When a commercial property is leased out for business on rent, the tenant or lessee needs to improve the property either before occupying the property or after occupying it. Tenant improvements are always a contentious area in a leasing transaction. Unless the parties to the lease are careful in defining their rights and obligations, there may be disputes that have to be taken to a court of law involving a lot of time and money for both the lessee and the landlord.
When you have rented your building to a lessee, there are many circumstances in which disputes may arise between you. The tenancy is fully governed by the rental agreement or lease deed executed by the lessee when entering the property.
If the lessee undertakes some changes to the rented property without your consent or does something to which you have not consented, it leads to many risks involved In Tenant Improvement to you as a Landlord.
The Landlord Undertakes Tenant Improvements.
When a commercial building is rented out, the tenant requires certain changes and additions to be made to the property for them to make use of the property for their purposes. This depends on –
- Whether the property was old or new
- The property was previously occupied.
- The purpose for which the previous tenant used the property
- The use tenant wants to put the property now.
Minimum improvements will be needed if the property was previously rented for more or less similar uses. But if the property is new, it may need extensive modifications by way of installing electrical, plumbing, and other utilities for the better use of the property.
Handling the legal problems with your lessee for the improvements made by them.
When handling the legal disputes for tenant improvements in a leased-out property, the questions of
Who is Doing What? Who is Paying for What?
Assume the greatest importance and the legal for tenant improvements are wholly standing out for finding the right solutions for the above two questions.
Even in a turnkey buildout situation where the landlord himself completes everything that is needed by a lessee and handovers the property in a ready-to-occupy condition, some forms of modifications are needed for the occupant to settle in the property. They may have to complete works like installing phone lines, drawing data cabling, and those for communication.
They will also be doing the installation of furniture and other fixtures that are necessary for their business on the premises. In such cases, the building is said to be handed over for tenancy as a white box with finished doors, walls, ceiling, floor, heating, and air conditioning so that no extensive improvements by the tenant are required.
In this case, the lessee will make the alterations required at their own expense with the landlord’s proper approval. They can remove the improvements at the time of the move-out, and the landlord cannot be held responsible for them.
On the other hand, if the property is just a “ Cold Dark Shell “ at the time of leasing out, then the lessee has to make extensive improvements to the property to make it occupiable as the property will be taken on the lease without any heat, light or finish just as a demised space.
In this case, if the landlord and lessee agree in the lease deed how these works are to be executed in the lease deed, then the liability for these works will be fully governed by these terms in the lease deed.
When The Landlord Makes The Tenant Improvements
In all the cases where the landlord is making the tenant improvements, they need to be mentioned in the lease deed in express terms as it is necessary to clarify many grey areas in the lease transaction. This helps both the lessee and the landlord understand the things covered under the lease deed and the building’s shape to expect from the landlord.
In such cases, it will be easy for the occupant to list out the necessary things to perform on the property as improvements.
To avoid all the legal issues that may arise at a later time –
The lease deed must contain detailed descriptions of the alterations by way of clear “Building Standard “ layouts, materials, and finishes. Yet, one of the risks involved in tenant improvements that may arise in this situation is the time at which the building will be ready for modifications and when the tenant has to begin paying their rent.
It is also necessary for the occupant and the landlord to mention when the tenant improvements will be over when the occupant can occupy the property and from which time their obligation to pay rent begins to run.
A landlord who has undertaken to complete the tenant improvements within a fixed timeframe and hand over the possession of the property to the occupier is legally bound to execute the TIs within the agreed time.
If there is any default in this respect, then the occupant has legal remedies available to them, ranging from the termination of the lease to a holdover of the rent that is due under the lease for the period of non-delivery.
The landlord may also become liable to pay compensation to the occupant for the loss suffered by them due to the non-completion of the landlord’s tenant improvements, which is one of the big risks involved in TIs for the landlord.
Though the landlords may not like to impose upon themselves the occupier’s financial liability for the failure to complete the tenant’s improvements on time, there are clauses included in the lease deed providing for rent waiver during the extended period of non-completion of tenant improvements in the leased property.
In this case, these clauses are added to the lease deed as a way to assure the occupant that renovations will be made on time by the landlord.
Tenant Making Improvements Before The Occupation
In cases where the tenant himself undertakes the tenant improvements in the property before occupying the property, it is common to see some time gap during which the tenant undertakes the improvement works, and rental payment stands suspended during this time.
