When a commercial property is leased out for business on rent, the tenant 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 tenant and the landlord.
When you have rented your building to a tenant, 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 tenant when entering the property.
If the tenant 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 him to make use of the property for his 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 the 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 improvements by way of installing electrical, plumbing, and other utilities for the better use of the property.
Handling the legal problems with your tenant for the improvements made by him
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 tenant and handovers the property in a ready to occupy condition, some forms of improvements are needed for the tenant to settle in the property. He may have to complete works like installing phone lines, drawing of data cabling, and those for communication.
He will also be doing the installation of furniture and other fixtures that are necessary for his 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 airconditioning so that no extensive improvements by the tenant are required.
In this case, the tenant will make the improvements required at his own expense with the landlord’s proper approval. He can remove the improvements at the time of the move-out, and the landlord cannot be held responsible for these improvements.
On the other hand, if the property is just a “ Cold Dark Shell “ at the time of leasing out, then the tenant 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 tenant 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 tenant 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 tenant 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 improvements 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 improvements and when the tenant has to begin paying his rent.
It is also necessary for the tenant and the landlord to mention when the tenant improvements will be over and when the tenant can occupy the property and from which time his obligation to pay rent begins to run.
A landlord who has undertaken to complete the tenant improvements within a fixed timeframe and handover the possession of the property to the tenant is legally bound to execute the tenant improvements within the agreed time.
If there is any default in this respect, then the tenant has legal remedies available to him, ranging from the termination of the lease to 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 tenant for the loss suffered by him due to the non-completion of the landlord’s tenant improvements, which is one of the big risks involved in tenant improvements for the landlord.
Though the landlords may not like to impose upon themselves the tenants’ 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 tenant that improvements 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 tenant to complete the works on time and make the building ready to occupy. He has to start paying rent for the property from a particular date as agreed, irrespective of the fact whether he has completed the works or not.
When The Tenant Performs Improvements Post-Occupation
When the tenant has occupied the building and carries on some improvements for the better enjoyment of the property or necessary for the conduct of his business, he has to obtain written consent from the landlord for making the improvement works.
Whatever be the situation in the property, the tenant cannot make the improvements as he wishes, but they must be done only as per the lease deed after getting permission from the landlord.
When the tenant carries out improvements for his convenience that add lesser value to the property or causing 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 tenant wants to carry over the improvements, the landlord has to deal it within the corners of the lease deed as it will be mentioned in it:
- When a tenant can make improvements
- How he can make the improvements
- The time at which he can make the improvements
- The procedure he has to follow before starting the improvements
It is a common rule that the tenant has to obtain the consent of the landlord before starting tenant improvements. If the landlord finds that the tenant has not obtained his consent before starting the work, then he has to find out
- if the provisions of the lease deed to verify that all the clauses regarding the tenant improvements are properly included in the lease deed
- when the tenant has started the improvements and what they are planning to do
- if the work they are doing is harmful to the building
When the tenant has violated the terms of the lease by making the improvements without the landlord’s consent, he can take legal action against the tenant and stop him from proceeding with the work. He can get him to restore the building to its original state.
The tenant improvements that the tenant makes after getting the consent from the landlord can be allowed on condition that the fixtures if any added to the property by the tenant, must be removed by him at the end of the tenancy and the property restored to its original condition when it was leased out to him.
Thus, there are risks involved in tenant improvements to a landlord, and to avoid all these things pay more attention when you are drafting your lease deed and instruct your attorney to provide for each situation so that the rights of the landlord and tenant are well protected legally and the period of lease goes on without any problem till the lease is terminated.
Relevant Resources:
Things a Tenant Should Know About Commercial Leases
Tenant Improvements: How to Make Your Space More Retailer Friendly
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