If you are a commercial tenant reaching the end of your lease, it’s important to prepare for a smooth exit in advance. This includes dealing with specific end-of-lease obligations, such as reinstatements. These generally require you to restore any changes you’ve made to the premises back to its original condition. Although agreed at the outset of the lease, reinstatement obligations still catch many tenants by surprise. It pays to be proactive and remind yourself exactly what you need to do to comply well before your lease expires. If you do find yourself in a dispute, don’t worry. Disputes about end-of-lease obligations are fairly common, especially those around reinstatement.
In this guide, our experienced commercial property dispute lawyers help you understand how reinstatement obligations usually work, including what to look out for in your lease and what to do if disputes arise.Â
Contents:
- What are your reinstatement obligations?
- Are there any exceptions where the tenant is not required to reinstate an alteration?
- What happens if the commercial property tenant does not reinstate an alternation?
- Who decides if the reinstatement has been carried out to a good enough standard?
- How are disputes about reinstatement typically resolved?
- Summary
What are your reinstatement obligations?
Most modern-day commercial leases contain terms that specify what your reinstatement obligations are at the end of a lease. These don’t necessarily take the form of a labelled ‘reinstatement clause’. Often, a number of clauses of the lease need to be read together to understand the extent of your obligations. This includes any clauses about yielding-up and returning the property to the landlord, as well as any covenants about tenant alterations, improvements, and repairs. At the same time, you need to look further than the lease. Make sure to check supplemental documents issued under it. This includes the terms of any licenses for alterations or other agreements, including those relating to fitting out works. This might sound confusing and overwhelming, and in reality, it is for those who aren’t experienced in navigating leases and their terminology. We would strongly recommend seeking advice if you are unclear on your responsibilities.
Reinstatement usually applies to any alterations or customisations you’ve made to the premises. Some leases contain a blanket ban on alterations, so there may be little to reinstate other than minor works or additions permitted. Such a lease, may be of little use to tenants who often need to make adaptations to the premises to suit their business. In most cases, you will have obtained consent from your landlord to effect these changes in the form of a licence for alterations. Landlords may only be willing to give their consent for alterations in the first place subject to you making reinstatements. If you’ve made alterations without the landlord’s consent, which they discover when you hand back the property, they could pursue legal action against you for breaching the lease. It is wise to make sure you have any consents necessary before making alterations, or check with an experienced property solicitor if you are unsure.
Landlords often insist that tenants remove alterations and trade fixtures installed (and make good any resulting damage) at the end of the lease. This helps to ensure the premises are ready to be re-let to the next tenant, who is likely to want to put their own stamp on it. Of course, removing and restoring changes (especially major works) can end up proving costly for tenants, especially if the lease places an onerous obligation on you to ‘strip-out’ the premises entirely. It might not even be necessary, for example, if the landlord intends to demolish or renovate the premises. Ideally, as a tenant, you want to qualify any obligation to reinstate to what is reasonable. To add another layer of complexity, some leases expressly negate a tenant’s right to remove their trade fixtures or reserve a right for the landlord to give you notice to leave them. Removing these items in such a case might end up putting you in breach.
Are there any exceptions where the tenant is not required to reinstate an alteration?
Some leases make reinstatement obligations conditional upon receiving notice from the landlord. If you don’t receive the notice (whether because the landlord chooses not to, forgets to do so, or doesn’t serve the notice in accordance with the terms of the lease) you won’t be required to reinstate. This can apply to minor additions as well as more significant alterations that you obtained consent for.
If the lease is silent on the matter, then you can’t be forced to reinstate. You can hand back the property to the landlord in its altered state with no further liability (unless alterations were made unlawfully). Any lawful alterations will be deemed to be part of the premises and you can potentially claim compensation if they enhance its value. You are also not generally obliged to remove any of your own trade fixtures, but you are entitled to do so until the last moment (unless clearly stated otherwise in the lease).
On some occasions, a landlord may simply choose not to enforce a reinstatement clause even if you are in breach. This might be because the alteration you have made has actually improved the marketability or value of the property. We would never advise just leaving it to chance, even if the landlord reassures you he isn’t going to pursue action. Always seek expert advice to protect yourself.
