Can we make the alterations to the unit now and sort out the “legals” afterwards?
A tenant of a commercial unit may have a pressing commercial reason to carry out alterations to the unit. New plant or machinery may be arriving for installation. Production targets or deadlines may need to be met. Fit out contractors may be booked. In this article, we look at the steps that a tenant should take in such a situation to protect their position under their lease and the possible consequences if those steps are not taken.
Due to business needs, a tenant in occupation of a commercial unit may wish to carry out alterations to the unit without first considering the legal position. This is a very risky approach. We would recommend that they look at what their lease says about alterations and consider the implications of their actions so that they can make an informed decision about whether or not to proceed.
2.What does the lease say?
From a legal perspective, whether a tenant is permitted to carry out the alterations that they wish to make to their premises will depend on the provisions governing the tenant’s ability to carry out alterations in their lease. Each lease is different and each situation will need to be assessed on the basis of the facts. The most common themes in respect of different types of alterations are as follows:
a. Internal non-structural alterations
A lease usually permits a tenant to carry out internal non-structural alterations to their premises provided that they satisfy certain conditions. A very common condition is that a tenant must first obtain the landlord’s prior written consent to the alterations. The lease may specify that the landlord cannot unreasonably withhold or delay their consent. The landlord’s consent to the alterations would be documented in a licence to alter. A licence would include:
- a clear description of the alterations, usually by reference to plans and/or specifications;
- the standard to which the alterations need to be carried out, including the quality of the materials used;
- the date by which the alterations need to be started;
- the time period during which the alterations need to be completed once started;
- whether the alterations will be taken into account on rent review under the lease; and
- whether the alterations will need to be reinstated at the end of the lease term.
A tenant needs to comply with all the terms of the completed licence to alter, otherwise the licence will fall away, the landlord’s consent will no longer be valid and the condition in the lease requiring landlord’s consent will not be satisfied. If a tenant carries out internal non-structural alterations to a unit without complying with any conditions in the lease, then they are in breach of their lease.
If the licence has not yet been completed, but the landlord informs the tenant that the alterations “should be ok” or “will be authorised by licence”, and due to business needs the tenant is keen to proceed with the alterations, then the tenant will have to make a commercial decision about whether they go ahead with the alterations at that stage. If the tenant goes ahead without formal consent in the form of a completed licence, then the tenant is left vulnerable to the landlord changing their mind and denying the tenant formal consent, which would then mean that the tenant will be in breach of its lease.
b. Structural and external alterations
In general, leases provide that a tenant is not permitted to carry out alterations to the structure or the exterior of a unit (very occasionally, these types of alterations are permitted subject to first obtaining landlord’s consent). If this is the case, then a tenant could not make such alterations, like installing a mezzanine floor or knocking through walls, without being in breach of their lease.
That said, it is possible that if a tenant approaches their landlord with a proposal to make such alterations that the landlord may permit the alterations to be carried out irrespective of the prohibition in the lease. If this happens, then the landlord’s consent to the alterations would be documented in a licence to alter. If the tenant proceeds with the alterations without the grant of formal consent by the landlord, then the tenant will be in breach of their lease.
3. What are the consequences of a breach of the lease?
If a tenant breaches their lease, without formal consent from the landlord, for any of the reasons set out above, then they are in a precarious position. The consequences of the breach will depend on how the landlord chooses to respond to the breach. A spectrum of differing responses is possible. The three main possibilities are as follows:
- Forfeiture – A landlord may be able to exercise its right to bring the lease to an end. The landlord’s ability to do this is governed by the forfeiture provisions in the lease. It is usual for these provisions to state that the landlord may forfeit the lease where there is a breach of the tenant’s covenants in the lease. The lease may specify that forfeiture is only possible where there has been a material breach of the tenant’s covenants in the lease. The landlord would only be able to exercise its right if it first of all follows a statutory procedure and it is likely that the tenant would be able to apply to the court for relief from forfeiture.
- Reinstatement – A landlord may require the breach to be remedied immediately. In practice, this would mean that the tenant would need to reinstate the alterations. Clearly, removing a mezzanine floor that has just been installed or rebuilding walls that have just been knocked through would be costly and disruptive for a tenant’s business.
- Waiver – A landlord may decide to waive the tenant’s breach and provide consent for the alterations retrospectively. The landlord’s consent to the alterations would be documented in a retrospective licence to alter. A retrospective licence would cover many of the same points as set out above for a licence to alter. This is the best-case scenario for a tenant.
If a tenant wishes to make alterations to a unit then the lease should be consulted in the first instance to see whether such alterations are permitted and to identify any conditions which need to be satisfied. In the event that the lease will be breached, the tenant must be prepared for the consequences that may follow depending on how the landlord decides to respond to the breach. Evidently, a tenant is to be encouraged to comply with their lease wherever possible to avoid putting themselves in a precarious position in which their landlord may bring their lease to an end or they may be required to reinstate the alterations that they have just carried out at the unit. A landlord will in any event acquire a negotiating position with the tenant in the event that the tenant applies for a retrospective licence to alter – it could be a hostage to fortune for a tenant to put itself in such a position which any tenant is advised to seek to avoid if at all possible.
If you are a tenant who is considering making alterations to a unit, or a tenant who is looking to document alterations which have already been carried out, then please get in touch with the Real Estate team.