Have your cake and eat it

When a tenant spends a large capital sum on a building the landlord is normally delighted: it shows the tenant is committed to a long tenure at the building. When the landlord grants the tenant a license for the intended works they may be unnecessarily giving way c. 5% of the rent due from the next rent review or renewal.

Here’s why: as soon as the tenant has landlord’s consent for the works, those works may be considered to be “improvements” not merely “repairs” and that matters at rent review or lease renewal.  Improvements are usually disregarded from the valuation but repairs are not, repairs are fully valued.  If the tenant can classify repairs as consented improvements they will not have to pay the rent due for the repaired premises.        

That makes sense if a tenant builds an extension at their own cost: why should they pay rent for it as well as paying to build it? It does not make sense where the tenant is obliged by the lease to keep, say, the now decrepit air conditioning in good repair. Replacing an old system with a new one is usually just repair by replacement with a modern equivalent, but it can look like improvement to the uninitiated.  The distinction is often unclear and may depend how dilapidated the a/c is and what it is being replaced with, but the landlord’s default response ought to be: “Proceed with my blessing, but you don’t need my consent.”  The only time a license might protect the landlord is if he wanted the tenant to reinstate the works at the end of the lease, but for new a/c this is unlikely.

Do not rely on your solicitor to spot this.  It is not their job to evaluate whether works are “repair” or “improvement”.  Theirs is not to reason why you have asked them to draw up the license and they will not usually evaluate whether the works are “improvements” or necessary repairs. A good solicitor may point out that you should make that evaluation yourself, but they won’t get paid if you decide not to commission them to write a licence, so don’t be surprised if it is not their first priority.

The grey area is around repair works that include “an element of betterment”.  Often a scheme of works will include items that are repair works and some that are genuine improvement and differentiating between them can be difficult.  A new A/C system is often “better” by design than the system it replaces but that does not always matter if it is the tenant’s chosen form of repair. It depends on many factors but the first decision to get right is: don’t give landlord’s consent without good reason.

The only advantage of giving a licence is if you want it removed it at the end of the lease.

Beware of Greeks Bearing Gifts

As an alternative, or if the tenant insists on getting a license, the landlord could offer to make a contribution to the works.  Many leases will only disregard improvements done “at the tenant’s expense” or “without contribution from the landlord”.  If the landlord can show that they made even a nominal contribution to the works they should fall outside that definition of works to be disregarded and be fully valued in the new rent.

So when a tenant asks permission for something you should decide whether you want that disregarded at the next rent review or not.  If you want it to be valued, try not to give your permission, but if you have to, give them a contribution too.