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Commercial tenant warned over impact of improvements on rent review

Posted
February 11, 2012
Business Litigation

The issue of tenant improvements, for the purpose of rent reviews, has recently come under the spotlight (Cordoba v Ballymore [2011]), and highlighted the importance of maintaining detailed documentation of tenant improvement works to commercial property. Most rent review provisions allow tenant improvements to be disregarded when calculating any increase but a failure to properly document could result in a substantial rental rise. Moreover, some tenants who make improvements believe that they may actually be entitled to a reduction in rent, this simply isn’t the case…read on… We’ve used parties T and L to highlight the point in the scenario below: T upgraded an ordinary office building to a data centre; carrying out improvement work, amongst other things, to the power supply (both internally and externally).  A rent review was commenced and, as the parties were unable to agree a new rent, an arbitrator appointed. 

The lease indicated that improvements to the ‘Premises’ by the tenant were to be disregarded for the purpose of review. The arbitrator increased the rent from £1,803,300 to £2,848,000, indicating that use of the Premise as a data centre was, in addition to use as an office building, a use available to the ‘hypothetical open market’. 

Data centres command a higher commercial value and a higher rent could be applied; it would be up to L to decide to charge a higher rent. T argued that external works it had done to improve the power supply should be disregarded as a tenant improvement and that without these improvements the Premises could not be used as a data centre. 

Both L and T delivered experts reports regarding improvements.  L’s expert noted that T had carried out undocumented works to the inside of the premises and that the property had ‘the appropriate power from the grid, power feeds, substation connections and areas to house back up generators enabling it to be operated as a data centre’.  

He concluded ‘the property is currently used as a data centre and, therefore, it is reasonable to assume that there would be a hypothetical tenant in the market who would also adopt the same use…Similarly there may be a hypothetical willing tenant for an office use’.     T’s expert confirmed that T had undertaken works internally and externally and that these should both be disregarded noting ‘the tenant installed at their own cost an upgraded power supply’’.  

In response, L’s expert contented that there was no documentation concerning the upgrade to power supply, that the majority of works were carried out off-site, and that they should not be disregarded upon review. The case came before the Court, on application by T.  T argued that there had been a serious irregularity in the arbitrator’s decision, or an error in law.  T submitted that the arbitrator had accepted that the premises had been improved by external works to the power supply done by T, but still found that L was only to disregard the improvement to the demised premises (ie not external work), in determining the rent.

 L argued that T had failed to establish, by failing to provide the necessary evidence, the disregard relied upon (in this case the external works). The Court found that ‘it is incumbent on the tenant to establish that the improvement works he contends should be disregarded were carried out by him…it is not possible to disregard any increase in rental attributable to an improvement to the premises carried out by the tenant if there is no evidence as to the nature of the improvement, who carried it out, when and at what cost…paragraph 4.4.2 of Mr Lowns[T’s expert] first statement failed to meet those requirements…the deficiencies in Mr Lowns first statement were pointed out with commendable clarity in Mr Kirby’s [L’s expert] counterstatement…Mr Lown had ample opportunity to apply to the arbitrator for permission to adduce further evidence…In my judgment the arbitrator made no finding as to the existence of any external works of enhancement to the power supply carried out by [T] capable of affecting the rental value of the building’. In conclusion therefore, whilst rent review provisions usually indicate that improvements made by a tenant are to be disregarded for the purpose of review it is essential, based on Cordoba v Ballymore, to maintain an accurate record of works carried out to improve premise.  Consideration should also be given, when drafting review provisions, as to whether tenant improvements are to cover only those improvements within the demised premises. If in doubt about rent review provisions in your lease you should contact a specialist property lawyer.  

Published - February 2012

This article is provided for general information only. 

Please do not make any decision on the basis of this article alone without taking specific advice from us. stevensdrake will only be responsible for the advice we give which is specific to you.

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