has unreasonably withheld consent, effectively give permission to carry out the works. Or to simply go ahead with the works. The risk for the tenant in simply going ahead is that the landlord treats this as a breach of the lease and seeks to forfeit or terminate the lease, which will obviously then be disputed.

Alexandra Holsgrove Jones:

Yeah, what could a tenant do if the lease doesn't say that consent mustn't be unreasonably withheld or delayed?

Emma Cork:

This will be quite unusual, but Section 19-2 of the Landlord And Tenant Act 1927 may assist. This provides that where the landlord's consent is needed for improvements, then that consent cannot be unreasonably withheld. There may, of course, be a divergence of views on whether the tenant's proposed work is amount of improvements. From a tenants point of view, it'll be justifiable to argue that the alterations are improvements because otherwise it wouldn't want to carry them out.

Alexandra Holsgrove Jones:

Indeed. What happens if the lease prohibits all alterations?

Emma Cork:

If all alterations are prohibited, the tenant could still request that it be allowed to carry them out. But the landlord should be very careful in dealing with such requests. There are a couple of key points here. First, if you're dealing with a multi occupied building, you need to look at what the other leases say.

Emma Cork:

Earlier this year, the Supreme Court considered the point in De Val verses 11 to 13 Randall Crescent and held that if a landlord permitted attempt to carry out alterations, where there was an absolute prohibition against them in the lease, the landlord would be in breach of its obligation to enforce the lease covenant at the request of another tenant in the building.

Emma Cork:

Secondly, the landlord needs to bear in mind that where there is an absolute prohibition in the lease, grantings that will amount to a variation to the lease. And as Phil mentioned during the session on lease variations, bearing a lease without the consent of a guarantor can result in the guarantor being released from its liability under the guarantee provisions in the lease.

Alexandra Holsgrove Jones:

Thanks Emma. Now the alterations clause is just one element of the lease and it's always important to read the lease as a whole, rather than just focus on provisions in isolation. For example, it's critical to think about what the impact of a tenant's alterations will be on rent review. The normal practice is to disregard alterations from rent review. The tenant would have paid for the alterations themselves. So it would seem unfair for the tenant to then have the alterations taken into account when the rent is reviewed. And the parties also need to think about how alterations are going to be dealt with when the lease comes to an end.

Emma Cork:

Absolutely. We usually see an obligation on the tenant to reinstate at the end of the term. The Lease Code 2020 provides that except where heads of terms state that there will be a reinstatement specification or an obligation on tenants to remove alterations, the lease should allow the tenant to leave the alterations in place unless it's reasonable for the landlord to require their removal.

Emma Cork:

Given that landlords are likely to want to retain control over whether alterations are removed at the end of the term, we're likely to continue to see an obligation on tenants to remove alterations. From a landlord's perspective, if alterations have to be reinstated, it means that on the termination of the tenancy, there won't be any improvements which add to the letting value of the premises and for which the landlord might pay compensation under the 1927 Act.

Alexandra Holsgrove Jones:

Thanks, Emma, that's been a really useful run through of issues to consider when planning alterations. Thank you for joining us. If you have any questions on the issues raised, please get in touch. You can also sign up for other TLT Taster Sessions.

 

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