Sample Alterations Clause for Retail Leases: Part 1, Pro-Tenant

A standard clause containing alterations provisions is commonly found in a retail lease. While retail leases are generally governed by state law, this jurisdictionally neutral clause is useful and relevant in every state. This standard clause generally favors the tenant, but has integrated notes with important explanations and drafting and negotiating tips for both parties.

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Alterations

The alterations clause of a lease outlines the tenant’s rights and obligations when undertaking any alteration work in the premises. Unless the lease provides the tenant with a specific right to do so, a tenant is typically not permitted to alter the premises without the landlord’s prior consent. The landlord often agrees to allow the tenant to undertake nonstructural alterations or make cosmetic changes, but requires detailed plans before consenting to structural alterations.

This clause addresses alterations during the lease term only. Alterations performed by either the tenant or the landlord needed to prepare the premises for initial occupancy are beyond the scope of this clause and are typically addressed in a separate lease clause.

The alterations clause also outlines the procedure the tenant must follow before making any alterations.

Landlord’s Concerns

When considering alterations to retail space, a landlord’s most common concerns may include:

• That the lease may obligate the landlord to make improvements or alter the leased property beyond what is economically feasible based on the rent it is receiving from the tenant.
• Taking on additional construction obligations for leased property that the landlord did not originally intend to have to do.
• That the tenant’s alterations or improvements may:
  • adversely affect the structural strength of the property; or
  • diminish the value of the property to future tenants.
• Maintaining control over the appearance, character, and standards of the shopping center.

Tenant’s Concerns

A tenant typically wants the right to make alterations and modifications to the leased premises to ensure that the space is usable for the tenant’s purposes. Tenants typically consider alterations both:

• Before the lease term to prepare the space for occupancy.
• During the lease term to modify the space if the tenant’s business needs change.

When negotiating the alterations provisions, the tenant must consider the cost of obtaining the landlord’s approval and include these costs as part of its financial analysis of the premises.

The tenant typically must pay for the costs associated with its alterations, including:

• Architectural and engineering costs.
• Permitting costs.
• Landlord’s costs for reviewing the proposal and supervising the alteration.

State and Local Laws

State and local laws govern the interpretation and enforcement of real estate leases, which are typically the laws where the real property is located. This Standard Clause is useful and relevant in every state, but the parties should familiarize themselves with state and local laws and consult local counsel as needed.

Defined Terms

While many of the capitalized terms used in this Standard Clause are defined, terms, such as Building, Building System, Business Days, Governmental Authorities, Landlord, Lease, Lease Expiration Date, Mortgage, Person, Premises, Legal Requirement, Shopping Center, and Tenant are used in this Standard Clause but are undefined. These concepts should conform to their corresponding terms and definitions used in the lease.

Assumptions

This Standard Clause assumes:

• The tenant is leasing the premises for retail use in a multi-tenant, regional shopping center.
• The tenant has significant negotiating leverage.
• The landlord is a sophisticated owner and manager of shopping centers.

Bracketed Items

Bracketed items in ALL CAPS should be completed with the facts of the transaction. Bracketed items in sentence case are either optional provisions or include alternative language choices to be selected, added, or deleted at the drafting party’s discretion.

Article I
Alterations

Section 1.01   Landlord’s Consent and Tenant’s Obligations

(a) Landlord’s Consent.

(i) Tenant may make Minor Alterations in the Premises without Landlord’s prior written consent, but with prior notice to Landlord. As used in this Lease, “Minor Alterations” are alterations: (A) of a cosmetic nature such as painting, wallpapering, hanging pictures, and installing carpeting; (B) not visible from outside the Premises or Shopping Center; (C) that do not affect the Building Systems or the structure of the Building; (D) that do not require work to be performed inside the walls or above the ceiling of the Premises; and (E) that do not cost more than [$[NUMBER] in total/$[NUMBER] per square foot]. Tenant shall provide Landlord with at least [NUMBER IN WORDS] ([NUMBER]) [Business Days’/days’] notice before beginning any Minor Alterations, which notice shall include a general description of the nature and estimated cost of the proposed Minor Alteration, and the anticipated completion dates for such work.

(ii) Except for Minor Alterations, Tenant shall not make or allow to be made any alterations, additions, or improvements in or to the Premises (collectively, “Alterations”) without first obtaining Landlord’s prior written consent. Landlord’s consent shall not be unreasonably withheld, conditioned or delayed, except that Landlord shall have the right to withhold its consent in its sole and absolute discretion to any Alteration that in Landlord’s reasonable determination: (A) adversely affects any part of the Shopping Center other than the Premises; (B) requires any alterations, installations, improvements, additions or other physical changes to be performed in or made to any portion of the Shopping Center other than the Premises; (C) adversely affects the proper functioning of any Building System; (D) adversely affects the exterior of the Premises or the Shopping Center; (E) adversely affects the structure of the Building or Shopping Center; (F) violates or renders invalid the certificate of occupancy for the Building or Shopping Center or any part thereof; (G) violates any Legal Requirement; or (H) adversely affects or interferes with the rights of any other tenant or occupant of the Shopping Center. Notwithstanding the foregoing, if, in Tenant’s sole and absolute discretion, any Alterations are required for Tenant to use the Premises for the [Permitted Use/intended use as set forth in this Lease], Landlord shall grant its consent to same and Tenant may make the Alterations, provided, however, the terms and conditions of this Article [NUMBER] shall govern such Alterations. For the avoidance of doubt, all alterations not deemed to be Minor Alterations shall be deemed Alterations to which the provisions of this Article [NUMBER] shall apply.

