Tenant improvements in commercial premises in Poland – settlement after commercial lease termination

What are tenant improvements in commercial premises in Poland?

By tenant improvements in commercial premises in Poland, one should understand expenses incurred in relation to the premises during the term of the lease. They may involve repairs, improvements, adaptation, modernisation or fit-out of the space in line with the tenant’s business needs.

In practice, tenant improvements most often include, among other things:

• construction of partition walls,
• finishing of floors,
• installation of suspended ceilings,
• installation of electrical, ventilation, air-conditioning or water and sewage systems,
• adaptation of the premises for restaurant, retail or service activity,
• installation of shopfronts, anti-burglary shutters, security systems, RTV systems or sound systems,
• renovation, repair, modernisation or fit-out works.

Not every expense incurred by the tenant will be settled in the same way. The key issues are the legal classification of the outlays and the wording of the commercial lease agreement in Poland.

Necessary, useful and luxury outlays – basic classification under Polish law

The Polish Civil Code distinguishes three basic categories of outlays:

• necessary outlays,
• useful outlays,
• luxury outlays.

This classification is of major practical importance. It affects who should bear the cost of particular works and whether the tenant may seek reimbursement of the expenses incurred.

However, in commercial lease agreements in Poland, the parties may regulate these issues differently. The provisions governing the settlement of outlays are largely dispositive, which means that the landlord and the tenant may introduce their own settlement rules.

A properly drafted commercial premises lease agreement in Poland should therefore clearly specify:

• what works the tenant may carry out in the premises,
• whether the landlord’s prior consent is required,
• who bears the costs of particular works,
• whether the tenant’s outlays are reimbursable,
• whether the tenant must remove the outlays after the lease ends,
• whether the landlord may retain the improvements without payment.

Necessary outlays on commercial premises in Poland

Necessary outlays are expenses required to keep the premises in a condition suitable for the agreed use. Polish case law assumes that necessary outlays are, in substance, repairs without which the leased premises are not fit for the agreed use. The point is to ensure an average, required condition of the premises, not to bring them to an above-standard level of finish.

Practical example from Polish case law:

“Necessary repairs of the leased object are repairs without which the thing constituting the subject of the lease is not suitable for the use specified in the agreement. Other repairs are minor outlays connected with the ordinary use of the thing and are borne by the tenant” (judgment of the Court of Appeal in Kraków, 1st Civil Division, of 19 January 2015, case no. I ACa 1427/14).

In practice, necessary outlays may include, for example:

• repair of electrical, gas or water and sewage systems,
• removal of serious technical failures,
• repair of building elements that determine whether the premises can be used,
• repair of a staircase or lift shafts if they affect the suitability of the premises for the agreed use,
• replacement of worn elements if their condition prevents the use of the premises,
• replacement of window joinery if the condition of the windows prevents proper use of the premises.

As a rule, necessary outlays are borne by the landlord, unless the parties provide otherwise in the commercial lease agreement.

It is important, however, that necessary outlays are not intended to raise the standard of the premises. Their purpose is to bring the premises to a condition allowing them to be used in accordance with the lease agreement. Therefore, not every modernisation or improvement of the standard will qualify as a necessary outlay.

When can a high standard of commercial premises affect the assessment of outlays?

In practice, it is not always easy to distinguish necessary outlays from useful outlays. The required standard of the premises under the agreement, their intended use, location, age, degree of wear and market conditions should all be taken into account.

A premium office unit, a retail unit in a shopping centre and a small service unit in an older building should not be assessed in the same way. The standard required for a particular premises should correspond to their typical purpose, market conditions, the tenant’s reasonable expectations and the general technical condition of the premises.

Polish case law has indicated that outlays bringing the premises back to their pre-damaged condition may be treated as necessary. In some circumstances, outlays that objectively serve a high standard of commercial premises may also be considered necessary if, without them, the premises could not be used in accordance with the agreed purpose. The prestigious location of the premises may also be relevant.

Practical example from Polish case law:

“In the circumstances of this case, only outlays bringing the leased premises back to their pre-damaged condition could be regarded as necessary, and possibly also such outlays which, generally speaking, serve a particular high standard of commercial premises and without which the premises could not be used for commercial purposes, but which – due to the potentially prestigious character of the premises located in the city centre, in historic underground spaces – could in the circumstances of this case be classified as necessary within the meaning of suitability for the agreed use” (judgment of the Polish Supreme Court of 29 June 2005, case no. V CK 751/04).

