Tenant Funded Building Improvemants
an Article by Adrian Knowles of Associated Realty.
Running a commercial real estate agency has had its moments over the last three years. We began counting the number of commercial vacancies in June 2009 and at that time there were 388. It gradually grew to 490 in May of 2011 and now, for the first time, in two years, it gradually has started to decrease and is currently sitting at 478. We believe this is the first solid sign that the market is starting to improve but we expect vacancies won’t be back to normal levels for another two years.
The good news is that our most experienced investors have been actively purchasing, taking advantage of other investors’ pessimistic outlooks, with the knowledge that a full property cycle runs between ten to twelve years, and looking forward to the next capital gain period.
Along with leasing and selling commercial property, we often become involved in the negotiation of rent reviews and rights of renewal. As you may appreciate, some of these negotiations become quite complex and there was a case I was recently involved with, which I believe will be of particular interest to all commercial property owners who have had an assignment of lease where they had an assignor sell a business to an assignee but the assignor made improvements to the building. It is the common belief that a landlord cannot charge rent upon building improvements to the assignee if those improvements were paid for by the assignor.
This is not correct. If your assignor made building improvements and a right of renewal has occurred after the assignment took place, the landlord can charge the assignee rent upon the building improvements made by the assignor.
The assignee may argue that he or she purchased those building improvements as part of the business sale. The response is simple, you cannot purchase a building improvement that belongs to the landlord and the assignor is at fault for misrepresenting the ownership of the building improvements in the business sale. What sort of building improvement can a landlord charge rent upon? Certainly nothing specialised to the tenant’s business use, such as a kitchen in the case of a restaurant but anything generic, which is fixed to the building, such as a wall, tiles, etc, would be considered a building improvement that could be owned by the landlord.
Be aware that this concept is poorly understood by the wider business community and you are best to be guided by a large law firm if this situation is relevant and you wish to charge the assignee rent for improvements made by the assignor.
