Leases and underleases - Alterations and improvements

Learning Outcomes

This article outlines the legal principles governing alterations and improvements made by tenants under leases and underleases, including:

• Types of alteration covenants—absolute, qualified and fully qualified—and typical application to structural/exterior works, internal works and service media.
• Scope and operation of LTA 1927, s 19(2) for improvements and LTA 1927, s 3 where an absolute prohibition exists, including lawful conditions a landlord may impose.
• Reasonableness in withholding consent for improvements, with valid and invalid grounds for refusal.
• Practical steps and common conditions in licences to alter, including reinstatement and third‑party consents (planning and building control).
• Additional layers of consent and documentation for alterations under underleases, including the role of the superior landlord and direct covenants.
• Remedies for breach (damages, injunctions, forfeiture), statutory limitation on damages for disrepair/diminution of reversion, and operation of s 146 LPA 1925 procedures.

SQE1 Syllabus

For SQE1, you are required to understand the practical implications of lease covenants concerning alterations and improvements, with a focus on the following syllabus points:

• Identifying different types of alteration covenants (absolute, qualified, fully qualified).
• Explaining the effect of the Landlord and Tenant Act 1927, s 19(2) on qualified covenants concerning improvements.
• Understanding the process for obtaining landlord's consent, including licences to alter.
• Recognising the complexities involved in alterations under underleases.
• Advising on the consequences of breaching alteration covenants.
• Appreciating the separate need for planning permission and building regulation approval for many works and how this interacts with lease covenants.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which type of covenant completely prohibits alterations unless the landlord grants a specific waiver?
2. Under what circumstances does section 19(2) of the Landlord and Tenant Act 1927 imply a reasonableness requirement into a landlord's decision to withhold consent?
3. What is the key difference between a qualified covenant and a fully qualified covenant regarding alterations?
4. If an undertenant wishes to make alterations, whose consent might they potentially need besides their immediate landlord (the tenant)?

Introduction

When a tenant takes a lease of a property, they often wish to make changes to suit their specific needs or business requirements. These changes, known as alterations or improvements, are typically controlled by covenants within the lease. Landlords seek to control alterations to protect the structural integrity, value, and marketability of their property. This article examines the interplay between the tenant's desire to alter and the landlord's need for control, focusing on the relevant lease provisions and statutory modifications.

Works are often categorised by leases with different levels of control—for example, absolute prohibitions on structural or external changes, consent requirements for internal non‑structural works, and separate treatment for service media (heating, lighting, data cabling). In modern commercial leases, demountable partitioning is frequently permitted without consent because of its minimal impact. Alterations are also distinct from repairs and from changes of use; separate covenants and statutory regimes apply to each. Many physical works will also require planning permission or benefit from permitted development rights, and may require building regulation approval. Compliance with public law regimes is separate from compliance with the lease.

Key Term: absolute covenant
A lease term that strictly forbids the tenant from making specified alterations.

Key Term: qualified covenant
A lease term that prohibits alterations without the landlord’s consent, but does not explicitly require the landlord to be reasonable in withholding consent.

Key Term: fully qualified covenant
A lease term prohibiting alterations without the landlord’s consent, which must not be unreasonably withheld or delayed.

Key Term: underlease
A lease granted by a tenant (holding under a 'head lease') to a sub-tenant, for a term shorter than the remaining term of the head lease.

Types of Alteration Covenants

Lease agreements usually contain specific clauses, or covenants, that dictate whether and how a tenant can make alterations to the leased premises. The level of restriction varies significantly depending on the type of covenant used.

Absolute Covenant

An absolute covenant imposes a complete ban on alterations. The tenant is prohibited from carrying out any alterations specified in the covenant.

While the lease forbids the alteration, the landlord can still choose to permit specific works by granting a one-off consent, often documented in a Licence to Alter. However, the landlord is under no obligation to grant consent or even consider a request. In multi‑occupied buildings, additional constraints may arise: a landlord who has covenanted to enforce other tenants’ absolute covenants may be limited in its ability to waive an absolute prohibition for a single tenant if that would breach its obligation to other tenants.

Qualified Covenant

A qualified covenant prohibits alterations unless the landlord's prior consent is obtained.

Importantly, under a basic qualified covenant, the landlord does not have to be reasonable in deciding whether to grant or refuse consent, unless statute intervenes (see below regarding improvements). Qualified covenants are common in relation to internal non‑structural works and works to service media, allowing the landlord to retain control over standards and compliance.

Fully Qualified Covenant

This type of covenant also prohibits alterations without the landlord's consent, but it explicitly adds that the landlord's consent cannot be unreasonably withheld or delayed.

