By Simon Smith, Real Estate Department Partner, Fox Williams LLP
One of the pre-requisites for a property to be used as a data centre is, of course, a power supply which is large enough for that use. Typically a data centre will require power supply at least ten times larger than that of a normal warehouse or office use.
The cost of that enhanced power supply can be substantial and may be paid for by the data centre developer or by the data centre occupier which fits out the property for use as a data.
The rent payable by the occupier to its landlord will reflect a number of factors including the use of the property, the planning consent for the property and the power supply. If a developer who becomes the landlord has paid for the power then the rent will reflect the enhanced value of the property. A rough example is that a typical warehouse building without an enhanced power supply is likely to have a market rent of around £6 per square foot whereas the market rent with power and planning for use as a data centre is likely to be three times that amount.
If, however, the occupier/tenant has paid for the power supply should the fact that the property has the benefit of that additional power be reflected in the market rent when the rent is reviewed.
Standard rent review provisions in commercial leases invariably provide that a number of matters are to disregarded when setting a rent review. These include improvements carried out by a tenant to the property, in the absence of an obligation to its landlord to make those improvements. A tenant which fitted out a building as a data centre will therefore not have the cost of its works rentalised but this will not necessarily be the case with an increased power supply. Although the tenant has paid for that power there are no works to the property in connection with the additional power supply and therefore the fact that there is additional power will not be disregarded at rent review and may be taken into account when assessing the rental value of the property.
The recent case of Cordoba Holdings Ltd v Ballymore Properties Limited has highlighted this issue. Although the case concerned the reference of an arbitrator’s decision to the Court on a point of law, much of the evidence and the wording of the judgement show that where the tenant has paid for the power supply, unless the lease provides otherwise, the fact that the property has that power will be taken into account when assessing the rent resulting in a substantial rent increase. This case also makes clear that an appeal to the Court based on an arbitrator’s decision made on that basis is unlikely to succeed.
Owners and occupiers of data centres need to check their leases carefully well before the next rent review is due and their advisers should take particular care when drafting the rent review provisions in new data centre leases.
Simon Smith is a Partner in the Real Estate department at Fox Williams LLP. He can be contacted on 0207 614 2513 or firstname.lastname@example.org
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