(b) Tenant Work. Tenant agrees that all work performed by Tenant in completing the Alterations (the “Tenant’s Work”) shall be completed at Tenant’s sole cost and expense and in a good and workmanlike manner, that the structural integrity of the Building shall not be impaired, and that no liens shall attach to all or any part of the Premises, the Building, or the Shopping Center by reason thereof; provided, however, if such liens shall attach, then within [NUMBER IN WORDS] ([NUMBER]) [Business Days/days] of its receipt of notice of such filing, Tenant shall discharge such lien, at Tenants expense, by filing a bond as required by law or by other reasonable means. Tenant shall obtain, at its sole expense, all permits required for Tenant’s Work.

Approval for Alterations

Landlord’s Consent

The alterations provision of a lease outlines the tenant’s rights and obligations when undertaking any alteration work in the premises. In a lease for retail space, the landlord generally maintains responsibility for structural alterations that preserve the integrity of the building.

Most retail leases restrict the tenant’s ability to perform any:

•  Structural alterations. The tenant usually cannot undertake structural alterations without the landlord’s consent. The landlord can usually withhold its consent for any proposed structural alterations in its sole discretion.
•  Non-structural alterations. The tenant usually cannot undertake non-structural alterations without the landlord’s prior consent. If the tenant has any level of negotiating leverage, it can typically negotiate that the landlord cannot unreasonably withhold its consent for non-structural alterations, provided the tenant adheres to the procedure for approval and performance as outlined in the lease. A tenant may also successfully negotiate into a lease that certain minor alterations require no approval (those under a certain dollar threshold, for example).

Section 1.01 is an example of how a tenant may negotiate the approval language to include more reasonable provisions for the tenant.

This section permits the tenant to make non-structural improvements up to a certain dollar amount without the landlord’s consent so that the tenant can make minor changes without needing the landlord’s permission. This is particularly important where updates or changes may be needed for a retail tenant to comply with evolving brand standards during the lease term. Tenants should negotiate a reasonable dollar amount for prospective alterations, considering the size and condition of the premises at commencement and the nature and projected growth of the tenant’s business.

This section also provides that the landlord must be reasonable in its approval of the tenant’s proposed alterations except under certain circumstances.

The tenant is also allowed to make any alterations necessary to comply with its permitted use. This is an extremely important provision for a retail tenant because often retail lease permitted use clauses are tied to operating under a specific brand or trade name. Brand standard for trade names often evolve over time but it is easy for a tenant to demonstrate that certain changes to the interior of the premises were necessary to comply with internal brand standard changes.

Allowing the tenant to make certain immaterial alterations without consent and requiring the landlord to be reasonable in its consent are two negotiating positions for a tenant.

Tenant’s Work

Section 1.01(b) provides that if the landlord does grant its consent to alterations, the tenant must ensure that:

• All work must be completed:
  • at tenant’s expense; and
  • in a good and workmanlike manner.
• No liens attach to the property that are not dismissed or bonded within an agreed time (typically within 30 to 45 days).
• All necessary permits are obtained.

(c) Tenant’s Deliveries. With respect to any Alterations:

(i) Plans and Specifications. Tenant shall submit to Landlord detailed plans and specifications (including layout, architectural, mechanical, and structural drawings) for each proposed Alteration and shall not commence any such Alteration without first obtaining Landlord’s prior written approval of such plans and specifications, which approval shall be in the reasonable discretion of Landlord and notice of which shall be provided to Tenant within [NUMBER IN WORDS] ([NUMBER]) [Business Days/days] following Landlord’s receipt thereof. If Landlord does not respond within such [NUMBER IN WORDS] ([NUMBER]) [Business Day/day] period, Landlord shall be deemed to have approved Tenant’s plans and specifications. If Landlord disapproves Tenant’s plans and specifications, Landlord shall detail the reasons for such disapproval with sufficient particularity to allow Tenant to resubmit the plans and specifications for approval. Tenant shall have no obligation to reimburse Landlord for the cost of Landlord’s review of Tenant’s proposed plans and specifications or any other review by Landlord related to the Alterations;

Plans and Specifications

This clause provides that the tenant must deliver plans and specifications of its proposed alterations for the landlord to review before its approval or disapproval. This section includes a time frame in which the landlord must respond. A typical time frame favoring the tenant is five business days.

