Practical considerations for commercial owners concerning tenant alterations

When developing a commercial lease in Scotland, the proprietor must find a balance regarding alterations that accommodate both the tenant’s desire to optimise the space leased to them and its concerns regarding the preservation of the asset’s value. Although the tenant’s fit-out at the commencement of the lease may be known at the time the lease is drafted, the lease must be “future-proofed” to account for the possibility that the tenant will wish to renovate or make other alterations during the lease term.

Differences between structural and non-structural modifications

As is often the case in Scotland, the position set out in the lease is final. Generally, a lease will look to prohibit structural alterations by a tenant – a landlord does not want the tenant to be able to make any alterations to the property that could negatively affect its value.

At the other end of the scale, a landlord may be relaxed about minor tenant alterations and a tenant will not want to have to go through the rigmarole of obtaining a landlord’s consent every time they want to make such minor changes. For example, it is typical to see that the installation of demountable partitioning does not require the landlord’s consent so long as the tenant removes it at lease expiry and makes good any damage caused.

This leaves us with non-structural alterations. A lease will typically require that non-structural alterations need the landlord’s consent, such consent not to be unreasonably withheld or delayed. Depending on the extent of the tenant’s lease demise, this might be restricted further to internal non-structural alterations, with external alterations also being prohibited or subject to landlord consent.

Documentation of the task – work licence

Obtaining the landlord’s approval for changes usually means obtaining a licence for the work (or “licence for works” in Scotland). The licence typically adheres to an established structure and comprises the following: a schedule delineating the completion date of the works; the tenant’s responsibilities preceding, during, and after the works’ completion; and any mandatory insurance policies.

Typically, a specification or detailed plans illustrating the modifications are appended to the licence. Doing so comprehensively documents all the works in a single location, providing a reference point for all parties involved, including potential future purchasers. However, this can present complications: if the tenant is performing extensive renovations on the property, hundreds of drawings may need to be attached to the licence, causing administrative difficulties and sore wrists for those who are required to sign.

Alternative choices are feasible; however, the mention of a drawing list in a historic licence for works will instil apprehension in a commercial solicitor who is engaged to conduct due diligence on behalf of a prospective buyer. Plans frequently vanish (particularly when the real estate has changed hands multiple times), and consulting the drawing list is frequently fruitless. Therefore, determining precisely what improvements the tenant has implemented can sometimes be challenging.

Fortunately, technological advancements have now simplified this procedure; however, certain clients have resorted to consulting a drawing list, particularly when the quantity of plans attached to a work licence is substantial or unsuitable for precise digitisation. The parties and their solicitors may then reach an agreement to retain a complete suite of drawings for each party.

Furthermore, the implementation of electronic signature technology in Scotland will, in the future, streamline and expedite the process for clients while bringing the country closer to parity with England and Wales.

Alterations carried out by tenants to a listed structure may necessitate a listed building consent, planning permission, or a building warrant, among other things.

Statutory Approval

Generally, the licence for works will stipulate that the tenant is liable for obtaining any necessary statutory consents and will provide a general indemnity against any claims brought against the landlord in connection with the tenant alterations. However, reasonably, the landlord will likely want to approve the terms of the application for permission or consent so that the tenant does not exceed reasonable limits and the permission or consent does not have an adverse impact on other areas of the landlord’s building.

About Sinead - Sinead attended the University of Stirling where she achieved her LLB. She completed her Diploma in Legal Practice at Strathclyde University and in 2022, she gained a Masters in Public Policy from the University of Stirling. Sinead has progressed through the Firm to associate Solicitor. She assists with the daily management of the Firm, and its operations and policy as well as assisting in the development of our marketing strategy. Sinead manages our Client Services team and aims to ensure that the firm delivers an excellent and consistent level of service to all our clients.