Leave Partially Finished Basement?

[Brandon Eleazer]

The rental has a small finished room (dropped ceiling, Sheetrock) in the basement. There was water damage and the carpet was removed and mildew on the walls so the bottom portion of two walls was also removed.

Since there is no closet and window it can only be utilized as storage. Is it necessary to reinstall the carpets and repair the drywall? Im concerned that once the repairs are done the tenants will use it as a bedroom, which is unsafe.

Should this space be left as-is? what are some options? Thanks