Alterations and Improvements in Your Commercial Lease Agreement

You might find that you'll want to make some changes to your commercial space during your tenancy. Perhaps you want to add some built-in cabinets and shelving. Or, maybe you want to rip out the old carpet and install new tile flooring. While you'll make these changes during your commercial tenancy, you should prepare for these alterations before you sign your commercial lease.

Your commercial lease's Improvements and Alterations clause should address how you'll handle alterations should they come up.

What Is an Alterations and Improvements Clause?

An "alterations and improvements clause" is a section of a commercial lease that outlines how alterations and improvements to the commercial space will be handled by the landlord and tenant. This lease term should specifically address when you need the landlord's consent to make alterations to the commercial space.

Many commercial leases will simply say that you can't make alterations without the landlord's consent. A thoughtful landlord, however, will realize that restricting you so severely and saddling themselves with this amount of oversight is often unnecessary. Do they 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 them, because a modification of this magnitude will affect the value and leasing potential of their property long after you've 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 two categories:

• minor alterations (no permission needed), and
• all the other alterations (permission required).

As you divide alterations into these categories, remember that alterations and improvements are different from maintenance and repairs. Your commercial lease should have a separate clause to cover maintenance and repairs.

Your landlord's position on alterations will probably be consistent with their approach to tenant improvements. If the landlord insists on designing and constructing your improvements, or if they offered you a "building standard allowance" build-out and nothing else, don't be surprised if they demand similar control when it comes to alterations during the life of the lease.

On the other hand, if they happily turned the whole project over to you, and particularly if you paid for it, you can expect a more liberal attitude. You can find more about negotiating improvements in our article about the tenant improvement allowance (TIA).

Minor Alterations to a Commercial Space

One way to separate minor from major alterations is to provide, in the Alterations and Improvements clause, that any project that satisfies the following criteria is minor and doesn't need landlord approval ahead of time. All other modifications 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 isn't likely to care much about the change, and might 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 can disturb other tenants.

Doesn't 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 might not be able to rent the space for as much as they could have were the asset still in place.

No permits or variances are required. The 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 likely 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 to a Commercial Space

Your lease should address the possibility that you might want more than simple cosmetic work sometime during your tenancy. Typical lease language will require you to receive permission for all but minor changes. It's 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 says that the landlord will use reason when evaluating your requests for non-minor alterations during your tenancy. Inserting this language will mean that your landlord can't use a subjective standard. Instead, the landlord will have to use criteria that any businessperson in their 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 might candidly remind you that it's their property, and if they don't like the look of your shutters, they won't allow them, period. Your landlord could insist on having the "sole discretion" to evaluate your alteration plan. This standard will mean that they can say no for any or no reason. If the market is tight and the landlord has the upper hand, you might have no choice.

Help Negotiating Your Alterations and Improvements Clause

Negotiating the best terms for your commercial lease isn't without its challenges. You'll need to prioritize which terms are the most important to you and the success of your business. You'll likely concede to some of the landlord's demands to earn you leverage to bargain for terms that matter more to you.

For example, if you foresee needing to make lots of changes to your commercial space but your landlord is insisting on full unrestricted oversight, you might decide to agree to a longer lease term in exchange for a friendlier Alterations and Improvements clause.

Check out our article on negotiating the best terms for your commercial lease for an overview of common lease terms and tips on how to negotiate your commercial lease.

If you've never signed a commercial lease before or you're facing an experienced landlord, consider asking a local commercial lease lawyer for help in the lease negotiations. Your landlord will likely hand you a lease that favors their own interests. But an experienced attorney can help you identify these unfavorable terms and bargain for better ones.