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. You will learn about the different types of alteration covenants, the impact of the Landlord and Tenant Act 1927, the process for obtaining landlord's consent, and the specific considerations for underleases. Understanding these aspects will enable you to advise clients and answer SQE1 questions concerning tenant alterations.

SQE1 Syllabus

For SQE1, you are required to understand the practical implications of lease covenants concerning alterations and improvements. Your revision should focus on:

• 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.

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.

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.

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

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.

Qualified Covenant

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

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.

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).

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.

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

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'.

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.

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.

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, for example:

• Concerns about structural integrity.
• Negative impact on the property's value or future lettings.
• Potential breach of superior lease terms or legal requirements.

A refusal based on personal dislike of the tenant or to gain an unrelated advantage would likely be deemed unreasonable.

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. The landlord's refusal without reason is likely unreasonable. The tenant could seek a court declaration 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 and specifications).
• The standard of materials and workmanship.
• Obtaining other necessary consents (eg, planning permission, building regulations approval).
• Payment of the landlord's legal and surveyor's fees associated with granting the licence.
• An obligation to reinstate the premises (ie, remove the alterations) at the end of the lease term, if required by the landlord.

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.

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.

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.

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).
• Specific Performance: In rare cases, a court might order the tenant to reinstate the premises, but this is unlikely due to difficulties in supervision.
• 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.
• Injunction: A landlord could seek an injunction to prevent planned unauthorised alterations or compel removal of alterations already made.

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.
• An 'improvement' is assessed from the tenant's viewpoint.
• Landlord's consent for alterations is usually documented in a Licence to Alter, which sets out conditions.
• Alterations under an underlease often require consent from both the immediate (head tenant) and superior landlord.
• Breaching alteration covenants can lead to damages, injunctions, or forfeiture.

Key Terms and Concepts

• absolute covenant
• qualified covenant
• fully qualified covenant
• section 19(2) Landlord and Tenant Act 1927
• improvement
• licence to alter
• underlease