Practice note: How covenants against alterations can be overridden to permit improvements

1.???? ?If there is no express covenant against alteration, the tenant can alter the demised premises provided that the alteration does cause lasting damage or “waste” to the freehold reversion. But of course, almost all the leases we see in practice contain a covenant against alterations. These covenants sometimes prohibit alterations absolutely, and sometimes only prohibit alterations to which the landlord’s consent is not forthcoming.? And frequently an alterations covenant will do a mixture of the two – for example prohibiting structural alterations absolutely, and permitting other alterations provided the landlord consents to them.? It is well known to property practitioners that where landlord’s consent is required for an alteration, and that alteration would be an improvement, that consent cannot be unreasonably withheld (s. 19(2) of the Landlord and Tenant Act 1927 (“the 1927 Act”)).? ?

2.???? However, a point that can sometimes be missed is the potential impact on a tenant’s right to alter of the compensation for improvements regime in Part 1 of the 1927 Act.? That part applies to premises used wholly or partly for carrying out a business or trade with? exceptions? for agricultural, mining, and service tenancies, and the professions.? Where it applies, it cannot be contracted out of (s. 9).? It gives the tenant the right in certain circumstances to claim compensation for improvements on quitting the holding (s. 1).? What is sometimes missed is that the statutory preconditions for making? a claim in fact creates a mechanism for potentially overriding any alteration covenant to which the tenant is subject.?

3.???? ?Section 3(1) of the 1927 provides that a tenant who proposes to make an improvement on his holding can serve on his landlord a notice of his intention, and a specification and plan showing it.? ?A notice of intention is potentially a very powerful weapon for a tenant who wishes to alter the demised premises, but is constrained from so doing by an alteration covenant.? There are a number of points to note about this statutory mechanism:?

(a)?? service of such a notice of intention, in writing (s. 23), is a precondition to any later claim for compensation (s. 3(5));?

(b)? if the tenant gives an improvement notice, then the landlord has three months to serve a notice of objection;?

(c)?? if the landlord gives a notice of objection, then the tenant can apply to the tribunal (normally the County Court: s. 21), which has jurisdiction to certify that the improvement is a “proper improvement”.? ?In order to certify that, the tribunal has to be satisfied of three things, namely that the improvement:

(i)??? is of such a nature as to be calculated to add to the letting value of the holding at the termination of the tenancy; and

(ii)?? is reasonable and suitable to the character thereof; and

(iii) will not diminish the value of any other property belonging to the same landlord, or to any superior landlord from whom the immediate landlord of the tenant directly or indirectly holds; and

(d)? if the landlord fails to object, or the tribunal so certifies, then the tenant is entitled to carry out the improvement, in accordance with the plan and specification.? This is the effect of s. 3(4), which provides:

(4) Where no such notice of objection as aforesaid to a proposed improvement has been served within the time allowed by this section, or where the tribunal has certified an improvement to be a proper improvement, it shall be lawful for the tenant as against the immediate and any superior landlord to execute the improvement according to the plan and specification served on the landlord, or according to such plan and specification as modified by the tribunal or by agreement between the tenant and the landlord or landlords affected, anything in any lease of the premises to the contrary […]

4.???? Of course, if the tenant applies to the tribunal, then both the landlord, and any superior landlord (who must be given an opportunity to be heard), will have had the opportunity to scrutinise and challenge the tenant’s proposal, and to seek modifications to it, and the imposition of such other conditions as the tribunal may think reasonable (ss. 3(1) and (2)). ?Further, the landlord has the opportunity to offer to execute the improvement itself, in consideration of a rent increase, and (provided the landlord actually does the works) by this method to prevent the tenant getting its certificate (s. 3(1)).?

5.???? However, if the landlord simply fails to give a notice of objection, then the tenant can carry out the proposed works, even though there has been no scrutiny of them, and no certification.? Given that an improvement notice under the 1927 Act does not have to refer expressly to the Act (Deefield Travel v Leathersellers of London (1983) 46 P&CR 132), this makes these notices potentially a very useful tool for tenants, and a potential “trap” that landlords will need to be on the lookout for, if they are to avoid finding that not only can the tenant circumvent the alteration covenant, but also can then claim compensation for the improvement when it quits.

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Greville Healey and Simon Freeman

Falcon Chambers and Clarke Willmott

4 June 2024