by John Butler
In the current economic climate tenants will be looking very closely at their level of overheads and, in particular, accommodation costs. In a bull market, landlords have been able to impose onerous lease terms. In the current market, tenants and their advisers can be expected to scrutinise, even more carefully, lease provisions with a view to arguing that an onerous provision will have an adverse effect on value at rent review.
We have already seen cases which demonstrate that a restrictive user or dealings clause can have a considerable impact on valuation at rent review: see Plinth Property Investments v Mott Hay & Anderson (1978) 249 EG 1167 and James v British Craft Centre [6] 1 EGLR 117; (1985) 277 EG 976 and [1987] 1 EGLR 139; (1987) 282 EG 1251, CA.
In Norwich Life Insurance Society v British Railways Board [7] 2 EGLR 137; (1987) 283 EG 846 we have seen how an onerous repairing clause (involving an obligation to “rebuild reconstruct or replace”) can, in certain cases, have an adverse effect at rent review.
The recent case of Taylor v Vectapike Ltd [0] 2 EGLR 12; [1990] 44 EG 75 highlights the possible valuation implications where the tenant’s ability to carry out alterations is impaired by the terms of the lease. In this case, the court had to consider a lease of premises which were defined so as to exclude all structural elements of the building. This is, of course, a common definition in the letting of multi-occupied buildings where the landlord maintains the structure and recovers costs under a service charge.
Additionally, the lease contained in clause 2.11 an absolute prohibition against alterations:
Not to make any alteration or additions to the demised premises.
It had been contended in an earlier arbitration that clause 2.11 of the lease was a major encumbrance. The effect of this clause, read with the definition of the “demised premises”, was that “the tenant of the property would be unable, without the landlord’s consent, to carry out a number of improvements to the flat which a purchaser wishing to reside in it would be likely to require”.
The court was invited to make a declaration as to the extent of the alterations or additions which could be made. The court refused, in the absence of any specific alterations proposal, to make such declaration. However, Morritt J said in relation to the installation of central heating and other works that:
These were matters which, it seems to me on any view, the tenant under this lease could not carry out without the consent of the landlord, because it would involve going outside the demised premises, as strictly construed.
The above case does underline the possible dangers of excluding from the demise “the structural elements”. If, by doing so, the tenant is precluded from undertaking alterations or works which any reasonable occupant would be likely to require, this may well have an adverse effect on rental value at review.
Similar difficulties may arise where the air space above a building is excluded from the definition of “the demised premises” and the tenant does not have under the terms of the lease the right to install essential equipment or carry out other works which are necessary for the proper enjoyment of the premises.
Apart from the difficulties arising from the restricted definition of the demised premises, the above case also touched upon the meaning of “alteration”. If there is an absolute covenant against all alterations in a lease, where does this leave the tenant?
Much depends on the precise wording of the lease, but not all may be lost. The case of Bickmore v Dimmer [3] 1 Ch 158 concerned the erection of a large clock outside a shop supported by iron stays bolted to the front of the building. It was held not to be a breach of the lessee’s covenant against alterations without the landlord’s consent. Vaughan Williams LJ said:
In my opinion, the words “alteration to the said premises” apply only to alterations which would affect the form or structure of the premises. But, whether I am right or wrong in so drawing the line, I desire to add that, in my opinion, we ought so to draw the line and that the covenant will not operate to prevent a tenant who is entitled to carry on his business from doing those acts which are convenient and usual for a tradesman to do in the ordinary conduct of his business. So to construe the covenant that the tradesman could not affix a lamp or, as here, a clock to the front of his shop if he thought it convenient to do so for the purposes of his business is, it seems to me, a construction which could not have been in the contemplation of the parties.
Bickmore v Dimmer may be contrasted with Pearlman v Keepers & Governors of Harrow School (1978) 247 EG 1173. In that case, the Court of Appeal took the view, albeit in a statutory context, that the installation of a central heating system (which included works that involved making holes in structural walls) did amount to a structural alteration or addition.
Applying what are apparently conflicting decisions to the precise wording of an alterations covenant construed in the context of the whole lease can be difficult. The lesson is that if a tenant wishes to retain the freedom to run its business satisfactorily, there can be no substitute for clear wording permitting alterations.
Where there is no such clear wording, it is important not to lose sight of statutory provisions. The Landlord and Tenant Act 1927 is concerned with the carrying out of improvements to business premises and compensation for those improvements. Even if a lease contains an absolute prohibition against all alterations, there may still be the ability to carry out “improvements” under the Landlord and Tenant Act 1927. (Whether an “alteration” constitutes an “improvement” is a thorny problem: see F W Woolworth & Co v Lambert [7] Ch 37.) Tucked away in the Act is section 3(4) which permits certain improvements notwithstanding an absolute restriction in the lease or indeed any superior lease.
However, the 1927 Act procedure is cumbersome and, in any event, the improvement must be one which is calculated to add to the letting value of the premises at the termination of the tenancy. In the case of many improvements, especially when they are to be undertaken many years before the reversion falls in, it may be difficult to satisfy this requirement.
In a case where a lease contains a covenant against the carrying out of alterations “without consent”, as opposed to an absolute prohibition, and the proposed alteration is an improvement, section 19(2) of the 1927 Act imports a proviso to the effect that the landlord’s consent is not to be unreasonably withheld. Also, some statutes override lease provisions so as to enable certain essential works to be undertaken. For example, section 28(2) of the Fire Precautions Act 1971 empowers the court to set aside or modify any lease terms or conditions that the court considers just and equitable if a person is precluded by reason of the lease from carrying out certain fire precaution works.
Under section 96 of the Telecommunications Act 1984 (which has yet to come into force) if the ability to carry out telecommunication works is precluded by a lease (for a term of a year or more) it will be assumed that the landlord’s consent is required and such consent is not to be unreasonably withheld. This is on the basis that no lessee is unreasonably to be denied access to a telecommunications system.
Although an absolute prohibition on alterations does not mean quite all that it says, it must be said that there is fairly limited scope to circumvent such prohibitions. While, in practice, landlords may be prepared to consent to alterations, even though there is an absolute prohibition in the lease, this may not assist at rent review. Even though in the real world of negotiating letting terms, such matters of detail do not seem to have an effect on value, things never seem to be quite the same at rent review. It should be remembered that in Plinth (supra), the Court of Appeal held that where a landlord has an absolute right to withhold consent (in that case to a change of user) the possibility of obtaining his consent should be ignored. That decision has been criticised but, as matters stand, there is no reason in principle why such reasoning should not be applied also to restrictions on alterations and, indeed, any other onerous lease term.
