Leasehold improvements: Overview, definition, and example
What are leasehold improvements?
Leasehold improvements are changes or upgrades made to a rented property by a tenant to better suit their business needs. These improvements can include things like adding walls, upgrading lighting, installing flooring, or customizing office space. While the tenant pays for these modifications, they typically become the landlord’s property once the lease ends, unless the lease states otherwise.
Why are leasehold improvements important?
For businesses, leasehold improvements are crucial for making a rented space functional and efficient. Whether it’s a restaurant installing a kitchen or a retail store setting up display shelving, these changes help businesses operate effectively.
From an accounting perspective, leasehold improvements are usually considered long-term assets, meaning they’re recorded on financial statements and depreciated over time. Understanding how they’re handled in a lease is important for both landlords and tenants to avoid disputes over costs, ownership, and responsibilities when the lease ends.
Understanding leasehold improvements through an example
Imagine you lease a commercial space to open a boutique clothing store. The space is empty, so you install dressing rooms, build display shelves, and add special lighting. These are leasehold improvements because they enhance the space for your business.
Now, let’s say your lease expires after five years. Unless your lease agreement allows you to remove these improvements, they typically stay with the property, benefiting the landlord and future tenants. If you plan to take them with you, you’ll need to negotiate that in the lease upfront.
An example of a leasehold improvements clause
Here’s an example of how a lease agreement might address leasehold improvements:
“Tenant shall have the right to make leasehold improvements to the Premises, subject to Landlord’s prior written consent. All improvements shall be made at Tenant’s expense and in compliance with applicable laws. Unless otherwise agreed in writing, any leasehold improvements shall become the property of the Landlord upon termination of the Lease, with no obligation for the Landlord to compensate the Tenant.”
Conclusion
Leasehold improvements allow businesses to customize rental spaces to fit their needs, but it’s important to understand who pays for them, who owns them, and what happens when the lease ends.
Before making improvements, tenants should review their lease carefully and negotiate terms that clarify their rights and responsibilities. Whether you’re a landlord or a tenant, having clear agreements on leasehold improvements can prevent misunderstandings and ensure a smooth leasing experience.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.