Lease renewal: implications for re-instatement clauses

9 February 2017

Vivien King considers the implications for re-instatement clauses of lease renewal in demised premises that have been altered by tenants

Many commercial leases enable a tenant to conduct physical alterations to the premises demised: some works require landlord’s consent, some do not. Certain leases, or licences to conduct alterations, require the tenant to remove some or all alterations at the lease end and restore the premises to the physical state at commencement.

This article is not concerned with the meaning and effect of those covenants, neither with when nor how the landlord should make their request to restore the premises to their original condition. Instead, it focuses on the problems that can arise if and when the tenant remains in occupation of its altered premises pursuant to a new lease.

The new lease may follow a tenant’s request for one under Part II of the Landlord and Tenant Act 1954, but does not always do so. The landlord and tenant may simply agree, outside the provisions of the act, that a new lease should be granted after expiry of the old, or that the old lease may be surrendered by the tenant to enable the parties to enter a restructured agreement.

Protracted negotiations

Whatever the reason and procedure, negotiations will almost certainly have been protracted, usually in relation to rental levels, and little thought will have been given to the premises to be demised. The tenant was, after all, in occupation and knew the premises well, and the landlord will have made sure that the tenant continues to keep and yield up the premises in repair with alterations removed at the lease end. What would the parties say, however, if reminded that the premises demised pursuant to the new lease will be those premises as they exist at the commencement of the new term?

Let us look at an example. A certain premises originally consisted of 4 floors of open office space constructed around a central core that contained lifts, stairs and toilets. The tenant took up occupation of the premises pursuant to a 5-year lease granted in 2005. They installed throughout the building raised floors and suspended ceilings that contained a new heating and air conditioning system, modern lighting and communication systems.

They also installed a large reception desk on the ground floor with partitioned meeting rooms, service rooms – including a small kitchen enabling reception staff to offer refreshments to visitors – and wardrobes for visitors’ outdoor clothes, bags and so on. The remaining floors were partitioned to give small, individual offices on floor 1 and open space on floors 2 and 3, each containing work space, staff eating facilities, internal meeting rooms and break-out areas.

This fit-out suited the particular tenant, but the landlord was anxious that the premises be restored to open office space at the lease end. They therefore imposed a re-instatement clause requiring the tenant to remove their alterations at the lease end and to conduct all necessary repairs.

New tenancy

In 2010, the tenant requested a new tenancy and negotiations ensued. The new lease was granted in 2011, on the same terms and conditions as the original lease excepting as to rental level, and expired in 2016. At lease end, the landlord’s building surveyor served a schedule of dilapidations requiring the tenant to remove the totality of its 2005 fit-out. The tenant refused. While they recognised that they must yield up the premises in repair, they did not, they claimed, have to remove their alterations: none had been made since 2011.

The identity of the property demised by a lease depends on the way the documentation is constructed but, as Nicholas Dowding and Kirk Reynolds point out in Dilapidations: The Modern Law and Practice, “The description of the demised premises in the lease must also be read in the light of the objective facts reasonably available to the parties at the date of the lease.” Unless the lease states otherwise, the facts will dictate that the demise is as it existed at the date of the new lease – that is, in our example, with the tenant’s alterations in place.

The parties could, of course, agree otherwise: it will be a matter of negotiation between them. Equally, the parties’ building surveyors could bring this matter to their respective clients’ attention, for instance agreeing works to be conducted pursuant to the old lease and advising that a schedule of works to be conducted at the lease expiry be annexed to the new lease. So: be alert, warn and advise.

Vivien King is a consultant to Malcolm Hollis

Further information

• Related competencies include Legal/regulatory compliance.
• This feature is taken from the RICS Building surveying journal (December 2016/January 2017).