Improvement is in the Eye of the Beholder (if the Beholder is a Tenant)

06 Apr

Introduction


Commercial landlords and tenants alike will be well aware that a frequent sticking point in negotiations to renew business tenancies is the rent, particularly when the nature of the property has changed because of alterations made to it by the tenant. If the landlord has previously let the tenant a field, what rent can he charge under a new tenancy, now that the tenant has erected a building upon the field?


Section 34 of the Landlord and Tenant Act 1954


For those tenancies to which the Landlord and Tenant Act 1954 applies, deadlock can be broken by asking the Court to determine the rent under section 34 LTA154. Broadly, that exercise involves the Court asking itself what rent the “willing lessor” – a hypothetical reasonable person – could reasonably expect to achieve on the property, and what the “willing lessee” would be willing to pay. Crucially, and per section 34(1)(c) and 34(2), the Court must disregard from its assessment any value added to the property by improvements made by the tenant of his own accord (rather than pursuant to an obligation owed to the landlord), or improvements made by the tenant’s predecessor, when the conditions in section 34(2)(a), (b), (c) and (d) are satisfied.


The Importance of a Definition


It is important, then, for both landlords and tenants to understand what alterations count as improvements for the purposes of section 34 LTA1954. Understanding how the Court is likely to determine the rental value of the property might aid negotiation and save parties the expense of litigation, or at the very least, assist those who cannot agree in assessing the merits of their positions.


No Statutory Definition


The LTA1954 provides no definition of “improvement”; nor is one provided by the Landlord and Tenant Act 1927, when it deals at section 3 with “proper improvements”, that is improvements for which the tenant can claim compensation from the landlord upon quitting the property. Thankfully, however, a definition is provided by the Court of Appeal in the linked cases F.W. Woolworth & Co Ltd v Lambert (No. 1) [1937] Ch. 37 and Lambert and Another v F. W. Woolworth & Co Ltd (No.2) [1938] Ch. 883 CA.


The Tenant’s Perspective


In Lambert No.1, Lord Wright M.R. states in obiter that the question whether an alteration is an improvement is one that should be assessed from the tenant’s point of view alone; simply put, it is irrelevant whether the landlord thinks that the tenant’s alteration improves the property or not. This is so even when the alterations comprise substantial structural changes to the property: “It was said the effect would be to destroy the premises as a shop altogether, and that therefore they could not in law be treated as improvements. I do not take that view. I think the word “improvements” is used here in a wider sense. The question, being regarded from the point of view of the tenant, is: How can he get, consistently with the other conditions of his lease, the most beneficial user of these premises as premises? One way of achieving that result may be to use these premises along with and in *50 conjunction with some other premises, and to achieve that result some structural alterations may be, and probably always will be, necessary”.


In Lambert No.2, Slesser LJ noted that the Court was not bound by Lord Wright M.R.’s definition before accepting it wholesale: “it follows that the section contemplates that an alteration may be an improvement although it produces damage or diminution in the value of the premises or does not add to the letting value of the holding, so that the mere fact of damage or diminution in the value arising to the premises from their alteration will not of itself necessarily prevent the alteration being an improvement. In other words (as the Court has, by a majority, I think, already decided), the question whether the alteration is an improvement must be regarded from the point of view of the tenant”.


Both No.1 and No.2 concern LTA1927, but the definition of “improvement” given has since been taken to be applicable to section 34 LTA1954: Kirk Reynolds QC & Wayne Clark (2017), Renewal of Business Tenancies (Fifth Edition): Thompson Reuters (Sweet and Maxwell), London, paragraph 8-140.


Demolition and Radical Alterations


As Lambert No.1 and Lambert No.2 suggest, “improvement” is likely to include even radical alterations to the property. Indeed, “improvement” may even include demolition: in National Electric Theatres Limited v Hudgell [1939] Ch. 553 it was held that the complete demolition of a building on the premises let was an improvement. Although National Electric Theatres concerns the meaning of “improvement” under Part 1 of LTA1927, following Lambert No.1 and Lambert No.2, the point is likely to apply equally, it is submitted, to section 34 LTA1954: Kirk Reynolds QC & Wayne Clark (2017), Renewal of Business Tenancies (Fifth Edition): Thompson Reuters (Sweet and Maxwell), London, paragraph 8-140.


Conclusion


The definition of “improvement” should be borne in mind by landlords and tenants alike. Whilst tenants can perhaps take comfort from the fact that the question whether alterations to the property count as improvements for the purposes of section 34(1)(c) and 34(2) LTA1954 will be considered from their point of view, landlords should be slow to go to the Court on the basis that the value of an alteration should not be deducted under section 34(1)(c) and 34(2), simply because they do not agree that the alteration made by the tenant improves the property.

Article by Dr Thomas Richardson – Nothing in this article is intended to be legal advice. Readers may contact clerks@stourchambers.co.uk should they wish formal legal advice on their particular circumstances.

This set comes recommended for its members' expertise in children and matrimonial finance matters. The children cases range across both public and private law work, and include those concerning non-accidental injury, sexual abuse and fabricated illness. On the financial side, the set's barristers demonstrate the ability to act in substantial financial remedies cases as well as Schedule 1 and TOLATA matters.

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