Lessee's improvements considered permanent in spite of an obligation to restore premises
30 November 2020
In a case between a lessor and a lessee, the Danish Eastern High Court found that improvements of leased premises carried out by the lessee should be disregarded and that such improvements can be considered to be permanent, even if the lessee has an obligation to restore the premises on vacation.
On 7 April 2015, the lessor instituted proceedings before the Danish Rent Tribunal against a lessee, claiming that the lessee must recognise a significant rent increase.
During the proceedings it was a central question whether an inserted floor of 22 sqm installed by the lessee was to be included in the area for which rent was to be paid. The lessee contested that rent was to be paid for this area because the lessee's own, permanent improvements were to be disregarded in connection with the assessment of the market rent, see section 13(6)(i) of the Danish Business Lease Act. The lessor insisted that the improvements, in the nature of things, could not be considered to be permanent when the lessee had accepted an obligation to remove the inserted floor on vacation.
Based on the evidence, in particular the expert’s assessment, both instances partially upheld the lessor’s claim. However, unlike the Rent Tribunal, the Danish Eastern High Court found that rent was not to be paid for the inserted floor, and accordingly found that the lessee's improvements must be considered permanent, even if the lessee had a full obligation to restore the premises.
This is a landmark decision, as it has now been established that an improvement, for instance an extension, may be permanent even if the lessee is obliged to remove it on vacation.
This gives rise to careful considerations in connection with the conclusion of commercial leases and the lessor’s consent to alterations made by the lessee. A lessor should keep in mind that the lease should include a term that the lessee’s alteration of the premises - made with the consent of the lessor - can only be considered to be permanent improvements if the lessor accepts to derogate from the lessee's obligation to restore the premises in connection with the alteration. A derogation from section 13(6)(1) of the Danish Business Lease Act should be included in the lease if the lessor is to avoid that the lessee's alterations - made subject to a claim for restoration on the part of the lessor - will affect the market rent negatively.
Plesner represented the lessor.
During the proceedings it was a central question whether an inserted floor of 22 sqm installed by the lessee was to be included in the area for which rent was to be paid. The lessee contested that rent was to be paid for this area because the lessee's own, permanent improvements were to be disregarded in connection with the assessment of the market rent, see section 13(6)(i) of the Danish Business Lease Act. The lessor insisted that the improvements, in the nature of things, could not be considered to be permanent when the lessee had accepted an obligation to remove the inserted floor on vacation.
Based on the evidence, in particular the expert’s assessment, both instances partially upheld the lessor’s claim. However, unlike the Rent Tribunal, the Danish Eastern High Court found that rent was not to be paid for the inserted floor, and accordingly found that the lessee's improvements must be considered permanent, even if the lessee had a full obligation to restore the premises.
This is a landmark decision, as it has now been established that an improvement, for instance an extension, may be permanent even if the lessee is obliged to remove it on vacation.
This gives rise to careful considerations in connection with the conclusion of commercial leases and the lessor’s consent to alterations made by the lessee. A lessor should keep in mind that the lease should include a term that the lessee’s alteration of the premises - made with the consent of the lessor - can only be considered to be permanent improvements if the lessor accepts to derogate from the lessee's obligation to restore the premises in connection with the alteration. A derogation from section 13(6)(1) of the Danish Business Lease Act should be included in the lease if the lessor is to avoid that the lessee's alterations - made subject to a claim for restoration on the part of the lessor - will affect the market rent negatively.
Plesner represented the lessor.
