An alterations clause defines the rights and obligations of both the landlord and tenant with respect to the tenant’s desire to make physical changes to the leased premises. The clause typically contains 5 elements:
(1) Requirement of consent: Usually, the tenant is prohibited from making physical changes to the leased premises without the consent of the landlord.
(2) Procedures for landlord notification and granting of consent. An alterations clause defines how a tenant may acquire the landlord’s consent to make physical changes to the leased premises.
(3) Manner of construction: The clause will typically detail how the work will be performed and allocate the costs and liabilities of the work between the landlord and the tenant.
(4) Payment and Liens: The clause may require the tenant promptly pay all contractors and to post bond to insure completion of work and protection against liens.
(5) Removal of Alterations: Finally, an alterations clause may define what will happen to the alterations once the relationship between the landlord and tenant has ended.
Because of the many issues associated with making physical alterations to the leased premises, the full-breadth of an alterations clause is typically spread out over several consecutive clauses.
Standard Clause - Brief
Standard Clause - Modifications
Analysis An alterations clause represents the contracting parties’ agreement with respect to physical changes made by the tenant to the leased premises. In temporal order, an alterations clause answers the questions: When does the tenant have to do prior to the alterations? What is the manner for making the alterations? What happens after the alterations have been made? More specifically, the alterations clause answers the following questions: (1) What constitutes an alteration? – Most alterations clauses define an “alteration” as “any improvements, alterations, additions or changes to the premises.” However, this list is not exhaustive. In essence, an “alteration” is any physical change to the premises leased to the tenant. Such alterations could conceivable include: tearing down or putting up walls on the premises, adding new flooring to the premises, or installing new fixtures. (2) Can tenant make alterations without landlord’s consent? – An alteration clause will usually define circumstances when a tenant may make alterations to the premises without the landlord’s approval. Typically, the tenant does not need to gain the landlord’s approval to make “cosmetic” changes to the premises. What constitutes a cosmetic change can be hard to define, and is usually defined in the negative (see e.g., Alterations (b), above). However, it is safe to say that a cosmetic alteration to the premises would include painting the interior of the premises, or perhaps adding decorative shelving to the walls. Also, a tenant may make alterations to the premises where the tenant has an affirmative duty to do so per the lease agreement.
(3) If needed, how can tenant acquire the landlord’s consent for alterations? – Another major function of an alterations clause is to establish the method by which a tenant may seek the landlord’s consent to make alterations to the premises. To this end, an alterations clause will state: (a) how far in advance a notice of alteration must be submitted to the landlord; (b) what the notice must consist of, including blueprints of the proposed alterations, as well information about who will be making the alterations; and (c) how quickly the landlord must make a decision about whether to allow the alterations. (4) If landlord consents to alterations, what other conditions must tenant satisfy with regards to the work? – Even though the landlord may give consent to the tenant to make the alterations, an alterations clause will place further duties on the tenant that must be satisfied by the tenant to avoid a breach of the lease agreement. Typically, the tenant’s duties at the time of alteration include: (a) acquiring the proper construction permits, (b) hiring contractors approved by the landlord, and (c) completing the work in a diligent, workmanlike manner. This list of the tenant’s duties is not exhaustive. (5) What assurance does the landlord have that the landlord will not be financially liable for the alterations, or consequences thereof? – Another major function of an alterations clause is to shift the liability risks of the alterations from the landlord to the tenant, or to a cost-spreading entity such as an insurance company. Essentially, the landlord gains assurance from the tenant that the landlord will not be liable for the cost of the alterations, or any torts which may result as a consequence of the alterations. Typically, the tenant is required to acquire builder’s insurance before any work on the project begins, as well as a lien and completion bond to assure the landlord that the premises will not be subject to a mechanic’s lien after the work is completed. The landlord may also include a provision requiring that the tenant promptly pay any contractor, as well as indemnify the landlord if the landlord has to pay out-of-pocket to release a mechanic’s lien. (6) What happens to the alterations at the end of the lease? Finally, an alterations clause also contemplates what will happen to the alterations once the relationship between the landlord and tenant has ended. Typically, the landlord reserves the right to keep the alterations at no cost to the landlord, or have the alterations removed from the premises at the expense of the tenant. The landlord’s right to keep or remove the alterations is not an all-or-nothing proposition, and a well-drafted alterations clause will allow the landlord to pick and choose which alterations to keep or have removed. Notes Consent Variations – Alterations clauses vary widely when describing the conditions and pre-requisites necessary to gain a landlord’s consent to an alteration. Typically, the conditions vary based on the cost of the alteration, or the location of alteration itself:
Americans with Disabilities Act Considerations – Landlords may also protect themselves from additional costs associated with an alteration. An alteration may, for instance, cause a premises that was once in compliance with the Americans With Disabilities Act (ADA) to be out of compliance after the work is completed. In such an instance, a landlord may want to expressly allocate the cost of complying with the ADA to the tenant.
Signage – Commercial tenants may want to expressly deal with business-identifying signs that might be added to the premises.
Wireless Internet – Technology-savvy landlords may also want to consider the implications of a tenant installing a wireless network on the premises.
