This is our second blog looking at landlord considerations when dealing with tenant works. In the first blog we looked at the lease implications of tenant alterations. Here we consider the position at lease expiry.
Removal at expiry
It is of benefit to both the landlord and the tenant that a lease is clear as to what happens to tenant alterations at lease expiry. A landlord will want to know the extent of the property being returned to them while a tenant will want clarity as to what they need, or don't need, to remove. There are cost implications for both parties, which is why such clauses are scrutinised during lease negotiations.
What should a tenant remove (the dilaps)?
The short answer is 'it depends' as there is no hard and fast rule.
The starting point in most Scottish leases is that, unless the landlord and the tenant agree otherwise, all alterations made by the tenant during the term of the lease must be removed by the tenant. The key driver for the landlord is that it wants the property back in a condition that it can immediately re-let. If the landlord has to carry out such works after lease expiry, the property cannot be let so there is no rental income for the landlord. For the tenant, the key driver is minimising the cost implications of having to (i) potentially close its business at the property months prior to lease expiry to carry out the removal works and (ii) the costs of doing those works.
To provide certainty as to what is required at lease expiry, a tenant may look to place the onus on a landlord. That would involve the landlord confirming within a fixed period prior to lease expiry which, if any, tenant alterations must be removed. If the landlord fails to notify, the tenant will likely prefer that to mean that no removal is required. On the other hand, the landlord would likely prefer that to mean that the full removal is required.
Therefore, a landlord would look to place that onus back onto the tenant by requiring the tenant to ask the landlord in advance whether they require alterations to be removed, with a suitable timescale for the landlord to reply. Such a situation can ultimately benefit the landlord – there may be tenant alterations that the landlord would prefer to remain in situ (e.g., stairs connecting floors, staff areas, certain shelving in retail units and the like). A landlord should also consider whether the lease needs to make clear from the outset that certain alterations will not be removed; particularly those works that the landlord has paid for. In short, the position needs to be tailored to the situation at hand and care should be taken when agreeing the terms.
Please see our recent blog on tenant's fixtures and fittings in the context of dilaps that considers this point, and others, in further detail. One must also ensure any notices triggering dilaps are correctly served – see our recent blog on lease notices (Top ten tips for serving break lease notices in Scotland).
Lease v licence for works
The interaction between the lease and the licence for works on removal of alterations is key. While generally the preferred position is that the two do not contradict one another, there can be situations where the landlord may want the reinstatement obligation in the licence for works to differ from the lease; for example, if the lease states that no alterations require to be removed at lease expiry or that the tenant has absolute discretion as to what it removes. Therefore, when it comes to lease expiry, both the lease and the licence for works both need to be reviewed to ascertain what is required.
Alterations from prior leases
One final point to note is that if an existing tenant has taken a new lease at the property, rather than an extension of their existing lease, it is also important to link any alterations made under the previous lease to the tenant's removal obligation under the new lease. Failure to do so would mean that the tenant is only obliged to remove the alterations made under the new lease.
Summary
As dilaps claims by landlords can be expensive for tenants, terminal dilapidations schedules are increasingly scrutinised and negotiated. We do not discuss dilaps claims here as they have been covered by our recent articles – see in particular our blog in preparing terminal dilaps schedules (Top ten tips when preparing a terminal dilapidations claim in Scotland). However, the focus on dilaps schedule has, in turn, lead to parties – particularly tenants – paying close attention to lease removal provisions at the time the lease is entered into. Those clauses are increasingly revised and are often the most negotiated clauses in leases. Careful consideration should therefore be given to them, given their implications.
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