Most commercial leases include a covenant restricting the tenant's ability to make alterations or improvements to the demised premises without the landlord's consent. This covenant protects the landlord's interest in the property — preserving its physical condition, structural integrity, and potential for re-letting. However, a blanket prohibition on all alterations is increasingly uncommon in modern commercial leases; tenants' need to fit out and adapt commercial space to their operational requirements means that well-negotiated leases include mechanisms for obtaining consent to alterations through a formal licence to alter. Understanding the distinction between absolute, qualified, and fully qualified covenants — and the statutory framework under the Landlord and Tenant Act 1927 — is essential for both landlords and tenants.
Types of Alterations Covenant
Commercial leases typically contain one of three types of alterations covenant. An absolute covenant prohibits all alterations without exception — the landlord has complete discretion to refuse, and there is no statutory override. However, if the landlord does grant consent under an absolute covenant, that consent is legally effective. A qualified covenant prohibits alterations without consent — but under Section 19(2) of the Landlord and Tenant Act 1927, where the works constitute 'improvements', the landlord cannot withhold consent unreasonably. A fully qualified covenant explicitly states that consent shall not be unreasonably withheld — this is the modern standard recommended by the RICS Commercial Lease Code. Decorative works and non-structural works that are not 'improvements' may not benefit from the s.19(2) protection even under a qualified covenant.
- Absolute covenant: landlord can refuse consent at will — no statutory override; common for structural alterations and external works in many commercial leases
- Qualified covenant: tenant cannot alter without consent; s.19(2) LTA 1927 applies to 'improvements' — landlord cannot unreasonably withhold consent for qualifying works
- Fully qualified covenant: consent not to be unreasonably withheld — RICS recommended standard; same practical effect as s.19(2) for improvements
- What is an 'improvement': works that improve the premises from the tenant's perspective (not necessarily from the landlord's) — Woolworth & Co v Lambert [1937]; works may be improvements even if they reduce the landlord's reversion value
- Decorative works: redecoration and cosmetic works are typically not 'improvements' under s.19(2) — landlord can withhold consent to redecorations even under a qualified covenant
Section 19(2) LTA 1927 — Consent Cannot Be Unreasonably Withheld
Section 19(2) of the Landlord and Tenant Act 1927 provides that where a lease contains a qualified covenant against the making of improvements without consent, that consent shall not be unreasonably withheld. However, the landlord may impose reasonable conditions as the price of consent — specifically: payment of a sum of money to cover the landlord's legal and other expenses; compensation for any diminution in the value of the premises or adjoining property; and an obligation to reinstate the premises at the end of the lease. The landlord's right to require reinstatement as a condition of consent is particularly important — it enables the landlord to grant consent to alterations that might otherwise reduce the future marketability of the property, safe in the knowledge that the tenant will restore the premises to their original state at lease end.
- s.19(2) LTA 1927: reasonable consent to improvements; landlord cannot withhold consent for improvements under a qualified covenant without reasonable grounds
- Reasonable conditions permitted: payment of landlord's legal costs; compensation for diminution in value; reinstatement obligation at lease end
- Reinstatement as condition: landlord can require tenant to remove alterations and restore to original condition at lease end — this obligation is recorded in the licence to alter
- Reasonableness: whether withholding consent is reasonable depends on the nature of the works, their impact on the premises and adjoining property, and the landlord's legitimate interests — Lambert v FW Woolworth [1938]
- Time limit: landlord should respond within a reasonable time to a consent application — unreasonable delay may constitute deemed consent or give the tenant a damages claim
The Licence to Alter — Contents and Key Provisions
A licence to alter is the formal deed by which the landlord grants consent to specified alterations. Key provisions include: identification of the works (typically by reference to drawings and specifications approved by the landlord); any conditions attached to consent (architect's supervision; structural engineer sign-off; building regulations compliance; planning permission; reinstatement obligation); the tenant's obligation to carry out works in a good and workmanlike manner; insurance during works; access for the landlord to inspect progress; landlord's right to approve the final completed works; and the reinstatement condition at lease end. The licence should be executed as a deed by both parties — and where the landlord's title is registered, the licence should be noted on the landlord's title at HM Land Registry.
- Describe works precisely: identify works by reference to approved drawings and specifications annexed to the licence — ambiguity as to what was consented to leads to disputes
- Conditions: legal costs; structural engineer sign-off; building regulations compliance; planning permission where required; insurance during works
- Reinstatement: specify clearly whether the tenant must reinstate at lease end — include a schedule of what must be removed and what can remain
- Supervision: require architect or structural engineer oversight for structural works — protects landlord's interest in the physical integrity of the building
- SDLT: a licence to alter is not itself an SDLT-able transaction; but premium payments for consent should be taken into account in SDLT analysis of the lease
Tenant's Right to Compensation for Improvements — LTA 1927 ss.1–3
Under the Landlord and Tenant Act 1927 sections 1–3, a commercial tenant may be entitled to compensation from the landlord at the end of the tenancy for improvements made to the premises during the tenancy. The compensation regime applies where: (1) the tenant served a notice of intention to make improvements under s.3 and the landlord did not serve a counter-notice within 3 months (or consent was obtained under the terms of s.3); (2) the improvement added to the letting value of the premises; and (3) the claim was made in the correct form and within the time limit prescribed under s.1(3). The compensation is capped at the net addition to the letting value of the premises or the reasonable cost of making the improvement (whichever is less). In practice, many tenants fail to follow the s.3 notice procedure, which prevents a s.1 compensation claim even if the works were consented to under the lease.
