“Learning About How Tenants Should Make Alterations To A Space For Rent” written by Mike Marko
Do you want to minimize the damages caused by alterations and improvements made by your tenant?
Most commercial space for rent is used for business purposes. In this kind of business, tenants will ask if they can make alterations and improvements to the rented property. But this doesn’t mean that you’ll allow these tenants make the alterations and improvement.
The changes may be either good or bad for your space for rent. This means that you have to make sure that the changes would only improve the property.
That’s where the alterations and improvement clause in the lease agreement comes into play.
That’s why in today’s article we’ll be talking about the alterations and improvement clause that you should have in the commercial rental agreement.
The Alterations And Improvements Clause For Commercial Space For Rent
Rental or lease agreements traditionally include everything about the tenancy. It also includes the ability that the tenant may have in making improvements or changes to the commercial property. Most commonly, these types of issues are negotiated and listed or are included in the terms, policies, or rules for renting the property.
Rental and lease agreements vary greatly between residential properties and commercial properties. The reasons for these differences is there’s a big difference between renting a residential property and a commercial property.
Usually, most residential lease or rental agreement is for short-term rentals and require the tenant to leave the property as it was rented to them. Most residential leases prohibit the tenants from making changes to the rented property. Commonly, residential tenants are only allowed to make at least minor changes like painting walls or changing carpets within the rental.
This rule is completely different from a tenant that’s renting a commercial space.
When a commercial company is considering a space for their business operations and location, they look for a property that will meet the needs of their business. Often, commercial businesses seek long-term stability and leases that are commonly 2 years to 10 years in duration.
Most commercial businesses want to customize the rental property to meet the needs and look for their business and customers. So it is common for a commercial lease to include the terms and ability for the business renting the space to make changes to the rented space.
The most common way to ensure that a commercial business can customize the rental space for their operations is to include alterations and improvement clause in the commercial lease that they negotiate. Often alteration and improvement clauses could either be good or bad for your commercial property management business.
That’s why we’re going to discuss in detail the positives and negatives regarding the alteration and improvement clause on a commercial space for rent agreements.
What Is The Alterations And Improvements Clause
The alteration and improvement clause is a clause in a commercial lease that allows the tenant to make changes to the rented property. However, when the clause is negotiated it commonly comes with the need for final approval and written consent from a property manager or landlord before tenants start making alterations.
When the lease agreement allows for alterations, as the property manager, you must oblige your tenant to follow the required rules in making changes. To maintain the value of the property and to ensure that work is done according to negotiated terms, you need to make sure that all work is done properly and under established work schedules.
Without oversight of alterations, you could run the risk of irritating or disturbing your other tenant’s business that also occupies the commercial property.
Also, if you’re allowing major or minor alterations to your property, you need to make sure you have a system that would set the different kinds of alterations so that these alterations can be easily approved or disapproved.
When negotiating or setting the rules on your alteration and improvement clause, it is advisable to know how the different kinds of alterations would affect your commercial space for rent business.
Minor alterations are normally done to the interior of the rental space and do not affect the structure or function of the commercial rental space. Often, only minor alterations are allowed because major alterations could heavily affect your space for rent.
Let’s take a look at common minor alterations to commercial rental space and their effects.
No Significant Impact On Other Tenants
When writing and negotiating the alteration clause, it is advisable to list the minor alterations that could be done by your tenant. You should include all kinds of alteration that would rarely affect your other tenant’s business.
Painting, changing carpets, customizing interior walls and offices for use are all minor changes that would not affect other building tenants.
Minor alterations should be the changes that could be done in the space for rent even without consulting it to you.
Does Not Decrease The Value Of The Property
Aside from the disturbance effect of a planned alteration, the minor changes that you negotiate into the commercial lease should not affect the value or the rentability of the property. However, we would still highly advise that any alteration is required to have final approval to ensure that building value or property values will not be affected by the minor alterations proposed.
No Permits Or Variances Required
Minor alterations are normally identified within the commercial lease agreement as changes to the property that do not require any kind of permits or variances. The permit and variance process invariably involves the property owner and both of these are expensive and time-consuming.
The loss of work times are normal reasons cited by commercial property owners is why they normally do not allow any alterations that require permits or variances.
No Impact On The Structural Integrity Of The Building
When your tenant wants to do some alterations to the rented space, you need to make sure that it would have no impact or effects on the structural integrity of the building. If your tenant’s plans would weaken the structure or adversely affect the building’s systems, it is better to consider its effects and outcomes first before approving such an alteration.
Minor alterations normally could be undone and it would not pose any kind of problem that would concern you or the structural integrity of the commercial building they are renting...
Improvements To The Space For Rent
Specific and clear details about any major alterations and improvements are very important to be negotiated and approved prior to the signing of commercial lease agreements. To cover all aspects of improvements or alterations to rental spaces, you need to make sure that those details are provided in the alterations and improvement clause of the commercial lease signed.
Take a look at the details that you should include in your alteration clause.
Who Designs Tenant Improvements
It is important to state who will design the changes that will be made in the rented space.
In most small business leasing situations, the property manager or landlord would help the tenant design and complete the rented space prior to the business moving into the rented space. However, since making your tenants satisfied is a high priority, improvements or alterations should be jointly approved and agreed upon before you start making the alterations.
If the tenant will desire to design the space, you should also require the tenants to get your written approval in their plans before they begin. This will ensure you that your tenant will not adversely affect the building’s structure or its systems or other tenants in the building with the changes they would make.
Who Does The Work
It is also important to state in your clause who does the work.
If the tenant wants to coordinate the construction of the improvements which normally allows them to have a complete control of the alteration you need to consider the following. Before giving your tenant the control over any improvements projects, you should require them to:
- carry workers’ compensation and liability insurance for workers doing improvements
- post a bond which will cover completion costs in case the planned alteration didn’t go well
- ensure you that you’ll be protected against “mechanics’ liens” or other major legal hassles
Who Pays For The Improvements
Most importantly when negotiating improvements or alterations into commercial lease agreements you should state in your clause who will pay for the improvement and alterations.
You and your tenant should discuss this matter thoroughly. Usually you can give the tenant an amount of money known as a “Tenant Improvement Allowance” for paint and other minor alterations. However if, the tenant wishes to completely change or alter the space and the improvements exceed the TIA then the tenant would pay the extra expenses.
You can also offer the tenant the building standard allowance or “build-out”. However, this is only offered if the property is newly constructed.
Final Thoughts On Tenant’s Alterations To A Space For Rent
When renting out a space for rent, property managers like you will normally encounter tenants who will seek to do some alterations and improvements on the property. When this happens, you have to make sure that the alterations and improvements that they desire to do will not bring a negative effect on the space for rent.
This is why today we talked the alterations and improvements clause in a lease agreement. This clause can help property managers in regulating how tenants making alterations and improvements in the space for rent.
The specific details when it comes to any major alterations should be negotiated and approved first before a tenant could proceed with doing it to the space for rent. This includes who designs, works on, and ultimately pays for the changes.
Comment below if you have any questions or additional ideas about the alterations and improvements clause in a lease agreement.
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