The new protocol - will it alter applications for consent for the better?

29th April 2016

In an attempt to avoid the, in their words, ‘squabbles’ that can often arise when a tenant makes an application for consent to undertake alterations to their demise, the authors [1] of the Alienation Protocol, which we discussed in our article in December 2014, have issued a second property protocol, the Protocol for Applications for Consent to Carry Out Alterations (the Protocol). The new Protocol applies where a tenant wishes to make alterations to their demise but their lease places restrictions on their ability to do so. The aim of the Protocol is to assist landlords and tenants in avoiding unnecessary disputes and where issues do arise, to resolve them quickly through alternative dispute resolution without the need to resort to long-winded and costly litigation. The Protocol is accompanied by a guidance note which details some of the more frequently encountered issues relating to applications for consent to alter. The authors hope that the Protocol and its guidance note, together with the Alienation Protocol (and other documents which they hope to produce in the future) will set out what they believe to be best practice and thereby ‘smooth landlord and tenant relations’.

Background

In the absence of any provision in the lease to the contrary (subject to some very specific exceptions) tenants are free to alter their demise in any way they wish. As a result, leases of commercial premises generally contain covenants restricting alterations. It is common to see covenants which prohibit alterations to the exterior and structure of the premises, with internal, non-structural alterations being permitted subject to obtaining landlord’s consent.

The provisions of the lease do not, however, provide the whole story. The Landlord and Tenant Act 1927 (LTA 1927) gives tenants a number of additional rights, the most notable being that where any alterations that they wish to undertake can be construed as improvements, even in the absence of an express provision, a term is implied into the lease that the consent of the landlord to alterations is not to be unreasonably withheld. If section 19(2) of the LTA 1927 applies whether or not an alteration is an ‘improvement’ is viewed from the tenant’s perspective [2]. It should also be noted that whilst section 19(2) amends the scope of the restriction placed on the tenant, it does not impose a positive obligation on the landlord not to withhold consent unreasonably. Therefore whilst a tenant can apply to the court a declaration that consent is being unreasonably withheld, it cannot claim damages.

Should the landlord decide to withhold consent, then the principles laid out in the case of Iqbal v Thakrar [3] can be used to determine whether that refusal was reasonable. A detailed discussion of those principles is beyond the scope of this article however it is for the tenant to show that the landlord has unreasonably withheld consent. It is not necessary for the landlord to prove that the conclusions which gave rise to the refusal of consent were justified, provided that they were conclusions which may have been reached by a reasonable landlord in the particular circumstances. Consent cannot however be withheld on the basis of pecuniary loss alone as the correct response in such a situation would be for the landlord to ask for a payment by way of compensation.

A landlord is also entitled to attach conditions to the grant of its consent and section 19(2) specifies that certain conditions will be considered reasonable, namely:

• Payment of a reasonable sum for damage to or diminution in value of the property (or any neighbouring property owned by the landlord);
• Payment of expenses properly incurred in connection with the consent; and
• A requirement on the tenant to reinstate the property at the end of the term, albeit this can only be made a condition of the consent if the improvement does not add to the letting value of the premises and it is a reasonable requirement.

The Protocol

The Protocol aims to improve the communication between the landlord and tenant and to set out a timetable for the application and the landlord’s decision. It is not an exhaustive list of steps that must be taken, nor is it mandatory. Compliance with the protocol should ensure that tenants provide sufficient information in their application to enable the landlord to reach a decision as to whether to consent within a reasonable timeframe.

The application

The first substantive section of the Protocol deals with the tenant’s application for consent. Whilst the Protocol acknowledges that the content of each application will depend on the works to be carried it confirms that the application should describe the works, preferably by reference to detailed plans and specifications and refer to the relevant provisions of the lease and any statute. The content of the application should be sufficiently detailed to enable the landlord to determine whether the proposed alterations fall within the demise, whether they are structural or non-structural, the works for which consent is needed and those for which it is not and works that are absolutely prohibited by the terms of the lease. Ideally all information should be provided to the landlord in a single package and should be served on the landlord in accordance with the terms of the lease, with a copy being sent to the landlord’s solicitor or agent if the tenant is aware that the landlord has retained such advisors.

