Leasing 101: Tenant Alteration Rights
Generally speaking, a tenant should be allowed to have control over the aesthetic design and construction standards of its leased premises.
Subject to a landlord’s signage and construction requirements, certain prior approval from landlord, and applicable law, the tenant should be able to decorate, improve, and renovate its leased premises, the storefront façade, and the store’s signage in such ways that tenant feels necessary for its business operation.
Landlords typically will want to have review and approval rights over tenant alterations in the premises. The logic is straightforward: the landlord owns the building and wants to know what the tenant is doing to the building.
That said, there are a few things to keep in mind:
1. Reasonable Review. The review period should be of a reasonable length that allows landlord to review the plans but short enough to not unnecessarily delay tenant.
2. Structural Changes, Exterior, and Roof. Landlord’s review and consent should be limited to structural changes and alterations affecting the roof and the exterior of the building. Structural alterations are, by their nature, significant alterations, and it is reasonable for landlord to have oversight.
In most cases, if anyone but an authorized landlord party makes adjustments to the roof, the roof warranty is automatically void. So, it makes sense for a landlord to be involved when the roof is at issue.
The exterior of the building is a significant item in retail because of the architectural and design standards for the retail center. Landlord will want to maintain a uniform design throughout the center to maintain a uniform “feel” for the shopper’s experience. There almost always is not an issue when landlord’s consent is required for these types of items.
3. Cosmetic Changes. Landlord should not have a review and consent right if tenant is only making cosmetic or non-structural alterations. Picture hanging, painting, new carpeting, and other similar items are relatively minor items, and a tenant should enjoy unfettered control and dominion over the interior of the leased premises.
Sometimes tenant’s right to make alterations without landlord’s consent is negotiated as a cost threshold. For example, ‘tenant may make non-structural, cosmetic alterations costing less than $25,000.00 in the aggregate without landlord’s consent.’ Language like this usually is a reasonable way to compromise and finalize this provision in the lease.
4. Good Faith and Fair Approval Rights. Landlord’s review should be reasonable, and its consent should not be unreasonably withheld, conditioned, or delayed. The parties should be operating in good faith, and landlord should not be able to use its consent right as leverage to get tenant’s agreement in a separate, unrelated matter.
5. Review Fees. Landlord review fees should be eliminated or capped. In any event, the potential cost should be contained. One way to contain the review fees is to limit them to landlord’s actual out-of-pocket costs paid to third parties as part of its review and consent.
6. Abandonment. Tenant should have the right to abandon the improvements and fixtures at the end of the term. Tenant should have the right to remove its personal property and trade fixtures. If landlord insists on the right to have tenant remove the improvements at the end of the term, this right should be exercised at the time landlord grants its consent, and if landlord does not require this at that time, then tenant should have the right to abandon.
In this way, tenant will know at the time of installation of the fixtures whether it will have to remove them at the end of the term. The tenant may be able to treat the fixtures differently from a tax perspective depending on whether it has to remove them or can abandon them.
A tenant needs to consider alteration rights because, at some point during the length of the lease term, it likely will want to update its premises or make changes to its operations. By negotiating these rights before its signs the lease, the tenant will be able to better manage its operations and costs.
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