For that reason, the lease agreement should specify what standard of the premises the parties recognise as the starting point and which works are to be treated as the landlord’s obligation and which as the tenant’s individual adaptation.

Useful outlays and leasehold improvements in commercial premises in Poland

Useful outlays are outlays that increase the value or utility of the premises. They are not necessary for the premises to be used, but they improve the leased object.

The Polish Court of Appeal in Białystok, in its judgment of 12 April 2017, case no. I ACa 935/16, indicated that improvements should be understood as outlays which are not incurred out of a desire or necessity to keep the leased thing in a condition suitable for the agreed use, but with the intention of improving the leased object.

In practice, useful outlays may include, for example:

• modernisation of installations,
• adaptation of the premises to a specific business model,
• creation of additional rooms,
• raising the standard of finish,
• installation of equipment increasing the functionality of the premises,
• adaptation works increasing the value of the space.

In the context of commercial lease agreements in Poland, useful outlays are the category that most often leads to disputes. The tenant often treats them as an investment in the premises, while the landlord may argue that they were made exclusively for the purposes of the tenant’s specific business and should not be reimbursed.

The lease agreement should therefore precisely specify whether, after the lease ends, the landlord will:

• retain the improvements against payment,
• retain the improvements without payment,
• require the tenant to restore the previous condition of the premises,
• settle the outlays through deductions from rent,
• settle the outlays in another manner agreed with the tenant.

Luxury outlays and minor repairs borne by the tenant

A separate category consists of luxury outlays as well as minor outlays and repairs which, as a rule, are borne by the tenant. They are connected with ordinary use of the premises and keeping them in proper condition.

Such works may include in particular:

• minor repairs of floors,
• minor repairs of doors and windows,
• painting of walls and the inner side of the entrance door,
• minor repairs of technical installations and devices,
• ongoing maintenance activities,
• minor repairs of devices enabling the use of light, heating, water supply and drainage.

In commercial lease agreements in Poland, it is worth specifying which works are treated as minor tenant repairs and which require the landlord’s participation or consent. This helps reduce the risk of disputes during the lease term and when the premises are returned.

Why should a Polish commercial lease agreement regulate tenant improvements in detail?

The provisions of the Polish Civil Code do not always reflect the realities of the Polish commercial real estate market. Each premises may have a different character, technical standard, purpose and functional use, and may therefore require a different scope of adaptation, renovation or modernisation works. In addition, commercial premises in Poland are often handed over in an unfinished condition, while the tenant incurs high costs of adapting the space to its business.

If the lease agreement does not regulate outlays, after the lease ends a dispute may arise over whether the tenant has the right to reimbursement of costs, whether the landlord may retain the improvements and whether the tenant should restore the premises to their original condition.

The parties may therefore agree in the lease agreement, an annex to the lease agreement or a separate agreement concluded during the lease term on rules different from those resulting from the Polish Civil Code. In practice, lease agreements often provide that, after the lease ends, the tenant will leave in the premises certain elements such as partition walls, flooring, suspended ceilings, internal installations, shopfronts, anti-burglary shutters or technical elements permanently connected with the premises.

The lease agreement should therefore regulate at least:

• the definition of outlays and improvements,
• the procedure for obtaining the landlord’s consent,
• the scope of permitted works,
• project documentation,
• the procedure for acceptance of works,
• the method of settling outlays after the lease ends,
• the obligation to remove or leave improvements,
• liability for damage caused during the works.

Settlement of tenant improvements after termination of a commercial lease in Poland

Under Article 676 of the Polish Civil Code, if the tenant has improved the leased thing, the landlord may – in the absence of a different agreement – either retain the improvements against payment of a sum corresponding to their value at the time of return or require restoration of the previous condition.

This provision is particularly important where the lease agreement does not contain its own rules for settling improvements. In commercial leases in Poland, however, the parties usually depart from the statutory model and regulate their own rules in detail.