This provides the most flexibility for the tenant, as the landlord must have valid, property-related reasons for refusing consent. A fully qualified covenant may also specify procedural requirements, such as submitting drawings and method statements and paying the landlord’s reasonable legal and surveyor’s fees.

Worked Example 1.1

A commercial lease states: "The Tenant shall not make any alterations to the exterior of the Premises." Later, it states: "The Tenant shall not make any internal non-structural alterations without the Landlord's consent." What types of covenants are these?

Answer:
The first clause is an absolute covenant against external alterations. The second clause is a qualified covenant against internal non-structural alterations. The landlord's consent is required for the latter, but there is no express obligation for the landlord to be reasonable unless the alteration constitutes an 'improvement' under the LTA 1927.

Statutory Intervention: Improvements

The Landlord and Tenant Act 1927 (LTA 1927) plays a significant role, particularly section 19(2), which modifies the effect of qualified covenants concerning improvements.

Key Term: section 19(2) Landlord and Tenant Act 1927
A statutory provision stating that in leases containing a qualified covenant against making improvements without consent, consent is deemed to be subject to a proviso that it cannot be unreasonably withheld.

This section effectively upgrades a qualified covenant to a fully qualified covenant specifically in relation to alterations that qualify as 'improvements'. It applies whether or not the lease is of part or whole, and typically binds a superior landlord where the head lease contains a qualified covenant against improvements and their consent is required.

Key Term: section 3 Landlord and Tenant Act 1927
A statutory procedure enabling a business tenant to seek authorisation from the court to carry out improvements despite an absolute prohibition, subject to conditions protecting the landlord’s reversion.

What Constitutes an 'Improvement'?

The term 'improvement' under the LTA 1927 is interpreted broadly from the tenant's point of view (Lambert v FW Woolworth & Co Ltd). An alteration constitutes an improvement if it enhances the value or utility of the premises for the tenant, even if it doesn't increase the landlord's reversionary interest. Examples include upgrading HVAC to modern standards, installing energy‑efficient lighting, reconfiguring internal layout to improve workflow, or adding accessibility features.

Key Term: improvement
(In the context of LTA 1927, s 19(2)) An alteration to leased premises that, from the tenant's viewpoint, improves the property's usefulness or value for their purposes.

Where s 19(2) applies:

• The landlord cannot unreasonably withhold consent.
• The landlord cannot charge a fine or demand an increase in rent purely as a condition of consent to improvements.
• The landlord may impose reasonable conditions, such as requiring reinstatement at the end of the term, and may require the tenant to pay reasonable legal and surveyor’s fees for considering and supervising the works.
• The landlord may seek compensation for any demonstrable diminution in the value of the reversion caused by the improvement; however, in practice this is rare for bona fide upgrades.

Absolute prohibitions and the s 3 procedure

If the lease contains an absolute prohibition, s 19(2) does not assist. For business premises, s 3 provides a route for a tenant to propose improvements by notice. The landlord has three months to object or to offer to carry out the works for a reasonable rent adjustment. If the landlord objects, the tenant may apply to the court for authorisation. The court can approve the works if they add to the letting value of the holding, are reasonable and suitable to the character of the property, and do not diminish the value of other property of the landlord or any superior landlord. The court may modify plans and impose safeguards (including reinstatement).

In practice, s 3 is used sparingly because many modern leases already include mechanisms to consent to non‑structural improvements, and most tenants accept reinstatement obligations at lease end.

Reasonableness in Withholding Consent

Where section 19(2) applies (ie, a qualified covenant against an alteration deemed an improvement), the landlord must not unreasonably withhold consent. Case law (Iqbal v Thakrar) establishes that refusal must relate to the landlord-tenant relationship and the property itself. The following are commonly treated as reasonable grounds for refusal or for imposing conditions:

• Credible concerns about structural integrity or building safety (e.g., removal of load‑bearing walls without adequate engineering design).
• Risk of breaching planning control or building regulations, or of invalidating insurance because of the proposed works.
• Conflict with superior lease obligations or common parts management, or infringement of other occupiers’ rights.
• Material adverse impact on the marketability or value of the premises (supported by surveyor’s evidence), or on the reversion’s ability to be let in the future.

Conversely, grounds likely to be unreasonable include:

• Refusal to gain a collateral advantage unrelated to property management (e.g., pressing the tenant into a renegotiation of unrelated terms).
• Refusal based on personal dislike of the tenant or an unstated preference for a different design where the tenant’s design is compliant and safe.
• Undue delay with no engagement; while the Landlord and Tenant Act 1988 does not apply to alterations, an express “not unreasonably delayed” requirement in a fully qualified covenant should be honoured.

