Tread carefully: the Landlord and Tenant Act 1927

Tenants often feel aggrieved when receiving a terminal schedule of dilapidations where the landlord has failed to take into account their improvements to a property. However, landlords can ignore the effect of such improvements if the tenant has failed to comply with the procedure contained in Part I of the Landlord and Tenant Act 1927. Happily for landlords, if a claim for compensation for improvements is not made in the prescribed manner, then there is no claim. Tenants must comply with the mechanics of the Act to recover compensation for improvements at the end of the term. However, the provisions of the Act are little known or used by either tenants or property practitioners. Does the tenant have a right to carry out improvement works? Most modern leases will restrict a tenant’s rights to carry out alterations. However, the Act can assist a tenant if: the lease prevents improvements without the landlord’s prior consent, section 19(2) of the Act states that such consent may not be unreasonably withheld; and the lease contains an absolute prohibition on the tenant undertaking any improvements to the property, then the tenant may be able to apply to the landlord using the section 3 notice procedure to obtain the right to carry out that improvement, and then be compensated at the end of the term. When does the Act apply? The tenant in possession of the property under any contract of tenancy is entitled to claim compensation under the Act. Therefore, a tenant who has sublet the whole of a demised property cannot apply for compensation. Tenants should note that improvements made by a predecessor in title still qualify for the tenant’s claim to compensation, provided the appropriate certificate or landlord’s consent to the improvement had been obtained by the predecessor. Tenants who make an application to the landlord for consent to carry out improvement works, irrespective of whether they intend to make a claim for compensation later, should nevertheless give notice to the landlord in accordance with section 3(1) of the Act. This protects a tenant’s right to request compensation should a landlord establish grounds for possession in the future. Furthermore, where the lease is renewed under the Landlord and Tenant Act 1954, an improvement that adds to the landlord’s property will be disregarded in fixing a rent under section 34 of that Act. With this in mind, tenants should always ensure that a certificate of improvement is obtained from the landlord at the conclusion of improvement works. What improvements are allowed under the Act? Tenant’s improvements must: add to the lettable value of the property at the end of the term; be reasonable and suitable to the character of the tenancy;  not diminish the value of any other property belonging to the landlord or its superior landlord; and effect a “physical change” to the property. “Non-physical” means of enhancing the value of the property – such as obtaining planning permission for a change of use – cannot qualify as an improvement under the Act. Broadly, the type of physical improvement is unrestricted. For instance, the erection, demolition or even complete replacement of entire buildings within a tenant’s demise may be eligible. However, compensation for improvements is not allowed if the works are undertaken pursuant to a contract for valuable consideration, eg a building lease either between landlord and tenant or tenant and sub-tenant. Serving the notice The tenant must serve notice of the improvements on the landlord prior to carrying out the works. There is no form prescribed by the Act save that a specification and plan detailing the improvements and the extent of the property affected must be provided.  The landlord then has three months to provide its consent to the works or alternatively serve a notice of objection.  Alternatively, a landlord can offer to undertake the works of improvement itself in consideration for a reasonable increase in rent. The court may determine the reasonable rent uplift in the absence of agreement. Accordingly, a landlord of a lease which does not contain provision for improvements to be rentalised would be well advised to offer to undertake the works of improvement itself. The landlord’s right to object The landlord has three months after being served with the notice to serve an objection. However, the only ground for objection is that the proposed works are unsuitable as the improvement will damage the amenity or convenience of the neighbourhood. If no objection is served by the landlord within the prescribed time limit, the tenant can carry out the improvement works in accordance with the plans and the specification supplied. The tenant may then require the landlord to provide a certificate that the improvements have been duly executed. If the landlord chooses to serve a notice of objection to the suggested improvement, or defaults on the offer to carry out the works, then the tenant can apply to the court for a certificate that the improvement is a proper one. The court will issue such a certificate but may impose conditions and time limits to regulate the manner in which the works must be carried out. A tenant should ensure the works are carried out in strict compliance with the specification and plan that has been provided to the landlord/court, as otherwise its right to compensation will be lost. Completion of the works: obtaining a certificate Once the works have been completed the tenant should ask the landlord to provide a certificate of completion to certify that the improvement has been undertaken in compliance with the Act. This will ensure that any improvements can form the basis of future compensation on termination of the tenancy. Should a landlord refuse or fail to provide a certificate within one month of the tenant’s request, the tenant may apply to the county court for the district in which the property is situated to provide one.  Claiming compensation Section 1 of the Act requires the tenant to quit the holding to qualify for compensation for improvements. The tenant must then provide the landlord with a claim for compensation for improvements within the time limit set out in section 47 of the 1954 Act. This states that if a tenancy: is terminated by a notice to quit, the claim for compensation must be made within three months of the date the notice is given; comes to an end by effluxion of time, the time for making a claim is not earlier than six or later than three months before the termination of the tenancy; is terminated by forfeiture or re-entry, the time is calculated with the period of three months beginning on the date of the order of the court for recovery of possession of the land comprising the tenancy; if forfeiture is effected through re-entry, the period of three months begins from the date of re-entry. The claim must be in writing and contain: the names and addresses of the claimant and the landlord against whom the claim is made;  a description of the holding in respect of which the claim is made and of the trading business carried on there;  a concise statement of the nature of the claim;  details of the improvement (including the cost and completion date); and  a statement of the amount claimed. If this claim is not admitted by the landlord, the tenant can then apply to the court for compensation. Calculating compensation The level of compensation for a tenant’s works of improvement cannot exceed: the net addition to the value of the property directly attributable to the improvement; or the reasonable costs of carrying out the improvement at the termination of the tenancy, after deducting the costs (if any) of putting the works constituting the improvement into a reasonable state of repair. The rationale behind these limits is an attempt to ensure that the landlord pays the benefit of the improvement. This is consistent with the scheme of the Act as described in Hudd v Matthews [1930] 2 KB 197 per Lord Talbot as being: “… to prevent the appropriation by a landlord under his legal rights for his own pecuniary advantage of something which owes its origins to the exertions and skill of the tenant”. Consequently, if a landlord intends to redevelop the premises, that “pecuniary” benefit may be reduced or eliminated entirely and the tenant’s claim nullified. In determining the compensation under clause (a), regard must be had to the use of the property after the tenancy. Should a landlord intend to demolish, make structural alternations or use the premises for a different purpose, then this will be taken into consideration when deciding the value attributable to the improvement. The court must consider any benefits which the tenant or its predecessor in title may have received from the landlord (or the landlord’s predecessor in title) in consideration expressly and/or impliedly for the improvement, which may reduce the level of claim. If compensation for improvements is reduced or disallowed because of the landlord’s intentions to redevelop or alter the property, but the landlord fails to carry out that stated intention within the time imposed by a court, the tenant may then apply to the court for further compensation.  Final word The 1927 Act is not user-friendly, but the compensation available to a tenant is potentially significant. A well-advised tenant should ensure its paperwork is kept up to date and that notices are served on the landlord whenever relevant improvements have been made to safeguard a tenant’s later claim.  Paul Henson is a partner in the real estate disputes team at Irwin Mitchell Photo © StockSnap/Pixabay