Rent Review

If a tenant has improved the premises by carrying out works outside its demise, will it pay the price for those works on rent review?  In the case of Cordoba Holdings Ltd v Ballymore Properties Ltd, the Court considered a tenant's application for permission to appeal an arbitrator's award on rent review on the basis that it had carried out improvements outside its demise which in the tenant's view should have been disregarded for the purposes of the review.

The facts

The landlord and tenant had failed to reach agreement as to the new rent on rent review, and had therefore referred the matter to an arbitrator (as provided for under the terms of the lease).

The lease contained a provision found in most rent review clauses, namely that any increase in rental value attributable to improvements to the premises carried out by the tenant were to be disregarded on review.

At the time of the rent review date, the tenant was using the premises as a data centre. The arbitrator took this into account and determined the rent on the basis that it would also be open to the hypothetical tenant to use the premises as a data centre, not just an ordinary office building.

Use as a data centre as opposed to mere office use had the effect of increasing the rent payable in respect of the premises.

The tenant had carried out works outside its demise to improve the power supply to the premises in order to facilitate their use as a data centre; the tenant sought to argue that the arbitrator had failed to disregard these works. According to the tenant, without the improved power supply, it would not be possible to use the premises as a data centre.

The tenant sought the permission of the Court to appeal against the arbitrator's award.

What did the Court decide?

Ultimately the tenant was unable to produce any evidence to show that it had improved the power supply to the premises, and the High Court ruled that the onus was on the tenant to show that it had in fact carried out the improvements that it contended should be disregarded.

Accordingly the tenant's application for permission to appeal was dismissed. 

This is in some ways unfortunate; because the Court found that there was no evidence as to the nature of the improvement works and whether the works had in fact been carried out by the tenant, it was not actually necessary for the Court to determine what would have been an interesting point of law, namely does a disregard of tenant's improvements for rent review purposes only apply to improvements carried out on the demised premises, or does it extend to improvements outside the demise which actually increase the value if the premises?

Practical Points

It is anticipated that a disregard of improvements to the "premises" would not in any event have extended to a disregard of enhancement works outside the extent of the demised premises.
A practical point to take away from this case is that to be on the safe side, a tenant who, with landlord's consent, is carrying out improvement works outside the extent of its demised property should expressly agree with the landlord that the effect of the works on the value of the premises should be disregarded at rent review, regardless of what the lease says on the point.

Emma Wilson is a solicitor in the Michelmores property litigation team. For further information on the issues raised in this article, please contact Emma at emma.wilson@michelmores.com.

 
This information has been prepared by Michelmores LLP as a general guide only and does not constitute legal advice on any specific matter and should not be relied upon as such. We recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of this information.