Few tenants move into property without undertaking costly fit-out work. The recent decision in Geoffrey Funnel and another v Adams & Remer(a partnership) [2007] EWHC 2166 (QB); [2007] PLSCS 186 offers a salutary reminder of the importance of ensuring that the lease is clear regarding exactly what is to be valued at rent review in such circumstances, because the value of a tenant’s improvements can have a major effect on rent.
The tenants agreed to take a lease of premises and to remove a substantial amount of waste in return for a rent holiday. During the negotiations, the tenants asked for permission to undertake additional work for the benefit of their business. The landlord listed the additional work as part of the work that the tenants were required to undertake in accordance with the lease. The tenants’ solicitors did not warn them about the effect of this requirement, and they accepted the lease.
The general rule is that, unless the rent review clause states otherwise, premises must be valued as they stand, even if they include improvements that have been paid for by the tenant. However, it is generally acknowledged that it would be manifestly unfair for tenants to have to pay for their improvements twice, namely by on making them and then, because of an increased rent, on rent review. Consequently, the tenants’ lease provided that their improvements were to be disregarded on rent review (unless the improvements were made at the expense of or in pursuance of an obligation to the landlord).
Unfortunately, the tenants’ covenant to undertake the additional work transformed what should have been permitted alterations into improvements that were to be made in pursuance of an obligation to the landlord. The consequences were twofold, namely the tenants: (i) lost the ability to choose whether to undertake the work; and (ii) on being advised that the rent would increase by more than they had expected on rent review, decided to assign the premises to extricate themselves from the lease. They subsequently sought, and were awarded, substantial damages from their solicitor to cover the cost of leasing and improving the premises and extricating themselves from the lease.
Practitioners can avoid similar claims by ensuring that tenants’ works are the subject of licences for alterations that permit tenants to undertake the work without obliging them to do so. The usual form of covenant in a licence for alterations to carry out the work in a specified time, or to a certain standard, will not be construed as imposing an obligation to carry out improvements, unless the licence for alterations makes it very clear that the parties intend to override any disregard of improvements contained in the tenant’s lease: see Godbold v Martin the Newsagents Ltd [1983] 2 EGLR 128; (1983) 268 EG 1202. Nor will the disregard be frustrated by a provision that the lease is to apply as though the premises, as altered, had originally been comprised in the lease: see Historic House Hotels Ltd v Cadogan Estates Ltd [1995] 1 EGLR 117; [1995] 11 EG 140.
Allyson Colby is a property law consultant
