Licence to Alter – Back to Basics

15 / 06 / 2022

As a tenant, once you’ve found your new office, shop, restaurant, warehouse or other property, the next step is to set it up to meet your needs. To do this you may need to carry out some alterations. The landlord will have its interests in the property to protect too. They need to think about, amongst other things, the integrity of the building and whether alterations will make the property difficult to let after the lease has ended. A landlord simply isn’t going to allow a tenant to carry out any alterations it wishes, is it? Tenants’ works often require the prior approval of the landlord in the form of a licence to alter.

Check the lease

The starting point for any licence to alter is to look at the lease between the landlord and tenant. The terms of the lease will dictate:

  • what alterations the tenant is allowed to make;
  • the conditions to enable those alterations; and
  • how the alterations must be carried out.

The initial, crucial point for the tenant to consider is whether their proposed alterations are permitted. A relatively common position is that alterations:

  • to the exterior or structure of the premises are prohibited;
  • that are non-structural and internal to the premises are allowed with the landlord’s consent, which shall not be unreasonably withheld.

As to what “reasonable” means, that is a whole article of itself.

If a lease is silent on alterations, the tenant is free to make alterations without the landlord’s consent. This would be unusual. Astute landlords will include additional matters that need to be complied with, such as:

  • tenant must use good-quality materials;
  • works must be carried out in a good and workmanlike manner; and
  • alterations must be completed to the satisfaction of the landlord.

Despite the multitude of terms and restrictions contained in the lease, in certain circumstances, a business tenant has a statutory right to carry out alterations if they are ‘improvements’. Notwithstanding this, both landlords and tenants should carefully analyse the terms of the lease and seek legal advice. 

Other parties and other consents

Even if the lease grants the tenant rights to alter, there are numerous parties that may have a relevant interest in the property too. For instance:

  • where the landlord has taken out a mortgage then they will probably need permission from the bank;
  • where the lease is in fact an underlease, the landlord may need to ask the superior landlord for its consent to the works of the undertenant;
  • where the landlord’s title contains a restrictive covenant, you may need consent from another party, such as a neighbouring property owner;
  • where the insurer of the building may also need to approve the works or be notified ahead of any works commencing.  

The landlord will want to be sure that the tenant has obtained all consents before allowing a tenant to proceed.

From a landlord’s point of view it is vital that the tenant’s guarantor, if there is one, is also a party to the licence. The main reason for this is that the licence could constitute a variation of the lease. As always, this depends on the terms of the lease and the nature of the works but if the licence amounts to a variation, the guarantor might be inadvertently released from its obligations.

If the alterations are substantial then there is a greater risk that the guarantor will be released from their obligations as the tenant’s repair liability under the lease will be dramatically increased. It is best practice for a landlord to ensure that the tenant’s guarantor signs up to the licence to alter, regardless of the terms of the lease and extent of the works.

Internal or External?

The nature of the works is an inherently important consideration.  There is quite a difference between fitting a new carpet inside the tenant’s demise and installing an internet mast on the roof of the building. As a landlord, if the tenant’s works are taking place outside of their premises then some things to consider are:

  • where the alterations are taking place, how this will affect the building and any other tenants occupying the building?
  • does the landlord have the ability to ‘lift and shift’ the works easily to another place on the building should this be required?
  • if there are relocation provisions, who has to pay for the relocation? 

Any landlord will usually require evidence of the works by way of plans, specifications and drawings so that it is clear what has been approved and what may need to be removed at the end of the lease.

Warranties

If the alterations are structural or affect mechanical or electrical items, the landlord may require a  warranty or a guarantee from the tenant’s contractor(s). This creates a direct contractual link between the landlord and the relevant contractor. Without a warranty, the landlord may not be able to sue the contractor if something goes wrong. The landlord would still have redress against the tenant.

Tenants should be aware that the landlord may go a step further and require the tenant to employ the same contractors used by the landlord so as not to compromise any original building and design warranties or product guarantees.

Reinstatement

There’s also the question of what happens to the works when the lease ends?

The landlord will usually want the property put back into the condition it was in before the tenant carried out the works. Just because these works suited a particular tenant doesn’t mean that the next tenant will want them.

However, the tide is turning on this front as it isn’t environmentally friendly to keep disposing of tenant fitouts. A tenant should consider the benefits of the alterations against the costs of implementing and then removing them.

Conclusion

A licence to alter documents outlining the works that the parties have agreed can be carried out, how those works are to be carried out and what happens to them at the end of the lease.

However, often this is left to the last minute and contractors are booked before all of the relevant approvals are documented. Whilst this article summarises some considerations, it is not an exhaustive list.  However, it should help to manage everyone’s expectations and help save some time in the long run.

Key points 

  • Check the lease as this will deal with what a tenant can and cannot do without involving a landlord.
  • Check if any third party consents are required, in addition to any local authority consent under planning legislation.
  • Will the works affect the wider users of the building or just the area occupied by the tenant?
  • Are the works going to affect any guarantees or warranties or are the works such that a landlord may want a new warranty or guarantee?
  • It is likely that the works will need be removed by the tenant at the end of the lease