Worked Example 1.2

A tenant under a lease with a qualified covenant against alterations wishes to install a new heating system, which is more energy-efficient and suitable for their business needs. The landlord refuses consent without giving a specific reason. Advise the tenant.

Answer:
The installation of a new heating system is likely an 'improvement' from the tenant's point of view. Section 19(2) LTA 1927 applies, meaning the landlord cannot unreasonably withhold consent. A blanket refusal without property‑related reasons is likely unreasonable. The tenant should submit detailed proposals (specifications, method statements, compliance with building regulations) and, if refusal persists, seek a declaration from the court that consent is being unreasonably withheld.

Exam Warning

Remember that LTA 1927, s 19(2) only applies to qualified covenants and only where the alteration constitutes an improvement. It does not affect absolute covenants or alterations that are not improvements. Also, note that the Landlord and Tenant Act 1988 (duty to consent within a reasonable time) does not apply to alteration covenants, only to alienation covenants.

Practical Aspects: Licence to Alter

Where landlord's consent is required and granted for alterations, it is usually documented formally in a Licence to Alter.

Key Term: licence to alter
A formal written permission from the landlord allowing the tenant to carry out specified alterations to the leased premises, often subject to conditions.

A Licence to Alter typically contains conditions regarding:

• The specific works permitted (often referring to detailed plans, drawings, specifications, and structural calculations).
• The standard of materials and workmanship; compliance with building regulations and relevant British Standards.
• Obtaining other necessary consents (eg, planning permission, building regulations approval, listed building or conservation area consents).
• The tenant’s duty to carry out works without causing nuisance or damage to common parts and to make good any damage to the building.
• Payment of the landlord's legal and surveyor's fees associated with considering and granting the licence, and the cost of any monitoring by the landlord’s surveyor.
• Compliance with health and safety, CDM Regulations duties (where applicable), and insurance requirements.
• An obligation to reinstate the premises (ie, remove the alterations) at the end of the lease term, if required by the landlord, or to a specified condition at the landlord’s option.

Key Term: reinstatement
The tenant’s obligation, often imposed by the licence or lease, to remove alterations and return the premises to a specified condition, commonly the pre‑alterations layout, at or before lease end.

Planning and building regulation interplay

Many alterations also require public law consents. Under the Town and Country Planning Act 1990, works constituting development require planning permission unless falling within permitted development rights under the General Permitted Development Order. Separate building regulation approval is required for most building operations to ensure safety and compliance. Non‑compliance may lead to enforcement action (enforcement notices, stop notices, or breach of condition notices), and can be a reasonable basis for a landlord to refuse or condition consent. Even where planning is granted or not required, the lease’s private law covenants still govern whether works may be carried out.

Worked Example 1.3

A tenant proposes to replace recessed lighting with pendant fittings and to relocate internal doors. The lease contains a fully qualified covenant for internal non‑structural alterations, and the landlord’s surveyor asks for building regulation sign‑off and a method statement. Is this reasonable?

Answer:
Yes. Under a fully qualified covenant, the landlord cannot unreasonably withhold or delay consent, but can impose reasonable conditions to protect the building and ensure compliance. Requiring confirmation of building regulation compliance and a method statement for safe execution is a reasonable condition.

Alterations in Underleases

When dealing with an underlease (a lease granted by a tenant out of their own head lease), the situation regarding alterations becomes more complex.

An undertenant wishing to make alterations typically needs to consider two levels of consent:

1. Immediate Landlord (Head Tenant): Consent is required if the underlease contains an alteration covenant.
2. Superior Landlord (Freeholder/Head Landlord): Consent is also required if the head lease contains an alteration covenant that binds the head tenant, as the undertenant's alterations could put the head tenant in breach of the head lease.

Therefore, the undertenant (and their solicitor) must examine both the underlease and the head lease. Often, a Licence to Alter in this scenario will involve three parties: the superior landlord, the head tenant (immediate landlord), and the undertenant. It is common for the superior landlord to require a direct covenant from the undertenant to observe head lease obligations in relation to the works and to reinstate if required.

Key Term: superior landlord
The landlord under the head lease whose reversion sits above the head tenant’s interest; typically the freeholder who may need to consent to undertenant’s alterations where the head lease controls such works.

