Tenant improvements to meet the needs of the occupying tenant

Tenant improvements are improvements made to a leased property to meet the needs of the occupying tenant.

Consider a retail business owner who enters into a commercial lease agreement to occupy commercial space as a tenant. The leased premises do not contain tenant improvements (TIs) since the building is nothing more than a shell. [See RPI Form 552 through 552-4]

The tenant agrees to make all the tenant improvements needed to occupy the premises and operate a retail business (i.e., interior walls, flooring, ceilings, air conditioning, electrical outlets and lighting, plumbing, sprinklers, telephone and electronic wiring, etc.).

The lease agreement provides for the property to be delivered to the landlord on expiration of the lease “in the condition the tenant received it,” less normal wear and tear. However, no lease provision addresses whether, on expiration of the lease, the TIs will remain with the property or the property is to be restored by the tenant to its original condition before the addition of the tenant improvements.

On expiration of the lease, the tenant strips the premises of all of the tenant improvements they placed on the property and vacates. The building is returned to the landlord in the condition it was found by the tenant: an empty shell, less wear and tear.  To relet the space, the landlord replaces nearly all the tenant improvements that were removed.

Is the tenant liable for the landlord’s costs to replace the tenant improvements removed by the tenant on vacating?

Yes! Improvements made by a tenant that are permanently affixed to real estate become part of the real estate to which they are attached. Improvements remain with the property on expiration of the tenancy, unless the lease agreement provides for the tenant to remove the improvements and restore the property to its original condition. [Calif. Civil Code §1013]

However, the landlord’s right to improvements added to the property and paid for by the tenant depends upon whether:

  • the tenant improvements are permanent (built-in) or temporary
    (free-standing); and
  • the lease agreement requires the tenant to remove improvements and restore the premises.

All improvements attached to the building become part of the real estate, except for trade fixtures as discussed in a later section. [CC §660]

Examples of improvements that become part of the real estate include:

  • built-ins (i.e., central air conditioning and heating, cabinets and stairwells);
  • fixtures (i.e., electrical and plumbing);
  • walls, doors and dropped ceilings; and
  • attached flooring (i.e., carpeting, tile or linoleum).

In most circumstances, improvements attached to the building become part of the real estate. However, there are critical exceptions.

Improvements that are unique to the operation of the tenant’s business are called trade fixtures. Trade fixtures are retained by the tenant on expiration of the lease. They are also known as trade improvements.