What happens if the commercial property tenant does not reinstate an alternation?
If your lease requires you to reinstate alterations by the end of the term, you need to factor the time it takes and start work in advance. You are unlikely to be excused from leaving major reinstatement works until the last minute. If reinstatement obligations are conditional upon notice, you should be given a reasonable opportunity to complete the works on time (for eg, six months before the lease expires). If your landlord serves you notice at the last minute, you may be permitted by law to remain in temporary occupation to complete the works. This is a complex area and we would advise getting in touch if you’ve received short notice.
Sometimes, despite your best efforts and adequate notice, works might be too difficult to complete on time. It’s best to be open and honest with your landlord about this as soon as possible. They may be willing to agree an extension, accept partial works, or takeover the rest. Sometimes, timing isn’t the issue but the sheer cost of conducting reinstatements, especially for major works. If you simply can’t afford to do it, you might be able to negotiate with your landlord. It may involve sacrificing any security deposit paid that they hold on your behalf to cover their costs (which they would be entitled to anyway if you are in breach). If your covenant to reinstate is based on what is reasonably required by the landlord, you could potentially argue that expensive reinstatement works are disproportionate. Again, we would advise getting in touch so we can help you explore your options.
Ultimately, if you are under an obligation and do not reinstate the premises in compliance with the lease terms, technically you are in breach. The landlord can potentially recover the costs of the works from you, as well as loss of rent for the time taken. This can mount-up to substantial sums. That said, not all breaches result in legal action. For example, if the alterations you made enhance the letting value of the property or the landlord quickly finds a replacement tenant – there may be very little ‘loss’ actually suffered to claim. The same applies if the landlord has intended to demolish or renovate the property anyway.
If your alterations have caused a diminution in value to the property or made it difficult to re-let (perhaps because it has been heavily adapted to suit your business), you are more likely to face a claim. Unless the landlord is able to obtain an injunction forcing you to remain there and conduct the works, you can’t be stopped from moving to another premises. Bear in mind, you will be paying rent on the new premises while still potentially being liable to lost rent on the previous.
Who decides if the reinstatement has been carried out to a good enough standard?
This will depend on the terms of the lease or licence for alterations. It is common for these documents to provide that reinstatement works are carried out to the satisfaction of the landlord. Ideally, your solicitor will have negotiated and qualified this at the outset of the lease to be to the ‘reasonable satisfaction’ of the landlord. This keeps things objective and means the landlord cannot impose arbitrary requirements or unduly high standards. You would naturally expect a good level of workmanship when making restorations, using appropriate materials and techniques. It is worth arranging an inspection with your landlord and giving yourself some time to make any final adjustments.
How are disputes about reinstatement typically resolved?
Disputes about resinstatement are resolved in much the same way as disputes over other lease obligations:
Negotiation: As a first step, it is always best to engage in open communication with your landlord to explore potential solutions. You can approach your landlord directly or ask a solicitor to negotiate on your behalf if you don’t feel confident in doing so.
Meditation: If negotiations fail, parties can agree to attend mediation to resolve the issue. This is where a neutral third party facilitates discussions and helps both parties reach a mutually acceptable solution. Mediation is much cheaper than going to court, but the decision reached is not legally binding.
Arbitration: Many commercial leases require parties to consider arbitration as a method of resolving disputes. This is a formal alternative form of dispute resolution where an appointed adjudicator with expertise in the subject matters hears both sides and issues a binding decision.
Litigation: Court proceedings should only be used as a last resort or where the stakes are high. They are costly and unpredictable, but sometimes necessary if all other avenues fail.
Summary
If you feel uncertain about your obligations at the end of the lease, getting legal advice can give you the confidence you need to move forward. Our expert commercial property solicitors are here to help. We can review your lease and advise you on what steps to take to comply with your reinstatement obligations. At the same time, we have a wealth of experience assisting tenants swiftly resolve disputes with former landlords. Get in touch today.
