It is common for a tenant of commercial premises to alter or renovate the premises to better suit the needs of their business.
Under section 19 of the Act on Commercial Leases, the tenant requires the landlord’s consent to carry out alterations and repairs to the commercial premises. According to the Government Proposal, the tenant may be granted either an unrestricted or a limited right to carry out alterations. However, the landlord’s mere consent to the alterations does not determine what will happen to them when the lease ends. It is therefore important to agree in writing on who will bear the costs of the alterations and what will happen to them at the end of the lease. (Act on Commercial Leases 19 §)
Under section 14 of the Act on Commercial Leases, the landlord and the tenant may agree on their respective rights and obligations concerning the use, condition and maintenance of the premises. The landlord and the tenant may therefore freely agree on their rights and obligations relating to the condition and maintenance of the premises. The parties may agree on the condition in which the premises must be at the beginning of and during the lease, as well as the condition in which the premises must be at the end of the lease. (Act on Commercial Leases 14 §)
As a general rule, if the allocation of costs has not been specifically agreed upon, the costs of repairs carried out to the commercial premises are borne by the tenant, and the tenant is not entitled to compensation for them at the end of the lease.
Particularly in the case of fixtures and equipment, it is important to agree on whether they will remain on the premises or whether the tenant has the right or obligation to remove them at the end of the lease. The tenant may also be required to restore the premises to their original condition at the end of the lease if the landlord so requires.
However, a defect may also arise in the commercial premises for which the landlord is responsible. Under section 18(2) of the Act on Commercial Leases, if the premises are not in the required or agreed condition, the landlord is responsible for remedying the defect. If the landlord fails to carry out a repair for which the landlord is responsible, the tenant may remedy the defect at the landlord’s expense, unless the defect is due to the building being unfinished or an authority has prohibited the use of the premises. (Act on Commercial Leases 18 §)
The tenant must give the landlord an opportunity to carry out the repair before undertaking to remedy the defect themselves. The tenant must also ensure that the costs incurred by the landlord as a result of the repair remain reasonable.
Under section 45(1) of the Act on Commercial Leases, when a fixed-term lease ends, the tenant is entitled to compensation, at the value applicable at the end of the lease, for repairs and alterations carried out by the tenant that have increased the value of the premises, provided that the tenant was entitled to carry out such work and has not already received compensation for it. Under subsection 2 of the same section, if a lease valid until further notice is terminated by the landlord on grounds that cannot be considered consistent with good practice in lease relationships, the tenant is entitled to compensation for the repairs and alterations referred to in subsection 1. (Act on Commercial Leases 45 §)
The provision therefore constitutes an exception to the general rule. According to the Government Proposal, the obligation to pay compensation under section 45 applies only to alterations and repairs that the tenant was entitled to carry out under section 18(2) after first requesting the landlord to carry them out. No compensation is payable if the work has already been compensated for, for example by reducing the rent. A further condition for compensation is that the lease has ended. In addition, the alteration or repair must have increased the value of the premises. No specific time limit has been prescribed for claiming compensation.
It is therefore important to agree on investments and alterations to commercial premises when they are being planned and carried out. This helps to prevent uncertainty and disputes at the end of the lease.
AASA-LAW has experience in disputes concerning commercial leases. We have assisted both tenants and landlords of commercial premises.
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