Tenants’ Right to Carry Out Improvements

Refurbishment Works

by Raymond Cooper Consultant Property Lawyer on July 18, 2012

  • Sumo

Raymond Cooper is a Consultant Property Lawyer

Proposition: An absolute prohibition, in a lease of business premises, against redevelopment or the carrying out of structural alterations will not necessarily prevent the tenant from carrying any of the prohibited acts.

The issue canvassed below is not limited to such situations, but is particularly applicable to long development leases.  Developers and funders tend these days to require lease terms of at least 150 years and possibly more.  The lifespan of a modern building (due not only to structural deterioration and the wearing out of plant and machinery, but also to obsolescence arising from changes in occupational tenants’ requirements) is unlikely to exceed 50 years, so in the case of a lease of this kind one can expect at least two further redevelopments.  One can also expect a rather larger number of major refurbishments, as the plant and machinery elements of a modern building are unlikely to have a lifespan (for reasons similar to those given above) of more than 25 years.

This in fact gives rise to a number of issues, some of which I will cover in future posts, but what I am concerned with here is the question of whether it is possible to include in a development lease an absolute prohibition on the construction of new buildings (or rather whether such a provision is in reality enforceable).  The answer I think is that it is not.  The reason lies in a provision which is now about 85 years old but the broad effect of which is in my experience still not fully appreciated by some practicing property lawyers today.  I am referring to s.3 of the Landlord and Tenant Act 1927.

S1 of the 1927 Act enables a tenant of a holding to which Part 1 of the Act applies (as to which see below) to claim compensation, at the termination of his tenancy, for improvements carried out during the term of the tenancy.  Part 1 of the Act applies (s17(1)) to any premises held under a lease (other than mining lease) used wholly or partly for “carrying on thereat any trade of business” (there are exceptions, but they are not material for present purposes).  Where s1 applies then so does s3.

Refurbishment Works

S3 of the Act provides that a tenant must give his landlord notice of his intention to make an improvement, together with specification and plan showing the proposed improvement etc.  If the landlord wants to object he must serve a counternotice within three months and the tenant may then apply to the appropriate tribunal (now the County Court) for a certificate that the improvement is a proper improvement i.e.

(a) is of such a nature as to be calculated to add to the letting value of the holding at the termination of the tenancy; and
(b) is reasonable and suitable to the character thereof; and
(c) will not diminish the value of any other property belonging to the same landlord, or to any superior landlord from whom the immediate landlord of the tenant directly or indirectly holds.

The County Court has the power to make modifications and to impose conditions.  Of course, it is possible that a certificate will be refused but in the case of a new building which is properly designed it is unlikely that any of the above tests (particularly given the power of the Tribunal to make modifications and impose conditions) will apply, save possibly for (a) where there is a very long unexpired term or, in special circumstances, (c); but I doubt whether a landlord could prevent certification on either of these bases.

Building WorksThe comments above may seem somewhat off the subject, but are a necessary preliminary to considering the effect on an absolute prohibition of alterations of s.3 (4), which states that where no notice of objection is served by the landlord, or where the tribunal has certified an improvement to be a proper improvement, it shall be lawful for the tenant as against the immediate and any superior landlord to execute the improvement according to the plan and specification served on the landlord, or according to such plan and specification as modified by the tribunal or by agreement between the tenant and the landlord or landlords effected, anything in any lease of the premises to the contrary notwithstanding (my italics).

Leases, of course, tend in restrictions of this kind to refer to alterations rather than improvements but the replacement of an old building with a new one is, as I have indicated above, almost certain to amount to an improvement.  In general law the  question whether an alteration is an improvement is usually looked at from the point of view of the tenant; F.W.Woolworth and Company Limited v. Lambert, [1937] Ch. 37, but in terms of business tenancies within Part 1 of the 1927 Act, the demolition of a building and the erection of a new building has been decided to be capable of being an improvement for 1927 Act purposes even if it is for the purposes of a different business; National Electric Theatres Limited v Hudgell [1939] Ch553.

This post is not of course intended as a comprehensive exposition of the provisions of Part 1 of the 1927 Act but it is just worth mentioning that there is a proviso to s.3(1) under which the landlord may offer to execute the improvement himself in consideration “of a reasonable increase of rent” in which case the Tribunal is not to give a certificate unless the landlord subsequently fails to carry out his undertaking.  That I think has a very limited application; most investment landlords are not developers.

Blueprints and PlansNor is it within the scope of this post to cover other provisions which might mitigate the impact of covenants against alterations, but very briefly:

s.19(2) of the 1927 Act  implies into covenants not to make alterations without licence or consent a proviso that consent is not to be unreasonably withheld, but the sub-section does not apply to absolute covenants of the kind under consideration here;

– more significantly, s.84 of The Law of Property Act 1925 confers power on The Lands Tribunal, where certain limited grounds can be proved, to discharge or modify restrictive covenants in leases granted originally for a term of more than 40 years after 25 years have expired.  I am not sure how valuable this is in practice – I would be happy to comment in a future post if there is sufficient interest.

In summary, an absolute prohibition against the carrying out of alterations can be avoided by the tenant, if the alterations amount to an improvement within the meaning of the 1927 Act, by the tenant making an application to the County Court for a certificate, and either the landlord failing to serve a counternotice, or the case going to the Court and the Court issuing the certificate.  There are ways of drafting development leases so as to minimise this risk; if anyone is interested I will go into that in a future post.

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Raymond Cooper Consultant Property Lawyer
I am a senior property lawyer, formerly an equity partner and head of commercial property with a well-known and highly respected central London legal practice, Farrer & Co LLP. I have continued to be available to my previous practice as a consultant, but not on an exclusive basis; I operate independently on a freelance basis and am available to take up other opportunities as they arise. After more than 45 years of handling a large and varied caseload, I want to focus on specific projects where my experience can help achieve visible results. I am flexible about what form these opportunities might take, but some possibilities might be: Acting as a consultant to firms of solicitors or other professional practices; Non-executive directorships or advisory board memberships of property companies, corporate occupiers, or institutions; Membership of tribunals, or governmental or local authority or other non-corporate bodies; Research and publication; Acting as an expert witness or independent expert.
Raymond Cooper Consultant Property Lawyer

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