Deciding Restoration Responsibility for Alterations

Q: Should you negotiate for your tenant to be responsible for removing some or all of the alterations it made during the lease?

Q: Should you negotiate for your tenant to be responsible for removing some or all of the alterations it made during the lease?

A: Typically, it’s in an owner’s best interest to have the right to wait until the lease’s end to decide whether the tenant must restore the space to its original condition—except for reasonable wear and tear—or can let some or all of the tenant’s alterations stay in the space. That way, you’ll have enough time to properly evaluate whether an alteration will increase the space’s value and help you get a higher rent from the next tenant. On the other hand, if you decide that the alteration won’t enhance the space’s value, you can make the tenant remove the alterations or, at least, pay for their removal.

A tenant won’t want to let you wait until the lease’s end to decide about the removal of alterations. The cost of removing certain alterations may be prohibitive. For example, suppose the tenant installs an interior staircase in a multi-floor space. The expense could be enormous for the tenant if, at the lease’s end, it must demolish the staircase and close the ceiling penetrations between the floors. And a tenant won’t want to find out at the eleventh hour that it’s responsible for a large expense like this. Expect it to want to know when it signs its lease who will be responsible for removing any alterations the tenant has made during the lease.

Compromise with the tenant by agreeing that you’ll make the decision when consenting to alterations. This way, you won’t be forced to blindly decide about alterations’ removal when the tenant signs its lease, as you may not know what types of alterations the tenant will end up making in the space. Agree in the lease that you’ll decide whether the tenant must remove a particular alteration when you give your consent to that particular alteration. But make sure that you get from the tenant the option of doing the removal and restoration work yourself, at the tenant's expense. This option is valuable because, since the tenant will be moving out shortly, it won’t have an incentive to do a good restoration job. This compromise will give the tenant a clear idea of the alteration’s full cost, as it’ll know whether it must also include its removal costs. That lets the tenant decide whether making the alteration will work for it financially, avoiding financial difficulties that could result in it shortchanging you later.

The compromise lets you make a decision about the alterations without running blind—that is, you’ll know exactly what type of alteration the tenant will make before you decide whether to require its removal. And you’ll have the option of doing the work yourself so you can ensure that the space isn’t damaged and that it’s restored to your standards. You can do this by adding lease language to your alterations clause. State in the lease’s alterations clause that, at the same time you give your consent to an alteration, you’ll tell the tenant whether you want to either keep the alteration in the space, or require the alteration to be removed and the space restored, either by the tenant or you—as you decide. Show the following language to your attorney before using it in your leases:

Model Lease Language

If Landlord consents to such Alteration, Landlord shall immediately thereafter elect, by written notice to Tenant, to either:

a. Retain such Alteration as part of the Premises; or

b. Require the removal of such Alteration and the restoration of the Premises to its condition immediately prior to the installation of the Alteration (“Restoration Work”). Such Restoration Work shall be performed either by Landlord or by Tenant, at Landlord’s sole option, and at Tenant’s sole expense.

Expect the tenant to ask to revise the surrender clause (which typically requires it to return the space to you in its original condition at the lease’s end) so that its surrender obligations are subject to the compromise set out in the alterations clause. The tenant knows that, otherwise, you could argue—especially if you later change your mind about the removal of the alteration—that the surrender clause’s requirement supersedes the alterations clause.