Tenant Improvements

When a tenant wishes to undertake works to the property they rent, the consent of the landlord is normally required. A lease will normally contain a clause outlining how a tenant’s improvements are to be treated for the purposes of setting the rent at the rent review. The inclusion or otherwise of the tenant’s improvements in assessing the rent is also capable of being negotiated on an ‘as arising’ basis when the landlord’s permission is being sought for the improvements.

In a recent case, a landlord and tenant were in dispute over the rent payable following a rent review. The tenant had used the premises as a data centre and the arbitrator appointed under the lease assessed the market rent based on that use. The rent thus set by the arbitrator was in excess of that which would be payable were the premises used as general offices.

The tenant claimed that the use of the premises as a data centre had required it to undertake considerable electrical works. Since the lease contained a clause that a tenant’s improvements were to be excluded when determining the new rent, this should be set at the rate applicable for general office premises. The tenant therefore appealed the arbitrator’s decision to the High Court.

However, the tenant was unable to substantiate its claim that it had paid for the necessary improvements to the electrical system to allow the premises to be used as a data centre. As a result, its appeal was rejected.

Says Mark Ollier of our Seaton Office, “The absence of proof that the improvements were carried out by the tenant was crucial in the decision. It is essential to retain evidence of anything you may later need to prove. Had a licence to alter the premises been agreed between the landlord and tenant at the appropriate time, the argument would not have arisen in the first place.”