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Arbitrating Renewal Rent – The Value of Leasehold Improvements, Fire Productions v. Lauro (the appeal)

In my blog entry of January 23, 2006 I reviewed the trial decision in Fire Productions v. Lauro (2005), 38 R.P.R. (4th) 82 (B.C.S.C.). That decision was appealed and the British Columbia Court of Appeal reversed the decision. The appeal is reported at (2007) 49 R.P.R. (4th) 1.

The issue in this case was whether or not a market rent to be settled by an arbitrator for a renewal term should reflect the lease of the premises including the improvements that may have been constructed and installed by the Tenant or rather whether the rent should exclude such improvements. The premises in this case consisted of 3,100 square feet. The market rent including the improvements was held to be $19.00 per square foot. Without the improvements the rent was held to be $13.60 per square foot. The British Columbia Court of Appeal determined that the rent should include the value of the improvements.

Like most renewal provisions in commercial leases, the renewal provisions of this lease provided for the rent on the renewal to be the fair market rent. The parties did not agree on the rent and it proceeded to arbitration. The arbitrator awarded a renewal rent of $19.00 per square foot. In determining that market rent the arbitrator included the value of improvements that the Tenant constructed when it initially leased the premises. By the terms of the lease (as is typical) these improvements became the property of the Landlord upon completion. The arbitrator based its view on the fact that the improvements will accrue to the Landlord when the lease term is complete so the Tenant should pay a higher rent as a result of these.

The court in the trial decision reversed that.  It found that on a proper analysis of all the case law, that improvements made by a tenant are not to be taken into account upon a renewal unless the renewal clause specifically states otherwise. The Tenant should not be obligated to pay twice (once when it completes the improvements and then again as rent to the Landlord on the improvements during the renewal term).

The Court of Appeal reversed the trial decision and reinstated the arbitrator’s award. The Court of Appeal focused on the language in the lease. The use of the word “market” in the lease to define the rent to be paid could only mean that the rent to be paid was the rent that the premises would attract if it was exposed to the market at the time. Since the improvements belong to the Landlord the premises, as exposed to the market, would be improved premises. As such, the language precluded excluding the value of tenant improvements in calculating rent.

Accordingly, if a tenant does not wish to pay rent based on improvements it installed, it should specifically provide for the value of the improvements to be excluded.

Bill Rowlands

March 6, 2007 in Leasing | Permalink

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Comments

The use of the word “market” in the lease to define the rent to be paid could only mean that the rent to be paid was the rent that the premises would attract if it was exposed to the market at the time. Since the improvements belong to the Landlord the premises. As I said

Posted by: Matt | Apr 10, 2008 2:38:38 PM

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