In practice, several basic models of settling tenant improvements are used:

1. The tenant removes the outlays and restores the premises to their original condition. This model is beneficial to the landlord where the works are closely connected with the activity of a specific tenant and do not increase the value of the premises for future tenants.
2. The tenant leaves the outlays and the landlord pays their value. This model may be used where the outlays genuinely increase the value of the premises and can be used by the landlord or the next tenant.
3. The tenant leaves the outlays without the right to remuneration. This is a common solution in commercial leases, especially where the parties assume from the outset that the cost of adapting the premises is economically reflected in the lease terms.
4. The outlays are settled through rent. The parties may agree that part of the outlays will be settled through reduced rent, a rent-free period or deductions from future payments.
5. A mixed model. Some outlays may be removed by the tenant, some may be left without payment and some may be financially settled.

Leaving this issue unregulated is usually the worst solution. The parties are then forced to rely on general provisions and interpret the nature of the works already after the lease has ended. In practice, this often leads to court disputes.

Improvements that cannot be removed without damaging the premises

Particular problems arise where the nature of the improvements is such that they cannot be removed without damaging or materially changing the substance of the premises, or where the cost of restoring the premises to their previous condition would be disproportionately high.

In such a situation, an argument may arise that the outlays have become a component part of the premises. This is particularly relevant in the case of costly adaptation, installation or finishing works.

Polish legal commentary indicates, however, that in relation to improvements the concept of the possibility of removing them without affecting the substance of the premises should be interpreted broadly. The aim is to ensure that the choice provided for in Article 676 of the Polish Civil Code does not become illusory and that the landlord is not automatically obliged to retain and pay for very costly improvements corresponding only to the individual preferences of the tenant.

For that reason, the parties should specify as precisely as possible which elements installed by the tenant may be removed, which must be removed and which will remain in the premises after the lease ends.

Shell and core commercial premises in Poland and tenant improvements

Special care should be taken where the premises are handed over to the tenant in a shell and core standard. This means that the tenant receives unfinished or partially prepared space to be arranged and fitted out.

In practice, premises in this standard may include, for example, main walls, screed under the floor and access to utilities in the premises, such as electricity, water, telephone connection or utility submeters.

In this model, the tenant often performs very costly works, such as:

• floors and flooring,
• suspended ceilings,
• electrical, sanitary, ventilation and air-conditioning installations,
• lighting,
• built-in structures,
• division of space,
• finishing and arrangement works.

Some of these works may be difficult or impossible to remove without interfering with the substance of the premises. The lease agreement should therefore clearly specify which elements of the fit-out remain in the premises after the lease ends and which elements the tenant must remove.

It is also advisable to specify whether the landlord will be obliged to make any payment for the retained improvements. The absence of such regulation may lead to a serious financial dispute after the lease ends.

Landlord’s consent to adaptation works and fit-out in Poland

From the landlord’s perspective, it is crucial that the performance of outlays by the tenant requires the landlord’s prior consent. This helps avoid a situation in which the tenant carries out costly improvements without the property owner’s control and then seeks reimbursement.

The consent should cover not only the very fact that works are to be carried out, but also:

• the scope of works,
• project documentation,
• the standard of materials,
• the schedule,
• contractors,
• the manner of conducting the works,
• occupational health and safety obligations,
• rules for acceptance of works,
• liability for damage.

In practice, it is worth providing that outlays made without the landlord’s consent do not give the tenant the right to claim reimbursement of their value. Such a clause limits the risk of the tenant independently making costly improvements and then relying on an increase in the value of the premises.

In the case of major adaptation works, it is worth considering a separate agreement or a detailed technical schedule to the lease agreement. Such provisions should be consistent with a fit-out works agreement for commercial premises in Poland.

Tenant’s liability for works carried out in the premises

If the tenant carries out works in the premises, the lease agreement should clearly define the tenant’s liability. This concerns both liability towards the landlord and liability for third parties to whom the tenant entrusts the performance of works.

The tenant should be obliged in particular to:

• perform works in accordance with applicable law, administrative decisions and approved project documentation,
• exercise due care and use materials of appropriate quality,
• obtain required decisions, consents and permits,
• engage contractors with appropriate qualifications,
• conduct works in accordance with health and safety rules,
• ensure proper construction management if required,
• hold civil liability insurance covering the works,
• repair damage caused by the tenant or its contractors.

The landlord may secure the performance of these obligations through contractual penalties, an obligation to remedy damage, the right to suspend works or the right to terminate the lease agreement.

If the lease is terminated early by the landlord due to the tenant’s fault, and the tenant is obliged to leave the improvements in the premises without reimbursement, this may constitute an important protection of the landlord’s interests. However, those consequences must be clearly and precisely regulated in the lease agreement.

