When I am inspecting pubs for a valuation, licensees often point out the improvements they have made thinking that it will affect my valuation. For the purpose of a capital valuation, however, property is valued in its present configuration and condition, so who made the alterations is irrelevant as long as they were made with the landlord’s consent.
The effect of improvements made by the tenant are far more important when it comes to assessing the rent for lease renewal or rent review.
Disregard of improvements
Section 34 of the Landlord & Tenant Act 1954 states that at lease renewal the new rent is to be the rent that might reasonably be expected to be obtained in the open market disregarding “any effect on rent of an improvement”.
An improvement must have been carried out with the landlord’s consent if necessary, must not have been carried out as an obligation to the landlord, and must have been during the current tenancy or within the last 21 years. Rent review clauses in leases vary but often mirror the wording of the Landlord & Tenant Act.
The disregard of improvements often leads to arguments and it is important to establish that the alterations carried out did actually improve the property and were not just to suit the individual occupier.
The Royal Institution of Chartered Surveyors says: “In assessing market value the valuer may decide an in-coming operator would expect to improve trading potential by undertaking alterations or improvements.”
For instance, a new operator might be expected to open up a section of a pub to create a restaurant or function room.
Rent adjustment
In such circumstances the valuer might adjust the fair maintainable trade (FMT), or turnover, they think is achievable, assuming that any reasonably efficient operator would make the improvements. An appropriate allowance will then be made in the valuation to reflect the costs of completing the improvements and the delay in achieving FMT.
Similarly, if the property is in need of repair and/or decoration to enable the operator to achieve the FMT, then an appropriate allowance should be made in the valuation to reflect the cost of repairs and decorations.
In practice, following a strict interpretation of the wording of the Landlord & Tenant Act, valuers will often disregard improvements made by the tenant and simply value the property as it was originally let to the operator. This method is usually beneficial to the tenant as it results in a lower FMT and thus profit.
Either way, it is important for both parties in a rent review or lease renewal to consider whether improvements would be carried out by a reasonably efficient operator and for the tenant to keep a record of the costs they have incurred in alterations. As always, if in doubt, take professional advice.