In an underletting context:

• Where the head lease contains a qualified covenant against improvements, s 19(2) will generally apply to that covenant. If the superior landlord’s consent is required for the works, the superior landlord should not unreasonably withhold consent to improvements.
• Procedurally, the undertenant will often apply to the head tenant, who in turn seeks superior landlord’s consent. To avoid delay and duplication, a single, tripartite licence to alter is commonly agreed.
• The undertenant will be expected to pay the head tenant’s and superior landlord’s reasonable legal and surveyor’s fees for considering the proposals.

Worked Example 1.4

An undertenant in a multi‑let building wishes to add internal glazing and modify HVAC routes within the demise. The underlease requires the head tenant’s consent to alterations; the head lease requires the superior landlord’s consent to any works to service media. What is the correct approach?

Answer:
The undertenant must obtain consent from both the immediate landlord (head tenant) and the superior landlord because the works affect service media and could put the head tenant in breach of the head lease. The parties should negotiate a tripartite Licence to Alter, with the undertenant providing detailed plans and paying reasonable legal and surveyor’s fees. If the HVAC modifications amount to improvements, s 19(2) should guide reasonableness in the superior landlord’s decision.

Remedies for Breach

If a tenant carries out alterations in breach of covenant (eg, without required consent), the landlord has several potential remedies:

• Damages: The landlord can sue for damages, typically measured by the diminution in value of the landlord's reversionary interest (LTA 1927, s 18). For alterations, the landlord must show actual loss; courts will consider whether reinstatement is necessary to protect the reversion.
• Injunction: A landlord could seek an injunction to prevent planned unauthorised alterations or compel removal of alterations already made. Where works are ongoing, interim injunctive relief may be sought urgently.
• Forfeiture: A serious breach of an alteration covenant may entitle the landlord to seek forfeiture of the lease (ie, bring the lease to an end prematurely), subject to serving the requisite notice (LPA 1925, s 146) and the tenant's right to apply for relief. For non‑remediable breaches or where reinstatement is refused, forfeiture risk escalates.
• Specific Performance: In rare cases, a court might order the tenant to reinstate the premises, but this is less common due to supervision challenges. Injunctions are more typical.

Key Term: section 146 notice
A statutory notice that a landlord must serve before forfeiting for breach of covenant (other than non‑payment of rent); it must specify the breach and require remedy within a reasonable time where capable of remedy.

Forfeiture is a powerful remedy; however, if the breach is capable of remedy (e.g., unauthorized internal works), a s 146 notice should specify reinstatement or regularisation and allow reasonable time. Relief from forfeiture is often granted if the tenant promptly remedies the breach and pays the landlord’s costs.

Worked Example 1.5

A tenant removes part of a stud partition and installs a mezzanine without seeking consent, in breach of an alterations covenant. The landlord discovers the works mid‑construction and threatens forfeiture. What steps should each party take?

Answer:
The landlord should consider seeking an interim injunction to stop the works and serve a s 146 notice requiring remedy (reinstatement if appropriate) within a reasonable time, preserving the forfeiture right. The tenant should immediately cease the works, propose a retrospective Licence to Alter with full details, or commit to reinstatement, and pay the landlord’s reasonable costs to reduce forfeiture risk. If the mezzanine constitutes an improvement, s 19(2) informs the reasonableness of granting consent; however, unauthorized commencement may still justify protective conditions and costs.

Summary

Table: Comparison of Alteration Covenants

Key Point Checklist

This article has covered the following key knowledge points:

• Leases typically control tenant alterations through absolute, qualified, or fully qualified covenants.
• Section 19(2) LTA 1927 implies a reasonableness requirement into qualified covenants against improvements, prohibiting fines or rent increases purely as a condition of consent; reasonable conditions and costs may be imposed.
• Section 3 LTA 1927 provides a route for business tenants to seek court authorisation to carry out improvements despite an absolute prohibition, subject to safeguards.
• An 'improvement' is assessed from the tenant's viewpoint; property‑related reasons are required for refusing consent to improvements.
• Landlord's consent for alterations is usually documented in a Licence to Alter, which sets out conditions, standards, third‑party consents (planning/building regulations), and reinstatement.
• Alterations under an underlease often require consent from both the immediate (head tenant) and superior landlord; tripartite licences and direct undertenant covenants to the superior landlord are common.
• Breaching alteration covenants can lead to damages (subject to s 18 LTA 1927), injunctions, or forfeiture; s 146 LPA 1925 notices are required before forfeiture for breach other than rent.

Key Terms and Concepts

• absolute covenant
• qualified covenant
• fully qualified covenant
• section 19(2) Landlord and Tenant Act 1927
• section 3 Landlord and Tenant Act 1927
• improvement
• licence to alter
• reinstatement
• underlease
• superior landlord
• section 146 notice