The general rule is that, at rent review, unless the tenant’s lease states otherwise, premises must be valued as they stand, even if they include improvements paid for by the tenant. This is because the valuer must ascertain the rent at which the premises might reasonably be let in the open market, as opposed to the rent that it would be reasonable to require the tenant to pay, and a third party would pay rent for the land, buildings and any improvements effected by the tenant.
Consequently, most tenants incorporate specific disregards in rent review provisions and/or licences for alterations to ensure that they are not charged rent for improvements that they previously paid, or during the term of, a lease. The litigation in Cordoba Holdings Ltd v Ballymore Properties Ltd [2011] EWHC 1636 (Ch); [2011] PLSCS 177 highlights the importance of such safeguards.
The tenant converted its premises into a data centre and upgraded the power supply to the building to facilitate the change in use. As a result, the property had a power supply that was 10 times superior to that of a standard office building.
The majority of the work required to improve the electricity supply took place outside the demise. The parties asked an arbitrator to determine a new rent for the premises on rent review. He valued the property as a data centre, as opposed to an ordinary office building, and increased the annual rent by more than £1m.
The tenant argued that the arbitrator should have disregarded any increase in rental value that was attributable to the improvements that it made. It lost on the ground that it had failed to produce: (i) any documents dealing with the external work; and (ii) a schedule of improvements that it claimed should have been disregarded. Consequently, the issues had not been clearly put to the arbitrator, which meant that the court did not have to consider the effect of the rent review provisions in the tenant’s lease.
However, the judgment reveals that the valuer was required to disregard “any increase in rental value of the Premises attributable to the existence at the relevant Review Date of any improvement to the Premises… carried out… 1.4.3.1 by the Tenant its sub-tenants or their predecessors in title or by any lawful occupiers during the Term”. The clause was modelled loosely on the provisions of section 34 of the Landlord and Tenant Act 1954, which deals with the rent payable on the renewal of a business lease. Importantly, however, the disregard in section 34(2) is not expressed to be limited to improvements to the property.
Would a disregard of improvements to “the Premises” extend to improvements outside them? One suspects not. Consequently, tenants would be well advised to check the rent review provisions in their leases before making improvements and where there is a risk that they will be rentalised, to agree with the landlord that the improvements will be disregarded on rent review.
Allyson Colby is a property law consultant
