Business Monthly: When tenants make improvements

Picture: Andrew Roe
Picture: Andrew Roe
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It is vitally important that landlords and tenants of commercial premises understand the law relating to alterations and improvements of premises let on a commercial basis.

Leases of commercial properties usually restrict alterations as the landlord is concerned that at the end of the lease the property will be in a satisfactory state to enable it to be relet.

However, what the lease says is not always the end of the matter as the Landlord and Tenant Act 1927 (LTA 1927) gives Tenants three additional rights:-

1 Where the landlord’s consent is needed for improvements, that consent is not to be unreasonably withheld

2 In certain circumstances, the tenant can carry out improvements even if forbidden to do so by the lease

3 In certain circumstances, the tenant can obtain compensation at the end of the term for improvements that have been carried out

Consent not to be unreasonably withheld: The landlord can, as a condition of giving consent, require a tenant to pay a reasonable sum for any damage to or diminution in the value of the property and also require that the tenant reinstates the property at the end of the term.

It is for the tenant to show that the landlord has unreasonably withheld his consent to the proposals which the tenant has put forward. Further, consent cannot be refused on the grounds of monetary loss alone as in those circumstances the landlord could ask for a compensation payment.

The right to carry out improvements: The Act gives the tenant the right to carry out improvements even if forbidden to do so by the lease. A court can authorise improvements if they are calculated to add to the letting value of the property at the termination of the tenancy and are reasonable and suitable for the character of the property. A tenant must serve the appropriate notice on the landlord

The right to compensation: Compensation is payable for improvements by the tenant which at the termination of the tenancy “add to the letting value of the holding”.

To obtain compensation, the tenant must have served a valid notice of its intention to carry out improvements and no objection is received from the landlord for three months or a court has authorised the improvement.

In practice the right to compensation rarely arises in commercial leases as the lease obligations often require a tenant to remove fixtures and any alterations that they have made to the property before the end of the lease.