- LTA 1927 s.3: tenant must serve formal notice of intention to make improvements; landlord has 3 months to object or consent; failure to object within 3 months deems authorisation
- LTA 1927 s.1: compensation at lease end for improvements made in accordance with s.3; claim must be made before lease end and in prescribed form
- Cap: compensation is the lesser of: net addition to letting value of premises; or reasonable cost of making the improvement
- Exclusion by contract: many modern commercial leases include a clause excluding the LTA 1927 compensation regime — check the lease carefully
- Notice procedure essential: if tenant does not follow s.3 procedure (formal notice; no objection), the right to s.1 compensation is lost — even if the landlord consented via a licence to alter
Reinstatement, Dilapidations, and Scotland
The reinstatement obligation is one of the most commercially significant aspects of a licence to alter. Where the licence to alter requires reinstatement at lease end, the landlord can include reinstatement costs in the terminal schedule of dilapidations. The tenant's failure to reinstate is a breach of the lease and of the licence to alter, giving the landlord a right to recover the cost of reinstatement. However, the s.18(1) LTA 1927 cap applies: damages for failure to reinstate cannot exceed the diminution in value of the reversion. Where the landlord intends to redevelop (supersession), the reinstatement obligation may also be superseded. In Scotland, there is no statutory equivalent to LTA 1927 ss.1–3 (tenant's right to compensation for improvements) — the Scottish tenant must negotiate any such right expressly in the lease. Consent to alterations in Scottish commercial leases is governed by the lease terms; courts apply a reasonableness test to consent provisions.
- Reinstatement in dilapidations: failure to reinstate per the licence to alter forms part of the terminal dilapidations claim — cost of reinstatement is the landlord's loss
- s.18(1) LTA 1927 applies: reinstatement damages capped at diminution in value of the reversion; supersession cap if landlord intends to demolish/rebuild
- Pre-let agreement: landlords planning immediate redevelopment may agree in advance not to require reinstatement — important to record this to avoid dilapidations disputes
- Scotland: no equivalent to LTA 1927 s.1-s.3 compensation regime; Scottish tenants must negotiate improvement compensation rights expressly in the lease
- Scottish consent: Scottish commercial leases typically include an alterations clause; courts apply a reasonableness standard to landlord consent under qualified covenants in Scotland
Frequently asked questions
Can a commercial landlord refuse consent to alterations?+
It depends on the type of alterations covenant in the lease. Under an absolute covenant: yes — the landlord has complete discretion. Under a qualified covenant (or fully qualified covenant): for works that constitute 'improvements', Section 19(2) of the Landlord and Tenant Act 1927 provides that consent cannot be unreasonably withheld. The landlord may impose reasonable conditions including reinstatement and payment of costs.
What conditions can a landlord attach to a licence to alter?+
Under Section 19(2) LTA 1927, a landlord granting consent to improvements under a qualified covenant can require: payment of the landlord's legal and surveying costs; compensation for diminution in the value of the premises or adjoining property; and an obligation to reinstate the premises to their original condition at the end of the lease. These conditions must be reasonable.
Is a tenant entitled to compensation for improvements at the end of a commercial lease?+
Potentially yes — under Sections 1–3 of the Landlord and Tenant Act 1927, if the tenant followed the formal notice procedure (s.3 notice; no landlord objection within 3 months), the improvement added to the letting value, and the claim is made in time. The compensation is the lesser of the net addition to letting value or reasonable cost. Many modern leases exclude this right — check the lease carefully.
What is the reinstatement obligation in a licence to alter?+
A licence to alter typically requires the tenant to remove the alterations and restore the premises to their original condition at the end of the lease. Failure to reinstate is a breach of the lease and the licence, giving the landlord a dilapidations claim. The cost of reinstatement is subject to the Section 18(1) LTA 1927 diminution and supersession caps.
Does the LTA 1927 alterations regime apply in Scotland?+
No — there is no Scottish equivalent to the Landlord and Tenant Act 1927 ss.1–3 (compensation for improvements) or s.19(2) (reasonable consent). Scottish commercial leases are governed by Scots law; courts apply a reasonableness test to qualified consent provisions. Scottish tenants seeking improvement compensation rights must negotiate them expressly in the lease.