Reconfiguring office space - do you need landlord's consent?

The Covid-19 pandemic has confined the majority of the office workforce to working remotely, from home. The success of the remote working model is prompting business owners to look at how they are going to use their office space in the future.

We are now asking ourselves why our default choice has always been to work side-by-side at desks in office buildings. For many businesses, the last few months have demonstrated that a great deal of what is done in the office can be done effectively from home. In any event, in the short-term at least the challenges around returning to the office make the prospect unattractive for many -  social distancing requirements mean that many workstations would need to be left vacant, and renders hot-desking impractical. 

We sense a determination on the part of many office occupiers to re-think how accommodation is occupied and how (and where) staff are asked to work.  For example, should office space become more deliberately a place where staff come to physically network and interact, rather than just to sit at a desk and work in a solitary way (which can be done at home)? Should offices be reconfigured to consist of less workstation space, and more interactive/collaborative space? 

If this is the route that you want to take, what can you do within the confines of your lease? 

Do you need to get landlord’s consent?

A landlord’s objective in restricting alterations is to ensure that it has the control that it requires to prevent the property both from losing value and becoming more difficult to let. The type of alterations permitted will ordinarily depend on both the nature of the property and the length of the term. 

It is common for a lease of part of a building for office use to absolutely prohibit any external or structural alterations, and permit internal non-structural alterations with landlord’s consent.

If a tenant wants to reconfigure its office space it is, therefore, likely that it will need to request landlord’s consent. 

In some cases, the tenant may have been able to negotiate a provision allowing it to install and remove demountable partitioning without landlord’s consent. In such cases, although the lease gives the tenant this right, tenants are likely to be required to comply with notification obligations. For example, they will need to notify the landlord and insurers of any alterations made. It should be noted that the Code for Leasing Business Premises in England and Wales 2007 (the Lease Code 2007) states that landlord’s consent should not be required for internal non-structural alterations unless they could affect services or systems in the building. To date, the provisions of the Lease Code 2007 have not been widely followed. 

The Lease Code 2020 will take effect from 1 September 2020, with the status (for RICS members) of a professional statement, rather than a voluntary code (as was the case with the Lease Code 2007). In relation to alterations, the Lease Code 2020 differentiates between leases of whole and leases of part. Rather than saying that landlord’s consent should not be required for internal non-structural alterations (as set out above), it sets out that ‘In a lease of a unit in a multi-let building, a landlord may require that its consent for internal non-structural alterations is to be obtained and that such consent is not to be unreasonably withheld or delayed, and may prohibit any alterations that adversely affect the character, value, structural stability, statutory compliance or energy efficiency performance of the building or its building services.’

It is, therefore, likely that tenants with leases of part are going to have to continue to obtain landlord’s consent for all alterations.

Does the landlord have to be reasonable?

Where landlord’s consent must be obtained, the lease generally provides that consent must not be unreasonably withheld or delayed. 

Even if the lease does not set this out, section 19(2) of the Landlord and Tenant Act 1927 may assist. This provides that, where the landlord’s consent is needed for improvements, then that consent cannot be unreasonably withheld. There may, of course, be a divergence of views on whether the tenant’s proposed works actually amount to improvements, rather than just alterations. In certain circumstances, a tenant can carry out improvements even if it is forbidden by the lease. However, this comes back to the point as to whether the tenant’s proposed alterations are improvements. 

A tenant should, therefore, insist that the lease expressly states that the landlord’s consent to alterations must not be unreasonably withheld (or delayed). 

What else should landlords and tenants consider?

The alterations clause cannot be considered in a vacuum. Other points to look at include:

• Are changes required to service media? What does the lease say about this? Is a licence for alterations required? 
• Beware of alterations that are needed outside the premises (for example, a/c equipment on a roof or outside wall – almost certainly not part of premises demised by a lease of part of a building). Does the lease entitle the tenant to do this – if not then (for example) none of the requirements around a landlord acting reasonably will apply. 
• What does the lease say about the effect of alterations on rent review? The general position is that tenant alterations are disregarded on rent review, so that the tenant doesn’t end up paying both for the alterations themselves and by way of an increased rent for improved premises.
• What does the lease say about reinstatement? Often you will see an obligation on the tenant to reinstate alterations. The Lease Code 2007 sets out that reinstatement at the end of the term should only be required where reasonable. It also provides that the landlord should notify the tenant at least six months before the end of the term. The Lease Code 2020 provides that ‘Except where the heads of terms state that there will be a reinstatement specification or an obligation on tenants to remove alterations, a lease should allow the tenant to leave alterations in place unless it is reasonable for the landlord to require their removal. Given that landlords are likely to want to retain control over whether alterations are removed at the end of the term, we are likely to continue to see an obligation on the tenant to remove alterations.

What if there is an absolute prohibition on alterations?

A lease may be drafted so as to completely prohibit all alterations, or a particular type of alterations (commonly structural alterations). What happens if the landlord grants a tenant’s request to carry out these alterations regardless of the absolute prohibition in the lease? The parties may think that if a commercial agreement can be reached, this is entirely up to them. However, in a multi occupied building you also need to look at whether the other leases in the building contain similar provisions.

The Supreme Court recently considered the point in Duval v 11-13 Randolph Crescent, and held that if a landlord permitted a tenant to carry out alterations where there was an absolute prohibition against them in the lease, the landlord would be in breach of its obligation to enforce the lease covenants at the request of another tenant in the building. See our legal insight on the Duval decision for more information.

The landlord also needs to bear in mind that, where there is an absolute prohibition in the lease, granting consent will amount to a variation to the lease. This could result in a guarantor being released from its liability under the guarantee provisions in the lease.

What does the future hold?

As tenants review their space requirements, we are likely to see an increased focus, in new leases, on flexibility to reconfigure space without landlord’s consent. Whether or not tenants will be able to negotiate such provisions will depend on the relative bargaining strength of the parties. 
Tenants who are already occupying under existing leases will need to check whether any alterations can be carried out without consent. If not, an application for landlord’s consent will need to be made, and it is likely that we will see an increase in such applications. Landlords must ensure that they deal with such requests in accordance with the requirements of the lease.

TLT has extensive experience in acting for both landlords and tenants. If you would like to discuss your requirements, please get in touch.

Contributor: Alexandra Holsgrove Jones

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions