Leases in the retail sector: Repair and alterations
This series of articles explores key issues to be considered when agreeing heads of terms and negotiating the provisions of leases, with a focus on the retail sector.
Repair
Tenants are generally obligated to keep the property in good and substantial repair and condition. It is important for tenants to understand that this responsibility means not only maintaining the property in its current state but also improving it where necessary. If the property is in disrepair at the outset of the lease, the tenant may be required to carry out repairs and improvements to bring it up to a satisfactory standard.
To manage this obligation, tenants should consider negotiating the inclusion of a schedule of condition at the outset of the lease. This document records the state of the property when the tenant takes possession, ensuring they are only required to return the property in the same condition, without an obligation to improve it.
Furthermore, a well-drafted repair clause should clarify that any damage caused by an insured risk (e.g. fire or flooding) or uninsured risk (e.g. vandalism) is not the tenant's responsibility. For properties that are newly constructed, tenants may also want to seek an exclusion for damage arising from inherent defects in the building. In such cases, the lease should ideally place the responsibility for repairing such defects on the landlord. Alternatively a tenant may benefit from collateral warranties.
Alterations
Tenant are generally prohibited from carrying out external or structural alterations to the property without prior landlord consent. However, tenants are typically allowed to carry out internal, non-structural alterations, such as reconfiguring layouts or installing shelving units, provided they obtain consent from the landlord, which should not be unreasonably withheld or delayed. In some cases, tenants may also be permitted to install non-structural demountable partitioning without the landlord’s consent.
One consideration for retail tenants when carrying out alterations is the Energy Performance Certificate (EPC) rating of the property. A landlord may want to control tenant alterations that could negatively impact the energy performance of the building. Given that properties with an EPC rating of E or below are now subject to restrictions in being let, landlords will likely want to ensure that any alterations carried out by the tenant do not result in a lower EPC rating. With upcoming legislation raising the required minimum rating, tenants should be mindful of any works that could affect the EPC rating and discuss with the landlord before proceeding with any alterations.