For the prior video in this series covering the ownership rights of property improvements when a tenant vacates, click here.

Further-improvement provisions in a commercial lease

Commercial lease agreements typically contain a further-improvements provision allowing the landlord to either:

  • retain tenant improvements and alterations made by the tenant; or
  • require restoration of the property to its original condition on expiration of the lease. [See RPI Form 552]

Further-improvement provisions usually include clauses stating:

  • who will make the construction of improvements (landlord or tenant);
  • who will pay for the construction of the improvements (landlord or tenant);
  • the landlord’s consent is required before the tenant makes improvements;
  • any mechanic’s liens due to improvements contracted by the tenant will be removed by the tenant;
  • the condition of the premises on expiration of the lease; and
  • whether and on what conditions the improvements are to remain or be removed on expiration of the lease.

Improvements promised

A landlord under a lease agreement who agrees to make improvements to the rented premises is required to complete the improvements in a timely manner. If the landlord fails to make timely improvements, the tenant may cancel the lease agreement. [See RPI Form 552 §10]

Conversely, lease agreement provisions can obligate a tenant to construct or install improvements on the property. The time period for commencement and completion is agreed to in the lease agreement. If not agreed to, a reasonable period of time is allowed. [Calif. Civil Code §1657]

Further-improvement provisions typically call for the landlord to approve the planned improvements before construction is commenced.  Alternatively, some lease agreement provisions allow a tenant to make necessary improvements without the landlord’s further consent. These improvements are not specifically mandated, or required to be completed in exchange for a reduction in rent. This non-mandatory type of improvement is called a permissive improvement.

For example, a landlord and tenant sign a long-term lease agreement. Its further-improvements provision authorizes the tenant to demolish an existing building located on the property and construct a new one in its place without first obtaining the landlord’s consent. The rent is based solely on the current value of the premises.

The further-improvements provision does not state a specific time period for demolition or construction.

The tenant makes no effort to tear down the old building or erect a new one. Ultimately, the landlord claims the tenant has breached the lease agreement for failing to demolish the existing building and construct a new one.

Here, the tenant has not breached the lease agreement. The agreement contained no promise by the tenant to build and the rental amount was not based on the construction. The tenant was authorized to build without need for the landlord’s approval, but was not obligated to do so. Thus, the improvements on the tenant’s part were permissive, not mandatory. [Kusmark v. Montgomery Ward and Co. (1967) 249 CA2d 585]

Mandatory improvements

A further-improvements provision that requires a tenant to construct improvements at a rent rate reflecting the value of the land has different consequences.

If a date is not specified for completion of the improvements, the tenant needs to complete construction within a reasonable period of time since construction of improvements is mandated to occur.

For example, a landlord leases unimproved land to a developer who is obligated to build improvements, contingent on obtaining a construction mortgage. A time period is not set for commencement or completion of the construction. However, a cancellation provision gives the tenant/developer the right to cancel the lease agreement within one year if financing is not found to fund the construction. No provision authorizes the landlord to terminate the lease if the required construction is not completed.

Due to the onset of a recession, the tenant is unable to arrange financing within the one-year period. However, they do not exercise their right to cancel the lease agreement and avoid payment of future rents. Instead, the tenant continues their good faith effort to locate and qualify for construction financing. Ultimately, financing is not located and construction is not commenced.

A few years later, as the economy is showing signs of recovery, the landlord terminates the lease. The landlord claims the lease agreement has been breached since the promised construction was not completed.

The tenant claims the landlord cannot terminate the lease as long as the tenant continues their good faith effort to locate financing and remains solvent to qualify for the financing.

Here, the tenant has breached the lease agreement. They failed to construct the intended improvements within a reasonable period of time. The original purpose of the lease was to have buildings erected without specifying a completion date. Following the expiration of the right to cancel, the landlord gave the tenant a reasonable amount of time in which to commence construction before terminating the lease.

When the original purpose for the lease was the construction of a building by the tenant, a landlord cannot be forced to forgo the improvements bargained for. [City of Stockton v. Stockton Plaza Corporation (1968) 261 CA2d 639]

Surrender of improvements

All tenant improvements are to remain with the leased property on termination of a lease unless the lease agreement permits or mandates their removal by the tenant as a restoration of the premises.

Most lease agreements merely provide for the property to be returned in good condition, minus ordinary wear and tear for the years of the tenant’s occupancy. Thus, the tenant is not required to restore the property to its actual condition when they took possession since tenant improvements are part of the real estate.

A provision calling for the tenant’s ordinary care of the premises does not also require the tenant to remove their improvements or renovate the premises to eliminate deterioration, obsolescence or normal wear and tear caused by the tenant’s permitted use of the property. [Kanner v. Globe Bottling Co. (1969) 273 CA2d 559]

If a lease does not require the tenant to restore the property to the condition it was in when received, the tenant may only remove their personal improvements, called trade improvements or trade fixtures.