Covering the cost of alterations to premises under leases
The question of payment of the cost of alterations made to leased premises by a tenant is an important issue in the relationship between the tenant and the landlord. There are many factors affecting arrangements as to the cost of alterations, such as the duration of the lease, the premises leased, and the envisaged outlays on the part of the tenant.
Alterations are outlays incurred to increase the value or usefulness of the leased premises. However, these are not minor outlays as defined in Art. 662 § 2 and 681 of the Polish Civil Code for the purpose of maintenance, arising from normal use of the leased premises (for example repairing doors or painting the walls). Vital outlays, without which the premises are not suitable for the manner of use agreed between the parties, do not qualify either (art. 662 § 1 of the Polish Civil Code).
The procedure for settling payment of the cost of alterations is provided for in Art. 676 of the Polish Civil Code. Under this provision, the landlord is entitled to retain the alterations for a payment equal to the value of the alterations at the moment the premises are returned, or to request that the premises are restored to their former condition. The option chosen by the landlord is binding for the tenant. The model presented in law is not mandatory, and thus the parties are free to resolve the matter of payment in some other way.
There are three main ways in which the question of payment of the cost of alterations made by the tenant can be resolved contractually:
- The tenant leaves the alterations in the premises for the landlord in exchange for payment equal to the value of the alterations,
- The tenant is required to remove the alterations (this is usually an element of the broader obligation to restore the premises to their former condition),
- The tenant leaves the alterations in the premises for the landlord without reimbursement (or for a nominal fee, provided that they have been claimed as fully depreciated expenses).
The parties often opt for a combination of these solutions, in which the procedure for payment of the cost of alterations is determined by a number of factors and the circumstances of the lease relationship.
An alteration being a constituent part of the premises
One of these factors is the nature of the alterations. If the alteration becomes part of the premises and cannot be removed without causing damage or making a major change to the alteration or premises themselves, then the alteration constitutes a constituent part of the premises. In some cases, therefore, lease agreements provide that the tenant can only remove alterations that are not a constituent part of the premises and can be removed without causing damage to the premises. For other alterations, the tenant can be reimbursed by the landlord or the parties can agree that the alterations remain and no reimbursement is due.
Changes only with the landlord’s consent
As mentioned above, alterations may substantially affect the fundamental structure of the premises, and for this reason lease agreements often stipulate that the tenant may only make changes (including alterations) with the landlord’s consent. A clause of this kind often has direct implications for the manner in which the question of payment for the alterations is resolved, especially if the parties have agreed that in principle the tenant will be reimbursed for the cost when the premises are returned. In such cases, consent to alterations can serve as a means for the landlord to verify the amounts of the final settlement of payments between the parties. If the tenant intends to make alterations of significant value, the landlord can opt not to give consent in advance and thereby avoid the obligation to refund the costs in the future. This will mean that in such cases the tenant will not be entitled to reimbursement for alterations made without the landlord’s consent.
Changes made to premises without the landlord’s consent are frequently listed among the contractual grounds for the landlord to serve notice of termination of the lease agreement. If the lease relationship comes to an end early, whether due to the fault of the landlord or the lessee, this can be a material fact that significantly modifies the policy for payment for alterations. From the point of view of the tenant it is quite plain that it should be reimbursed for alterations it has made to the premises if the lease agreement is terminated early due to reasons for which the landlord is responsible and the outlays (alterations) incurred by the tenant have not been claimed as fully depreciated expenses. Provisions of this kind can be found in particular in leases for commercial space, i.e. space in which tenants commonly make alterations of significant value. On the other hand, the obligation to leave alterations for the landlord without the tenant being reimbursed, or of unconditional restoration of the premises to their former condition by the tenant, will incline a tenant towards orderly behaviour and be an additional means of securing due performance of the lease agreement by the tenant for the landlord in case of termination of the agreement due to the fault of the tenant.
The statute of limitations
Under Art. 677 of the Polish Civil Code, claims raised by a tenant for reimbursement for outlays incurred, including for alterations to premises, expire one year from the moment the premises are returned under the statute of limitations. This applies from the moment the premises are in fact returned to the landlord, and not the date for which return of the premises is agreed (for example see Supreme Court judgment of 25 May 2011, II CSK 488/10). In addition, the premises should be returned in such a manner that it is clear to the landlord that the premises are placed at its disposal due to the lease relationship coming to an end. This provision only applies to alterations made by the tenant during the course of the lease, and not once the lease has come to an end. Like other provisions on expiry under the statute of limitations, Art. 677 of the Polish Civil Code is mandatory. The parties cannot agree upon a shorter or longer period for expiry of claims.
The addressee for claims
A claim raised by a tenant for reimbursement for alterations can only be raised with respect to the landlord at the time. This means that if a tenant makes alterations and the landlord subsequently sells the premises, the tenant can only seek reimbursement from the new owner (landlord).
It is therefore crucial to establish a procedure for payment for alterations once a lease comes to an end that reflects the parties’ interests and other circumstances related to performance of the agreement. The numerous ways in which this question can be regulated mean that there is almost no limit to the method in which payment of the cost of alterations can be settled.
Mateusz Rydzewski, adwokat, Real Estate Development practice, Wardyński and Partners