If you take a completely newly constructed unit you will almost certainly need to carry out some initial fitting-out works to make it ready for the first day of business. In fact, landlords often leave new units in “shell condition”, ready for new tenants to do their fit-out. Or the premises may simply be in the lousy used state left by the previous tenants when they moved out. If that is the case, you should negotiate a rent-free period for the time necessary to get the premises ready for you to occupy.
If you are taking a lease for more than a few years, with a rent review or several rent reviews down the line, you have to be careful how your fitting out works are referred to in the lease, or there is a risk that you could unfairly end up paying extra rent for them.
You run the risk of paying rent on the works you paid for, which would be unfair.
I need to explain the issue first. If you carry out any works with the permission of the landlord – but not under an actual obligation to the landlord – those will be disregarded at the rent review. That means that the rent review will be of the premises in their shell or used condition, not in their opulent new condition after your fit-out works.
But if you carry out any works as an obligation to the landlord, they will not be disregarded at the rent review. That means that the landlords can have the rent reviewed based on the present state of the premises – after you have improved them – not as they were when they let them – which was shell condition.
In other words, you run the risk of paying rent on the works you paid for, which would be unfair.
Let me give you an example. You sign the lease, and what you receive is an empty shell. Because you intend the premises to be a high-class fashion shop, you fit it out with panelling, fitted cupboards and shelves in expensive wood, and a full drop ceiling with recessed lighting. In five years time there is a rent review. You spent a small fortune doing the shop up at the start of the lease, so you definitely don’t want the landlord now making you pay extra rent for that. After a rent review you will be required to pay the “open market rent” – which is the rent that a new tenant would pay for the premises. Of course, the landlord would love it if the new rent level would be assessed on the basis of the premises as they stand now with all that beautiful panelling and opulent fittings. But you definitely don’t want that. You’ve already paid to install it all. You certainly don’t want to pay twice by allowing the landlord to charge you rent for it during the next five years and the next, and so on. You want all that work disregarded. You want the rent review to be on the basis that the premises which the theoretical open market tenant is looking at is the shell or poor state in which you took the premises on.
That’s where that important distinction comes into play. If the original documentation permitting you to do the work did no more than give you permission, then you will win and the rent review will be on the basis of the original shell condition as if it was being let that way today. But if you have allowed the wording to say not only that you have permission to do the work but that you were under an obligation to the landlord to do it, then the landlord can assess the rent on the basis of the beautiful condition of the premises as they now are.
You can see how important it is to make sure this doesn’t happen.