The 3 Most Common Problems with Commercial Leasehold Improvements

Posted by Staff Reporter on Jun 21, 2019 11:39 AM EDT
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The process of improving a commercial property often begins with the best of intentions from both the tenant and the building owner. However, things do not always go smoothly.

Commercial leasehold improvements are an agreement between the landlord and the tenant for reimbursement or an allowance for the tenant to make improvements to the space. You may also hear this referred to as tenant improvements, leasehold improvements, or build-out in a commercial lease. There is no real difference.

This could be something like:

  • New plumbing

  • Adding a conference room

  • Adding or removing walls

  • Upgrading the flooring

When the improvements go well, it's a win-win. The tenant loves their workplace and the landlord has a more leasable space. However, when things don't go well they can lead to soured relationships and even thousands of dollars in litigation.

This typically happens for at least one of the following reasons.

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1. Improvements Go Over Budget

This is very common in any sort of commercial construction or renovation. Things will often run over budget. It's never ideal, but when it happens on a leasehold improvements agreement, you're now left paying out of pocket for everything that exceeds your agreed-upon budget.

This is why budgeting is so crucial. Always do your best to allow some buffer room for things to cost more than expected. If you receive any push-back from your landlord about the prices, let them know you're accounting for things not going 100% according to plan.

Or, you can simply be prepared financially to pay any overages yourself going into the process.

2. Improvements are Below Standards

It's also entirely possible that the building owner may think the quality of the work is subpar and may not feel like they should be responsible for paying for it.

This is where things can get contentious, as the two parties may disagree on the quality of the work. After all, the quality of workmanship can be subjective.

The best way to avoid this is to let the landlord suggest any companies or contractors that they trust and they have worked with before. This can help pre-approve the work, so to speak.

If you're the one sourcing the contractors, make sure you do a thorough job of screening and vetting them. Do not go with the lowest quote. Go with the company that appears to be best suited to deliver on time and on budget.

3. Miscommunications of Any Kind

We've touched on a few of the possible types of miscommunications in the previous examples. Misunderstandings about the price, schedule, or scope of the work are easily the most common and the most combative.

However, miscommunication of any type is never a good thing. This can lead to both parties experiencing an erosion of trust in the relationship. From that moment on, either party may wonder if they're getting the entire truth from the other.

Make communication a top priority during the entire process, but it is especially important in the early stages when you're negotiating and documenting the expectations for both sides.

If this is not your area of expertise, we highly recommend you work with some sort of commercial lease expert who can help you navigate the particulars of commercial leasehold improvements.

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