Improvements for Your Commercial Space

By , Attorney · Santa Clara University School of Law

Most often, any space you rent will need to be fixed up or modified before it's suitable for your use. This may range from the simple (repainting a few walls) to the complex (installing a brand-new kitchen in your restaurant space) to everything in-between (installing lighting and electrical outlets). Your lease is the place to spell out all the details, usually in a clause called "Improvements and Alterations." Both terms refer to the work that's done at the start of your tenancy; "alterations" may be used to refer to work that you may want to do during your tenancy.

Improvements Versus Trade Fixtures

It's important to understand the difference between "improvements" and "trade fixtures." Basically speaking, the landlord keeps the former; you take away the latter. Everything attached to the building or grounds is considered an improvement that becomes the property of the landlord, unless you and the landlord decide otherwise. With the exception of trade fixtures, items that are built, screwed, nailed, or bolted into the premises or painted onto the walls become the landlord's, no matter who paid for it.

What qualifies as a trade fixture

Tenants may remove trade fixtures—business items attached to the property, such as tools, signs, and portable equipment—but only if specific criteria are met:

  • trade fixtures must be paid for by the tenant.
  • trade fixtures must not become an integral part of the structure (that would be expensive to remove), and
  • removing trade fixtures must not cause undue (read "expensive") damage to the property.

Protecting your trade fixtures

To avoid uncertainty and future legal disputes regarding the fate of your fixtures, you may want to include a separate clause entitled "Trade Fixtures," which lists those items you intend to bring in, including how you plan to affix them to the property. Then, come to an understanding as to what will happen to your trade fixtures when the term ends. You may decide to leave them behind, but negotiate for compensation from the landlord. Or, you may want the right to take the trade fixtures away, but will agree to pay the landlord for the cost of returning the property to its original condition.

Improvements to Your Commercial Space

How improvements get done is all negotiable, and the details of your agreement should be nailed down in your lease.

Who designs tenant improvements

If your business will require special space configurations and specific equipment—such as work stations for a light industrial operation—you may have already engaged a space planner to evaluate the suitability of the property, or hired an architect to formalize your design. On the other hand, if your needs are simple (such as new window coverings), you may not have bothered much with the details. Whether your requirements are complicated or straightforward, designing your space may not be something that you even want to do. If you haven't yet spent time designing the space, you'll need to decide whether you or the landlord will take on this task.

In most small business leasing situations, it pays for you to have the landlord design the space. The landlord is apt to be more familiar with the process than you, or may want a uniform look to the building. If the landlord will do the designing, be sure that the lease gives you the right to view and approve the plans before any work begins.

If your needs are complicated or sophisticated, you may want to do the design work yourself (or hire someone to do it), assuming the landlord allows this. If you do the designing, expect that the landlord will need to approve your plans before you begin, to make sure that you're not going to adversely affect the building's structure or its systems or other tenants in the building.

Who does the work

In most situations, the landlord will prefer to perform the actual construction, even if you're the one handling the design, especially since the landlord's own contractors are probably familiar with the building structure and systems.

If you want to coordinate the construction of your improvements, which will give you an element of control (over work schedules, workers, and materials), be sure that you have the time and expertise to oversee the work. If the job is minor, you may want to take it on; but if you are contemplating significant additions or changes to the space, you may find yourself in over your head.

Before agreeing to give a tenant control over any improvements projects, a careful landlord will require you to:

  • carry workers' compensation and liability insurance
  • post a bond (often at great expense) which will cover completion costs in case you mismanage the job or run out of money, and
  • promise to protect the landlord against "mechanics' liens" on the property (placed by workers or suppliers who have not been paid), resulting in a "cloud on the title" to the property and major legal hassles for the landlord.

You will need to decide if these legal entanglements are worth the benefits of controlling the improvements projects. It may be wiser to turn the job over to the landlord.

Who pays for the improvements

Regardless of who actually does the work, you and the landlord must decide how to pay for it. Typically, the landlord will give you an amount of money (a fixed amount or a per foot amount) known as a tenant improvement allowance (TIA). If the improvements cost more than the TIA, you pay the extra.

An alternative, especially in new buildings, is the building standard allowance, or "build-out," in which the landlord offers you a set of improvements (such as a certain grade of carpeting or a specified number of drywall partitions) that are available to every tenant.

This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman.

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