Tenant improvements and security instruments in a Polish commercial lease agreement

The settlement of tenant improvements should be analysed together with other elements of a commercial lease agreement in Poland. In practice, the following may be particularly important:

• security deposit in a commercial lease agreement,
• bank guarantee in a commercial lease agreement,
• voluntary submission to enforcement by the tenant,
• rent indexation,
• rules for termination of the lease agreement,
• liability for returning the premises,
• the landlord’s right of set-off.

If the tenant is obliged to restore the premises to their previous condition, the landlord should consider whether the security deposit or bank guarantee also secures the costs of removing the outlays, remedying damage and bringing the premises into a condition compliant with the agreement.

It is also advisable to specify whether the landlord may set off its claims against the security deposit if the tenant does not remove the outlays or leaves the premises in a condition inconsistent with the lease agreement.

Tenant improvements and termination of a commercial premises lease agreement in Poland

The issue of tenant improvements is particularly important where the lease ends early. If the lease agreement is terminated before the agreed term, a dispute may arise as to whether the tenant has the right to settlement of outlays that it has not yet economically used.

This applies especially where:

• the tenant carried out costly adaptation of the premises,
• the lease agreement was concluded for a fixed term,
• the parties expected a long lease period,
• the outlays were to be settled through reduced rent or a rent-free period,
• the termination occurred due to the fault of one of the parties.

For this reason, the rules for settling tenant improvements should be linked with the provisions governing termination of a commercial premises lease agreement in Poland. Otherwise, doubts may arise as to whether the tenant is entitled to reimbursement of any part of the costs incurred.

Limitation period for claims for reimbursement of tenant improvements in Poland

Under Article 677 of the Polish Civil Code, the tenant’s claims against the landlord for reimbursement of outlays become time-barred one year after the return of the leased thing.

The return of the premises should be understood as the actual handover of the premises to the landlord, not merely the contractual date of lease termination. In the judgment of 25 May 2011, case no. II CSK 488/10, the Polish Supreme Court indicated that what matters is the actual return of the premises by the tenant to the landlord.

In practice, a handover protocol, the return of keys or another act confirming that the landlord has regained actual control of the premises may be important. Polish case law also indicates that the return of the thing may include a formal handover of the property to the landlord’s disposal if the landlord groundlessly refuses to accept it.

This limitation period is short. Therefore, in the event of a dispute concerning the settlement of tenant improvements in commercial premises in Poland, the tenant should act quickly, including by securing documentation regarding the scope of works, invoices, cost estimates, the landlord’s consents and the value of the improvements.

After the limitation period expires, the tenant should generally not attempt to circumvent this result by pursuing claims on another legal basis, for example unjust enrichment. Polish case law indicates that such a structure could lead to circumvention of the specific limitation period applicable to tenant claims for outlays.

Who settles tenant improvements after the sale of the property in Poland?

On the Polish commercial real estate market, premises and buildings may be sold during the term of a lease agreement. In such a situation, the landlord at the time when the tenant made the outlays may be different from the landlord at the time when the lease ends.

Under Article 678 § 1 of the Polish Civil Code, if the leased thing is sold during the lease term, the buyer enters into the lease relationship in place of the seller. As a result, claims concerning the settlement of tenant improvements may be directed against the entity that is the landlord at the time when the lease ends.

In transactions involving commercial real estate in Poland, it is therefore worth analysing not only the lease agreement itself, but also the documents concerning the sale of the property, the transfer of the landlord’s rights and obligations and any settlements between the previous and the new owner.

Tenant improvements in commercial premises in Poland – summary

Tenant improvements in commercial premises in Poland should be one of the key elements negotiated in a commercial lease agreement. This is particularly important where the tenant is to carry out costly adaptation works, fit-out works or modernisation of the premises.

The most important point is that the lease agreement should precisely specify:

• what works the tenant may carry out,
• whether the landlord’s consent is required,
• who bears the cost of the outlays,
• whether the outlays are reimbursable,
• what happens to the improvements after the lease ends,
• whether the tenant must restore the premises to their previous condition,
• what security instruments protect the landlord if the tenant fails to perform these obligations.

The absence of such clauses may lead to a dispute of significant financial value, especially where the outlays were made in high-standard commercial premises or in premises handed over in an unfinished condition.