What is reinstatement?
The connotations of the word ‘reinstatement’ suggest it is something to be dealt with at the end of the lease term. And to some extent it is. Reinstatement concerns the ‘putting right’ of a property at the end of the term into the state and condition required by the tenant covenants in the lease.
However, reinstatement takes time and inevitably money and it is something that both the landlord and the tenant should carefully plan in the run up to the end of the term.
The relationship between reinstatement and dilapidations
It is common for a lease to require a tenant to either keep the property in a state of good repair and condition, or in a state of good repair and condition but no better than as evidenced by a schedule of condition attached to the lease. The former requirement is an absolute obligation on the tenant. It has no limitation or caps and can potentially be very onerous. If the property is in a state of poor repair and condition at the beginning of the lease term – for example there is a leaking roof – then the tenant will still be required to maintain and repair the property in a good state of repair and condition throughout the lease term and to reinstate the property to that same good state at the end of the lease term.
The latter requirement is slightly less onerous on the tenant because its obligations extend only to the state of repair and condition of the property as evidenced by the photographic schedule of condition that is attached to the lease but nevertheless, if the property has been allowed to fall into a worse state of repair and condition during the lease term any reinstatement works required at the end of the lease term may still be extensive.
The way to deal with such ‘general’ repair and maintenance obligations at the end of the lease term is by way of service by the landlord on the tenant of a schedule of dilapidations. Such a schedule will detail all of the works that the tenant is required to undertake to ‘put right’ the property in accordance with the lease terms. For further information about dilapidations see Glen Salt’s blog ‘Dilapidations – What’s the Crack?’ .
Dilapidations and the requirement to maintain and yield up the property in a state of good repair and condition are ongoing and general matters with which the tenant should be concerned throughout the lease term. Reinstatement obligations are more specific and apply to works that the tenant has completed at the property. A common mistake is for a landlord to include a list of reinstatement works in a schedule of condition. This is dangerous because doing so may mean the landlord has failed to specifically and successfully serve a reinstatement notice as required by the lease (see below) and it makes it difficult to quantify the dilapidations. Although there are some overlaps, the two matters should always be treated separately.
What are the requirements on both the landlord and the tenant in relation to reinstating works completed at the property by the tenant under a licence contained in either the lease or a licence to alter/licence to carry out works?
The first reference point must be the document authorising the works (i.e. the lease or licence to alter/licence to carry out works) and careful attention must be paid to the following:
1. Does the authorising document require the landlord to serve a reinstatement notice on the tenant?
2. Does the requirement to reinstate apply only if the landlord successfully serves a reinstatement notice on the tenant?
3. By what date must the tenant complete the reinstatement works?
4. Who will decide whether the reinstatement works are satisfactory and therefore whether the tenant has fully complied with its reinstatement obligations?
5. What will be the consequences if the tenant does not complete the reinstatement works and comply with its reinstatement obligations?
Does the authorising document require the landlord to serve a reinstatement notice on the tenant?
Some leases require the landlord to give, for example, three months’ notice to the tenant if it wishes the tenant to complete reinstatement works. Other leases simply require a tenant to remove any items and alterations and make good the property at the end of the term. Does this latter requirement literally means ‘at the end of the term’ i.e. on the very last day? Perhaps yes, but such a requirement will very rarely work in practice. The tenant will need time to organise the required reinstatement works, perhaps to engage the necessary tradesmen and professionals to assist and to ensure that any damage is made good. Even if a reinstatement notice is not required by the terms of the lease it is a good idea for the landlord and the tenant to discuss any reinstatement requirements in advance in order to give time for the tenant to complete the works and so that the landlord has comfort and knowledge that the property will be returned to it in a state and condition that will allow it to be readily re-let.
Does the requirement to reinstate apply only if the landlord successfully serves a reinstatement notice on the tenant?
This very much depends on the terms of the authorising document. If the lease or licence to alter/carry out works requires the landlord to serve notice within a given time period, then that time period must be adhered to and any deviation will render the service of such notice invalid. If the authorising document is silent on the method of service for the reinstatement notice then the general notice terms in the lease should be reviewed and adhered to. If there is no guidance whatsoever in the authorising documents it will be a question of reasonableness as to how and when the reinstatement notice should be served and if and when it has been successfully done. A court is likely to favour the tenant in determining the question as to whether a reinstatement notice has been successfully served given that the landlord remains in control of the service procedure throughout.
By which date must the tenant complete the reinstatement works?
If the landlord has been required to give the tenant, for example, at least three months notice of the requirement to carry out reinstatement works, then it stands that such works must be complete by the end of the lease term. But if the lease simply contains a requirement for the tenant to complete reinstatement works at the end of the term, with no requirement for the landlord to first serve notice on the tenant, or if notice can be served on demand by the landlord and therefore feasibly on the last day of the term, then there is an argument that the tenant should have the benefit of an implied right to remain in the property beyond the end of the term for the purpose of completing the works. The question as to whetehr a right to remain can be implied will be subject to tests of business efficacy and necessity, which must be considered on a case by case basis.
Who will decide whether the reinstatement works are satisfactory and therefore whether the tenant has complied with its reinstatement obligations?
Again, this is a matter of interpretation of the authorising document, which may, for example, require any reinstatement works to be carried out to the satisfaction of the landlord or its surveyor. In either case, the tenant should allow time after completing the reinstatement works for the landlord or its surveyor to inspect the works and advise whether they are satisfactory. It will be more cost and time effective to do it this way rather than risk the landlord deciding after the tenant has vacated the property that the tenant has not fully complied with e reinstatement its obligations and that it is still ‘on the hook’ for tenant covenants in the lease.
What will be the consequences if the tenant does not complete the reinstatement works and comply with its reinstatement obligations?
A non-compliant tenant may be ordered to pay damages to the landlord for any reinstatement works that are not completed at the end of the term. The amount of damages will be measured against the actual loss (if any) that the landlord suffers as a result of the works not having been completed. This will not be calculated only on the fact of the works not having been completed but the reasonableness and the necessity of the works will also be considered. If the landlord does not intend to reinstate the property in any event then it cannot be recompensed for the tenant’s failure to carry out the reinstatement works. That would be grossly unfair on the tenant. Instead, the landlord will be recompensed for the diminution in the value of the property caused by the alterations.
So, in conclusion, and as is often the case with this kind of matter, there is no clear cut answer for landlords and tenants as to when reinstatement notices should be served and by when reinstatement works must be completed. The very first port of call for both parties must be the lease and any subsequent licences to alter/carry out works and the exact wording and construction of those authorising documents must be followed in order to give the landlord and tenant the best chance of complying with their respective obligations and negating the need to revisit the matter at a later date.
For further information about reinstatement and dilapidations obligations for both landlords and tenants please contact the Commercial Property Department.
Commercial Property Department