Discussion “A commercial real estate lease needs to include a comprehensive clause on alterations and modifications to your office space. If your alterations are neutral or improve the value, image or functionality of your office space, the landlord must accept them without requiring you to remove or restore the space to its previous condition when you leave. “The alteration clause should also require the landlord to consent or refuse alterations prior to the start of construction. And the decision should be based solely on any impact the alterations may have on re-letting the space. At the end of your lease, the landlord may demand costly restorations while early in the term, he still wants to keep you happy. “Another possible point of contention involves the selection of contractors to execute your alterations. Landlords can reasonably request contractors to be insured and experienced as well as posting a bond to guard against any costly damage. However, selection of the contractors should either be left to the tenant or follow a competitive bidding process to prevent unnecessary expenses.” (The Times They Are A-Changin’, Choyce Peterson, October 22, 2009, available at http://www.choycepeterson.com/blog/times-a-changin/) “Typical lease language will require you to receive permission for all but minor changes. It is reasonable that the landlord would want to reserve the right to view and approve your plans before work begins—whether your improvements occur before or after you move in. But you should bargain for a provision that the landlord will use reason when evaluating your requests for non-minor alterations during your tenancy. “Requiring the landlord’s reasonable consent will mean that she can’t use a subjective standard. Instead, the landlord will have to use criteria that any businessperson in her shoes would employ—and this excludes personal tastes. For example, it would be reasonable to block your plan to remove a load-bearing wall, because doing so has implications that any property owner would hesitate over. But it would be unreasonable to object to your installing shutters just because the landlord doesn’t like the color. “Many landlords will simply not accept the notion that they must be bound by an objective, reasonable standard when evaluating your requests concerning non-minor alterations. Your landlord may candidly remind you that it’s his property, and if he doesn’t like the look of your shutters, he won’t allow them, period. He may insist on having the “sole discretion” to evaluate your alteration plan. This will mean that he can say no for any or no reason. If the market is tight and the landlord has the upper hand, you may have no choice.” (Janet Portman, Alterations and Improvements in a Commercial Tenancy, available at http://www.landlordtenantlawfirms.com/resources/landlord-and-tenant/commercial-leases/alterations-improvements-tenant.htm) For a discussion of how courts handle the removal or retention of alterations at the end of a lease, see M. Robert Goldstein & Michael J. Goldstein, Alterations and Improvement Clauses, http://www.ggrgpc.com/publications/alterations.html) Example 12. ALTERATIONS AND ADDITIONS. (a) Lessee shall not, without the prior written consent of Lessor, which consent shall be at Lessor’s sole discretion, make any alterations, improvements, or additions to the premises. Notwithstanding Lessor’s consent to any alteration, improvement or addition to the premises, Lessor shall retain the option, upon the termination of this Lease, of requiring Lessee, at its sole cost and expense, to remove any or all of said alterations, improvements or additions and repair all the damage caused by such removal. If Lessor consents to any alterations, improvements, or additions, Lessor may impose such conditions with respect thereto as Lessor deems appropriate, including, without limitation, requiring Lessee to furnish Lessor with insurance against liabilities which may arise out of such work and plans and specifications and permits necessary for such work. The work necessary to make any alterations, improvements, or additions to the premises, whether prior to or subsequent to the Commencement Date, shall be done at Lessee’s expense by contractors hired by Lessor, or the Company, except to the extent Lessor gives its prior written consent to Lessee s hiring its own contractors, which consent shall be solely within Lessor’s discretion.
If Lessor shall so desire, Lessee shall submit to Lessor’s or the Company’s reasonable supervision of Lessee’s work at Lessee s expense. Lessee shall also pay Lessor for all other costs and expenses arising in connection with such work, including, without limitation, additional janitorial, elevator, security, and utility expense. Lessee shall promptly pay to Lessor, the Company, or the Lessee’s contractors, as the case may be, when due, the cost of all such work, supervision, and other charges. (b) Upon completion of such work, or from time to time as Lessor may reasonably require, Lessee shall deliver to Lessor, if payment is made directly to contractors, evidence of payment, contractors affidavits and full and final waivers of all liens for labor, services, or materials all in form satisfactory to Lessor. Lessee shall defend and hold Lessor harmless from all costs, damages, liens and expenses related to such work. Lessee further covenants and agrees not to suffer or permit any mechanics or materialmen liens or any other liens to be placed against the Building or premises with respect to work or services claimed to have been performed for, or materials claimed to have been furnished to, the Lessee or the premises. If any lien shall at any time be filed against the Building or premises in connection with such work, services, or materials, Lessee shall immediately cause it to be released and removed of record. If Lessee fails to do so, Lessor may, at Lessor’s option, cause the same to be released and removed of record using funds from the security deposit provided for in Paragraph 6 of this Lease. If such funds are insufficient for such purpose, Lessor may, at Lessor’s option, advance such additional funds for such purpose. In addition to Lessee’s obligation to replenish the security deposit as provided in Paragraph 6, Lessee shall immediately, upon demand, pay Lessor the amount of any such additional funds so advanced. (c) All work done by Lessee, or its contractors, pursuant to this Lease shall be done in a first class workmanlike manner using only good grades of materials, and shall comply with all insurance requirements and all applicable laws and ordinances and rules and regulations of governmental departments or agencies. All such work shall be performed so as not to interfere with or impair the use and enjoyment of the Building by Lessor and other tenants, and Lessor may require all or a portion of such work be performed outside business hours. Subject to Lessor’s option contained in the second sentence of subparagraph a) of this Paragraph 13, all additions, alterations, fixtures, and improvements (temporary or permanent) in and upon the premises, whether installed by Lessee or Lessor, shall become Lessor s property, and shall remain upon, and be surrendered with the premises without disturbance or injury upon the termination of this Lease by lapse of time or otherwise, all without payment or credit to Lessee. (LEASE, April 25, 2007, between TRIAD REALTY, LLC and 11 GOOD ENERGY, INC., available at http://www.sec.gov/Archives/edgar/data/1408597/000093041310003954/c60913_ex10-9.htm) |
Alterations |