Landlord’s response

The next section deals with the landlord’s response to the application and confirms that the landlord ought to acknowledge receipt of the application within 5 working days. Should the landlord require more time to consider the application or further information then it should notify the tenant. If the landlord needs the consent of its own superior landlord to alterations then a copy of the tenant’s application should be passed on promptly. Where it is properly able to recover the same, the landlord should also set out its position on costs to the tenant.

There is no statutory duty on the landlord to respond within a reasonable period of time, albeit the landlord may be under a contractual obligation to do so pursuant to the terms of the lease. In any event a full response should be given promptly as an unreasonable delay may amount to the landlord being deemed to have unreasonably withheld its consent. Furthermore the landlord’s actions may be relevant to the apportionment of costs if the matter is subsequently referred to dispute resolution.

The landlord’s response needs to be sufficiently detailed to enable the tenant to understand the landlord’s position. The response should make it clear whether the landlord consents to the alterations, and if so what conditions are attached, withholds its consent due to a lack of sufficient information and therefore what further information is required or whether it is refusing consent and state its reasons. Whilst a landlord is under no duty to give written reasons for a refusal of consent, in any subsequent proceedings to determine whether consent was unreasonably withheld the landlord will be limited to those reasons that it can prove it held at the time it withheld consent. Providing its reasons in writing to the tenant will therefore give the landlord evidence that it can later rely on.

Costs

The terms of a lease will generally permit the landlord to recover its reasonable and proper costs incurred in connection with the application for, and grant of, consent. Even if the lease does not expressly provide for the recovery of costs, dependant upon the circumstances the landlord will not usually be deemed to have behaved unreasonably if it refuses to consider the application unless the tenant has agreed to pay its costs.

The tenant may therefore wish to consider whether it wishes to offer to provide an undertaking for costs (or money on account) as part of its initial application. A tenant may be unwilling to provide an open-ended undertaking so at the very least it may want to request an estimate of the landlord’s costs in its initial application in order that it can subsequently provide an undertaking limited to that amount. If, at a later stage, the landlord considers its costs will exceed the amount for which it has received an undertaking then they should notify the tenant promptly, with reasons, of any additional sum it requires. The landlord should not, however, delay its consideration of the application on the basis that negotiations are ongoing in relation to the increased amount of an undertaking.

Disputes

If the tenant is of the belief that the landlord has unreasonably withheld or delayed consent then the parties ought to consider whether a form of alternative dispute resolution, such as arbitration, expert determination or mediation, is appropriate as opposed to commencing litigation. If the matter subsequently ends up in court then the parties may be required to provide evidence that alternative methods of considering the dispute were considered.

Documenting consent

The Protocol confirms that it is good practice for ensure that a written record of the alterations is made. It is fairly standard practice for all but the most minor alterations to be documented by a licence for alterations setting out the alterations consented to, the position on reinstatement at the end of the term and also whether the alterations are to be disregarded on any subsequent rent review. In the absence of a formal licence the parties may wish to consider whether a letter licence is appropriate. Even where formal consent is not required, the Protocol advises that a written record of the work undertaken would be desirable in case of any later disputes.

WM Comment

As we previously commented in relation to the Alienation Protocol, the new Protocol does not seek to break any new ground in relation to applications for consent to alterations. Much of what is contained in the Protocol is good practice that the majority of tenants and landlords have been adhering to for many years. The Protocol does however provide a very helpful reminder as to how such applications should ideally be dealt with and compliance with its terms may help streamline the process of obtaining consent.

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[1] Guy Fetherstonhaugh QC and Jonathan Karas QC of Falcon Chambers and Nicholas Cheffings and Matthew Ditchburn of Hogan Lovells International LLP.
[2] Lambert v Woolworth & Co [1938] Ch 883.
[3] Iqbal v Thakrar [2004] EWCA Civ 592.