Alterations and Improvements in Your Commercial Lease Agreement
You may find that you’ll want to make some changes to your space during your tenancy. Some of these changes may involve expanding your space—these eventualities are covered in Expansion Rights in Commercial Leases. Other changes will involve the space you already have. The Improvements and Alterations clause should address how you will handle alterations should they come up.
Many leases will simply state that you may not make alterations without the landlord’s consent. A thoughtful landlord, however, will realize that restricting you so severely and saddling himself with this amount of oversight is often unnecessary. Does he really want to be bothered when you decide to repaint your office? On the other hand, if you propose to cut a second stairwell from the first to the second floor, you can be sure that the landlord will want to be consulted. And in fairness, you ought to consult him, because a modification of this magnitude will affect the value and leasing potential of his property long after you have moved on.
As you and the landlord negotiate the alterations clause, you’ll want to come up with a system that identifies the kinds of alterations that will require the landlord’s approval and those that shouldn’t. A sensible method is to divide alterations into minor (no permission needed) and all the others (permission required), as explained below.
Your landlord’s position on alterations will probably be consistent with his approach to tenant improvements. If the landlord insisted on designing and constructing your improvements, or if he offered you a “building standard allowance” build-out and nothing else, don’t be surprised if he demands similar control when it comes to alterations during the life of the lease. On the other hand, if he happily turned the whole project over to you, and particularly if you paid for it, you can expect a more liberal attitude. (Tenant improvements, and the tenant improvement allowance, or TIA, are discussed in Tenant Improvement Allowance (“TIA”).
One way to separate minor from major alterations is to provide, in the Alterations clause, that any project that satisfies the following criteria is minor and does not need landlord preapproval. All others can be considered major (or potentially major). Here are the tests for minor work:
No significant impact on other tenants. If your alteration will not affect other tenants in the building, the landlord is not likely to care much, and may not need to be consulted. But if you want to install an exhaust system for your light industrial processes, the landlord will need to be consulted in case it produces noise or fumes that may disturb other tenants.
Does not decrease the value of the property. An alteration that doesn’t affect the value or rentability of the space is probably not too significant to your landlord. But if you propose removing an asset—for example, ripping out expensive track lighting—the landlord may not be able to rent the space for as much as he could have were it in place.
No permits or variances required. Absence of red tape is a blessing. The permit and variance process invariably involves the property owner. Because going to City Hall for a variance is often an expensive and time-consuming headache, the owner ought to be consulted first.
No impact on the structural integrity of the building. If your proposal would weaken the structure or adversely -affect the building’s systems (including plumbing and electricity), the landlord needs to be consulted. Temporary. An alteration that can be undone poses no lasting problem, and ought to be of little concern to the landlord.
If your lease clause defines minor alterations as suggested above, you should be able to perform them without the landlord’s consent. These alterations will almost always be cosmetic changes, involving paint, floor coverings, plastering, and window coverings.
All Other Alterations
Your lease should address the possibility that you may want more than simple cosmetic work sometime during your tenancy. In a sense, at this point you’re back where you were when you negotiated the improvements clause. The only difference now is that you’re already moved in.
Typical lease language will require you to receive permission for all but minor changes. It is reasonable that the landlord would want to reserve the right to view and approve your plans before work begins—whether your improvements occur before or after you move in. But you should bargain for a provision that the landlord will use reason when evaluating your requests for non-minor alterations during your tenancy.
Requiring the landlord’s reasonable consent will mean that she can’t use a subjective standard. Instead, the landlord will have to use criteria that any businessperson in her shoes would employ—and this excludes personal tastes. For example, it would be reasonable to block your plan to remove a load-bearing wall, because doing so has implications that any property owner would hesitate over. But it would be unreasonable to object to your installing shutters just because the landlord doesn’t like the color.
Many landlords will simply not accept the notion that they must be bound by an objective, reasonable standard when evaluating your requests concerning non-minor alterations. Your landlord may candidly remind you that it’s his property, and if he doesn’t like the look of your shutters, he won’t allow them, period. He may insist on having the “sole discretion” to evaluate your alteration plan. This will mean that he can say no for any or no reason. If the market is tight and the landlord has the upper hand, you may have no choice.
This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman