Improvements

Hello landlords and tenants. I’m here to discuss “improvements” and what that means in a commercial real estate lease. My name is Jenna Zebrowski and I am the attorney behind LawByJZ.com. Improvements are going to be defined as anything that’s added to the leased premises that increases its value, ranging from paint and paper to installing an HVAC or other building systems.

These improvements could be created or paid for by the landlord or the tenant. The commercial lease will tell you more!  It will also tell you about the ownership of the improvements at the end of the lease term, you might not own it, tenant, even if you installed it. The landlord might have the right to tell you what to take out, or what to leave in, and it might not be what you expected. The landlord might be nice enough to contribute some money to help you pay for these costs- but how are you going to know if it’s enough to cover your costs?

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Commercial Real Estate Case Study

Improvements- Do They Stay or Do They Go?

Lyle looked long and hard for his perfect location. His medical lab setup was expensive because it required special air filters for the chemicals his employees used in their work.  Finally found a space that was big enough for all of his equipment and alandlord that would allow him to install the special air filtration system his location required. 

When the lease ended, Lyle wanted to move his lab to a different location, that had yet more space, and he wanted to take the air filtration system with him.  He needed it to continue operating his lab and while it would be expensive to remove, it would be impossible to operate in his new location without it.

When Lyle told his landlord he wanted to remove the air filtration system, the landlord said no, because it was installed and now part of the building as an improvement that had to stay behind after the tenant left.  Removing it would also be too expensive and inconvenient to the other tenants in the building if it was removed.

Lyle hired an attorney when he negotiated his lease, and told the attorney that the air filtration system was very important to his business.  The attorney verified that the system would be considered a fixed improvement.  It increased the value of the space and it was part of the structure, since it was built into the ventilation system of the building.  As an improvement, it did have to be left behind, but the lease also stated that the landlord would compensate Lyle for the cost of the improvements left behind!  The amount was even written right into the lease, so there was no negotiating what the price would be.

This worked for both parties in the agreement. The landlord was able to keep Lyle from ripping out the air filtration system, and was therefore its proud new owner, and the new tenant, which was in a similar medical field, paid a higher rent for the space because they were able to use the already-installed air filtration system. The landlord paid Lyle enough money to leave the system behind that when he moved to his new location, the new air filtration system he wanted to install was heavily subsidized.  Lyle also didn’t have to pay for the cost associated with removing the old system and repairing the damage. The savings meant he could upgrade the new system so he could perform more sensitive work due to the increase capabilities of the air filtration system.