Rent reviews: how will tenant improvements be taken into account at lease renewal?

Unless expressly excluded from the Landlord and Tenant Act 1954, a tenant has a statutory right to a lease renewal. 

Usually, the landlord and the tenant will agree on a new rent. If they are unable to do so, it is up to the courts to determine the rental value of the premises. 

This article explains how improvements made to the property may affect how the courts determine the rent and why landlords and tenants should consider improvements. 

What are improvements and when are they disregarded?

It is important to establish whether the works carried out by the tenant are classified as "improvements" or simply as repair and maintenance under the lease.  

Under the Landlord and Tenant Act 1927, an improvement is an alteration that goes beyond repair, and from the tenant's subjective point of view, improves the premises. This will be the case even if the improvement reduces the value of the landlord's interest. 

In a renewal under the Landlord and Tenant Act 1954, improvements carried out by the tenant are to be disregarded when establishing the new rent. This is for the tenant's benefit, as an improved property will likely have a higher rentable value on review. 

Sheerness Steel Co v Medway Ports Authority makes it clear that a tenant should not have to pay an increased rent for the improvements they have made at their own expense. 

Many rent review clauses state that the effect on value of the tenant's improvements will only be disregarded if they were carried out with the landlord's consent. If the landlord unreasonably refuses consent, the landlord would then be prevented from relying on the absence of consent.

What happens if works have been carried out prior to the start of the lease? 

Even if the improvements were carried out before the date of the grant of lease, they may still be disregarded provided that they meet the requirements under Section 34 Landlord Tenant Act 1954, which are:-

• The improvements were completed no more than 21 years before the application for renewal of the lease
   
• The holding or part of the holding affected by the improvement has at all times since the improvement been compromised in a tenancy to which Section 23(1) applies 
   
• At the termination of the tenancy, the tenant did not quit the holding

Rent review clauses will usually only disregard the works carried out by the tenant or the tenant's predecessor in title. The same will also apply if the rent review clause incorporates Section 34 LTA, which refers to improvements as "carried out by a person who at the time was the tenant". 

If an agent carried out the improvements for the tenant (a third party under an agreement with the tenant), they will also be disregarded on review. 

However, if the improvements were carried out by a licensee, they will not be disregarded as a tenant does not include a person who is a licensee. This was illustrated in Euston Centre Properties v H&J Wilson Ltd. 

Summary

Usually, anything in excess of standard repairs/maintenance will be considered improvements. 

Improvements are often disregarded from lease renewal rent calculations. However, before carrying out works, it is prudent to speak to your solicitor and request consent from your landlord. 

SO Legal has commercial property solicitors in Brighton, London, East Sussex, and Cumbria, and we work with clients across the UK. 

If you need support with a commercial lease or want an informal no-obligation discussion, contact our team.