So, it becomes necessary for the lessee to complete the works on time and make the building ready to occupy. They have to start paying rent for the property from a particular date as agreed, irrespective of the fact whether they have completed the work or not.
When The Tenant Performs Improvements Post-Occupation
When the lessee has occupied the building and carries on some improvements for the better enjoyment of the property or necessary for the conduct of their business, they have to obtain written consent from the landlord for improvement works.
Whatever the situation in the property, the lessee cannot make the renovations as they wish, but they must be done only as per the lease deed after getting permission from the landlord.
When the tenant carries out improvements for their convenience that add lesser value to the property or cause damages to the rented property, the landlord can take legal action to stop such works.
How Landlord Should Deal With Tenant Improvements Post-Occupation
When the lessee wants to carry over the improvements, the landlord has to deal with it within the corners of the lease deed as it will be mentioned in it:
- When a tenant can make improvements
- How they can make the improvements
- The time at which they can make the improvements
- The procedure they have to follow before starting the improvements
It is a common rule that the lessee has to obtain the consent of the landlord before starting tenant improvements. If the landlord finds that the lessee has not obtained their consent before starting the work, then they have to find out –
- If the provisions of the lease deed verify that all the clauses regarding the TIs are properly included in the lease deed
- When the lessee has started the commercial renovations and what they are planning to do
- If the work they are doing is harmful to the building
When the lessee has violated the terms of the lease by making the improvements without the landlord’s consent, they can take legal action against the lessee and stop him from proceeding with the work. They can get them to restore the building to its original state.
The tenant improvements that the lessee makes after getting the consent from the landlord can be allowed on condition –
The fixtures, if any added to the property by the occupant, must be removed by them at the end of the tenancy and the property restored to its original condition when it was leased out to them.
How to Handle Legal Disputes with Tenant Improvements
- First, read your lease carefully. Understand exactly what the lease says about when and how a tenant can go about making improvements on the property. If the tenant has already begun to make improvements, find out when they proceeded and what are their plans. Some commercial leases do not permit tenants to make improvements without asking your permission first.
- Second, check if the tenant has violated the lease by making improvements that are not provided for in the lease. You have a legal right to stop them from continuing and to have your property restored to its original state. This is when you need to contact your lawyer to determine what the best course of action will be.
- Third, communicate with the tenant that you intend to take legal action against them if they do not stop making illegal improvements and restore the building to its original state. Sometimes, by talking to the tenant directly, you can avoid having to take legal action and save yourself time and money.
Drafting a Lease With a New Tenant
When drafting a lease with a new tenant, you and your lawyer should mention that a tenant is required to ask permission before making improvements so you can determine whether they are in the best interest of the property. Specify that any trade fixtures or additions to the property required for the tenant’s business must be paid for by the tenant and removed when the lease ends. The lease should also specify that if the tenant engages in improvements, they are liable for any issues, such as worker injuries, that occur during the construction process.
Carefully drafting a lease is the best way to prevent unwanted improvements by tenants. Talk to your lawyer before drafting the lease or if you need to take legal action against a tenant.
Conclusion
Thus, there are risks involved in tenant improvements to a landlord, and to avoid them pay more attention when drafting your lease deed. Instruct your attorney to provide for each situation so that the rights of the landlord and lessee are protected legally. This ensures that the period of the lease goes on without any problem till the lease is terminated.
Constructive Solutions, Inc. is a commercial general contractor possessing decades of experience in accomplishing build-outs, tenant improvement projects, renovations/remodels, ground-up construction, and several other commercial building projects.
Contact our team today to discuss your tenant improvement project.
FAQs
What is the tenant improvement allowance?
Tenant improvement allowance (TIA) is the agreed-upon sum of money a landlord spends on the alterations done to a leased space by the occupier. Usually, it’s stated as per-foot amount or total dollar price.
How can tenants and landlords avoid legal disputes related to TIs?
Open and transparent communication between the landlord and the lessee, documenting agreements in writing, and performing timely inspections can avoid legal risks in tenant improvements. One should also seek legal advice for risk management strategies.
Can tenants seek legal counsel while undertaking tenant improvements?
Yes, it is advisable for tenants to consult an experienced commercial real estate attorney on how to approach the landlord and seek guidance on lease compliance. Lawyers can help lessees add favorable clauses to the contract and negotiate a profitable tenant improvement deal with the landlord.
Relevant Resources:
How to Choose the Right Tenant Improvement Contractor in San Francisco?
Tips on How to Control Office Tenant Improvement Project Costs
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