An investment group of property owners leased their building for five years to Clinical Data for $8,780 per month. But a year later Clinical decided to sublease the building to Discovery Broadcasting Co. for $19,218 per month. Clinical kept the $10,438 sandwich lease monthly profit.
To obtain the landlord’s permission for the sublease to Discovery, Clinical promised to pay for any damage Discovery might cause by its alterations in building a sound stage and broadcast facilities. Discovery’s renovation was done without building permits.
After the lease expired and Discovery moved out, the building owners learned it would cost almost $300,000 to bring the building into compliance with current building codes. The building owners did the work and then leased the building to a radio station.
Then they sued Clinical Data for the costs of bringing the building into building code compliance. But Clinical argued the improvements made by subtenant Discovery Broadcasting made the building more valuable.
However, the building owners replied any improvements made to a building by a tenant belong to the landlord when the tenant moves out and should not be a setoff against the $300,000 renovation cost.
Should the building owners be awarded their $300,000 cost of repairing the building after the tenant moved out and, if so, should the building’s increased value due to the tenant’s improvements be set off?
The judge awarded $296,510.66 to the building owners and ruled there is no setoff for the increased building value due to the tenant’s improvements.
It is basic real estate law, the judge explained, that a tenant’s improvements to a building become the landlord’s property when the tenant vacates.
Although the improvements made by subtenant Discovery increased the building’s value and helped the owners obtain the new radio station tenant, he continued, the owners do not have to set off or repay tenant Clinical Data for its subtenant’s improvements.
Therefore, the tenant improvements belong to the landlord at the end of the lease at no cost to the landlord, any repairs necessary after the subtenant moves out must be paid by the tenant who remained liable on the lease and there is no setoff against the tenant’s repair costs for tenant improvements, the judge ruled.
Based on the 1993 California Court of Appeal decision in Wolfen vs. Clinical Data, Inc., 19 Cal.Rptr.2d 684.
