Fitting out costs means expenditure on the
provision of fixtures and chattels to equip the building to serve
the tenant's particular needs. Such expenditure is normally the
tenant's responsibility. If the landlord undertakes to meet the
cost, the tenant is receiving a reverse premium. The landlord may
meet the cost directly (by paying the supplier and any installation
costs) or indirectly (by reimbursing the tenant). If the
reimbursement is of fitting out costs otherwise qualifying for
capital allowances in the tenant's hands, see
BIM41090.
It may be necessary to distinguish here between the cost of
providing a building ready to let and the cost of meeting what are
properly the tenant's expenses of fitting out. The former is not a
reverse premium, the latter is.
For example, a landlord may buy an office block for £100
million and let it to a tenant for a market rent. The expenditure
by the landlord on buying the office block is not an inducement to
the tenant to take a lease of it. Similarly, if a landlord agrees
to make available to a tenant a partially completed building, and
to pay the tenant a sum effectively to complete the building on the
landlord's behalf, the sum paid is not a reverse premium. Say the
tenant wants a specialised roof that is more expensive than the
standard kind the landlord planned to install. The parties may
agree that the tenant will install and pay directly for the roof.
The landlord will reimburse the cost of the standard roof. That
reimbursement is not a payment by way of inducement to take a lease
because it is part of the cost of producing a finished building.
It should usually be clear what expenditure procures a
finished building and what represents tenant's fitting out costs.
As a rule of thumb, the latter will not increase the value of the
reversion, because it will be worthless to the landlord when the
lease ends. An example would be shop counters. Another rule of
thumb is that expenditure on fitting out costs will not fall to be
taken into account in fixing market rent on a rent review. In the
roof example, the installation of a roof, which will remain of
value to the landlord when the lease ends, will enhance the value
of the reversion and affect the outcome of a rent review.
It is possible that a landlord will meet a tenant's
expenditure directly but be reimbursed in some way by the tenant.
This will not create a benefit caught by the legislation. For
example, the rent may be fixed at a level enhanced to take account
of the additional value to the tenant of a building fully equipped
with tenant's fixtures. The extra rent reimburses the landlord for
the additional value. Hence, the tenant has received no
benefit.
