Improvements Made by the Tenant and Their (Dis)similarity to Unjust Enrichment

Compensation for the increase in value

Compensation for an increase in value comes into play where the tenant has altered the leased object with the landlord's consent without thereby acquiring a right to reimbursement of costs. The rules essentially express the principle of unjust enrichment, although both the literature and the case law point to several differences. The right to recover the equivalent of the amount by which the value of the leased thing has increased arises only on termination of the lease, not upon performance. It becomes time-barred under the general rules, not under those governing unjust enrichment.1,2) The case law on technical improvements, and on reimbursement of costs, has been settled since the days when Act No. 40/1964 Coll. was in force, and some provisions of the new Civil Code draw directly on it.

Unlike the determination of the amount of unjust enrichment, what matters for determining the increase in value is not the moment when the leased object is altered (improved and so forth), but the moment the lease ends. That applies to the extent of the alterations, their condition at the end of the lease and the prices used in quantifying them.3) Only permitted alterations are taken into account in determining the increase in value; any diminution in value resulting from unpermitted alterations, or damage caused by other misuse of the thing, is not. Account must also be taken of the extent to which the tenant has separated out what he brought in under Section 2225(2) of the Civil Code (on handing over the thing, the tenant separates out and takes everything he has put into or brought onto it at his own expense, where this is possible and does not impair the substance of the thing or unreasonably hinder its use).

The tenant's right to payment for the increase in value arises against the landlord when the lease ends, irrespective of whether the landlord knew of the alterations carried out. Any rights the landlord may have against the transferor on account of defects remain unaffected.

Where permitted alterations diminish the value of the leased thing, the landlord acquires no rights, since the diminution occurred with his consent. The position is different where the alterations were carried out defectively; the landlord is then entitled to compensation.

Reimbursement of costs

The tenant alters the leased thing at his own expense. He is entitled to reimbursement of costs only where the alterations to the leased object were carried out with the landlord's consent and, self-evidently, where the landlord undertook to reimburse them4). The landlord may assume that obligation in the lease or in another contract.

The contract may specify which costs the landlord will pay, to what extent and for what. Payment of the costs associated with alterations to the thing is governed primarily by the contract between landlord and tenant. The reference to payment of costs suggests that only sums of money are at stake, but the tenant's costs comprise not only the sums he has paid to suppliers but also his own materials and the work he has put in.

Unlike the previous rules (Section 667(1) of Act No. 40/1964 Coll., the Civil Code), the statute no longer provides that the right to reimbursement of costs arises only at the end of the lease, after deduction of any diminution of the alterations occurring in the meantime through use of the thing. Unless the parties agree otherwise, the right to reimbursement of costs arises under the rules governing contracts for work, as the closest analogy, that is upon completion of the alteration (Section 10 in conjunction with Section 2610). The contract may set a different moment, for example in the form of a reduction in the rent by a given amount.

The right to reimbursement of costs arises against the landlord with whom the contract was concluded. It arises against a successor in title only where the rights and duties under that contract passed to the new landlord on the conditions laid down in Section 2221(2) of the Civil Code (provided the debt did not arise earlier and that the successor knew of the consent to the alteration)5).
The right to reimbursement of costs becomes time-barred in the general limitation period, as does any other contractual debt.

Removal of unpermitted alterations (alteration of the thing without the landlord's consent)

Where the tenant alters the leased thing without the landlord's consent, he must restore it to its original condition. That duty also applies where the unpermitted alterations were carried out by a person to whom the tenant allowed the use of the thing (a sub-tenant). The tenant must remove the unpermitted alterations, but he need not return the leased object in the condition in which he took it over. The agreed manner of use of the leased object must always be taken into account, or at the least ordinary wear and tear. What matters is the removal of the unpermitted alterations. During the lease this duty falls due immediately upon the landlord's request, though the landlord may allow a longer period. Otherwise the tenant must restore the original condition at the end of the lease, and no request from the landlord is then needed. The statute does not expressly address the possibility that the landlord does not seek restoration of the original condition even at the end of the lease; yet even absent a specific rule, the landlord may release the tenant from his debt (Section 1995 of the Civil Code). The tenant may restore the original condition at any time, even without a request from the landlord6).

The tenant bears the costs of restoring the original condition. It is immaterial that, in the particular case, restoring the original condition costs the tenant more than carrying out the alteration to the leased thing did.7)

The tenant has no right to claim unjust enrichment in the form of the increase in value of the leased object (Section 2991 of the Civil Code), nor the costs purposefully expended by way of unauthorised agency of another's affairs for the landlord's benefit (Section 3009 of the Civil Code), even though the original condition has not been restored. This is the tenant's debt. In the rules on the lease of a flat or a house the statute says so expressly (Section 2293 of the Civil Code). Any other reading would, moreover, wholly efface the distinction between alterations carried out with and without the landlord's consent. Restoring the original condition is in substance a restitutionary form of compensation for the damage actually caused by the unpermitted alterations to the leased object. The tenant separates out and takes everything he has put into or brought onto the thing at his own expense, where this is possible and does not impair the substance of the thing or unreasonably hinder its use. Unpermitted alterations may, however, amount either to damage to the leased object or to an increase in its value, and it cannot be accepted that the landlord's right should lapse by preclusion in the one case and not in the other, although its content is essentially the same. Only the general limitation period therefore applies to the exercise of the right to restoration of the original condition following unpermitted alterations to the leased object.8)

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1) Decision of the Nejvyšší soud (Supreme Court), file no. 28 Cdo 314/2004
2) Decision of the Nejvyšší soud (Supreme Court), file no. 26 Cdo 1174/2017
3) Decision of the Nejvyšší soud (Supreme Court), file no. 28 Cdo 897/2008
4) Decision of the Nejvyšší soud (Supreme Court), file no. 28 Cdo 1138/2005
5) HULMÁK, Milan. Section 2221 [Change of ownership of the leased thing]. In: HULMÁK, Milan et al. Občanský zákoník VI. Závazkové právo. Zvláštní část (§ 2055–3014). 1st ed. Prague: C. H. Beck, 2014, p. 297, marg. no. 27.
6) HULMÁK, Milan. Section 2220 [Alteration of the leased thing by the tenant]. In: HULMÁK, Milan et al. Občanský zákoník VI. Závazkové právo. Zvláštní část (§ 2055–3014). 1st ed. Prague: C. H. Beck, 2014, p. 291, marg. no. 31.
7) HULMÁK, Milan. Section 2220 [Alteration of the leased thing by the tenant]. In: HULMÁK, Milan et al. Občanský zákoník VI. Závazkové právo. Zvláštní část (§ 2055–3014). 1st ed. Prague: C. H. Beck, 2014, p. 292, marg. no. 32.
8) HULMÁK, Milan. Section 2220 [Alteration of the leased thing by the tenant]. In: HULMÁK, Milan et al. Občanský zákoník VI. Závazkové právo. Zvláštní část (§ 2055–3014). 1st ed. Prague: C. H. Beck, 2014, p. 292, marg. no. 34.