A tenant with strong leverage may successfully negotiate in the above language providing that the landlord is deemed to have consented to a proposed alteration if it does not respond to the tenant’s proposal within an agreed time. This is valuable for tenants because it forces the landlord to review proposed alterations promptly.

Landlords, however, do not want to be inadvertently bound to approve an alteration of which the landlord was unaware, so landlords may negotiate for some or all of the following:

• A notice of a proposed alteration and any plans must be delivered by the tenant to a specific person at the landlord entity.
• Notice of proposed alterations must clearly state that a failure to respond results in a deemed approval.
• A second notice must be sent to the landlord triggering a further review period before an approval is deemed to have been granted.

This section provides that the landlord has discretion, in its reasonable judgment, to approve or reject the plans and specifications. However, the landlord must explain in detail the grounds for any rejection so that the tenant can prepare revised plans that should be acceptable to the landlord.

Landlords often require the tenant to reimburse the landlord for the costs of reviewing the plans and specifications; however, this pro-tenant clause specifies that the tenant is not required to reimburse landlord for its review. 

(ii) Governmental Authorities. Tenant shall, at Tenant’s sole cost and expense, obtain all permits, approvals, and certificates required by any Governmental Authorities for each Alteration. Upon the request of Tenant, Landlord, at Tenant’s sole cost and expense, shall join in any applications for any permits, approvals, or certificates required to be obtained by Tenant in connection with any Alteration and shall otherwise cooperate with Tenant in connection therewith; and

Governmental Authorities

This clause provides that the tenant must obtain any necessary permits, approvals, or certificates regarding any alterations performed by the tenant. Landlords usually make the tenant responsible for all costs of applying for the permits, approvals, or certificates.

The tenant usually must submit permit applications to the shopping center owner for their signature. If, for example, the landlord is a ground tenant, the tenant should ensure that the landlord either:

• Has the necessary authority to sign the application.
• Can obtain signature from the appropriate parties. 

(iii) Insurance. Tenant shall furnish to Landlord duplicate original policies or certificates thereof of worker’s compensation (covering all persons to be employed by Tenant and Tenant’s contractors and subcontractors in connection with each Alteration) and comprehensive public liability (including property damage coverage) insurance in such form, with such companies, for such periods and in such amounts as Landlord may reasonably approve, naming Landlord and its agents, any Lessor, and any Mortgagee, as additional insureds.

(d) Tenant’s Performance Obligations. Tenant shall perform its Alterations in accordance with and subject to each of the following:

(i) Contractors. All Alterations shall be performed, at Tenant’s sole cost and expense, by contractors, subcontractors, and mechanics chosen by Tenant and approved by Landlord in its reasonable discretion. If Tenant engages any contractor set forth on the list attached hereto as Exhibit [LETTER], or if Tenant proposes to use a contractor previously approved by Landlord for an Alteration made by Tenant, Tenant shall not be required to obtain Landlord’s consent for such contractor;

(ii) Compliance. All Alterations shall be made and performed substantially in accordance with the plans and specifications therefor as approved by Landlord. If, as a result of any Alterations performed by Tenant, any alterations, installations, improvements, additions, or other physical changes must be performed or made to any portion of the Building or the Shopping Center (other than the Premises) to comply with any Legal Requirement(s) (the “Resulting Alterations”), which Resulting Alterations would not otherwise have had to be performed or made at such time, Landlord, at Tenant’s sole cost and expense, may perform or make such Resulting Alterations and take such actions as Landlord shall deem reasonably necessary, and Tenant shall reimburse Landlord for the reasonable out-of-pocket cost of same on demand therefor by Landlord. Upon completion of any Alteration, Tenant, at Tenant’s sole cost and expense, shall obtain certificates of final approval of such Alteration required by any Governmental Authority and shall furnish Landlord with copies thereof, together with the “as built” plans and specifications for such Alterations;

Compliance

This clause provides that:

• The tenant must obtain the landlord’s approval, which must be reasonable, before choosing any contractor to construct the alterations or use approved contractors. Many landlords keep lists of contractors approved to work in their shopping centers, but agree to also consider contractors proposed by a tenant.
• All the alterations performed by the tenant must comply with all laws and building requirements.

Landlords typically make any alterations that may be required outside of the premises because of the tenant’s alterations in the premises. This section provides that the tenant must reimburse the landlord for its reasonable out-of-pocket costs to make the required alterations. The landlord may require a security deposit or performance bond to cover the costs of these alterations

(iii) Materials and Liens. All materials and equipment to be incorporated in the Premises as a result of any Alterations or a part thereof shall be of first class quality and no such materials or equipment (other than Tenant’s Owned Property (as hereinafter defined below)) shall be subject to any lien, encumbrance, chattel mortgage, or title retention or security agreement. Within [NUMBER IN WORDS] ([NUMBER]) [Business Days/days] after notice to Tenant of the filing or imposition of a mechanic’s lien against the Premises, the Building, or the Shopping Center for work claimed to have been done or materials claimed to have been furnished thereto, Tenant shall, at Tenant’s sole cost and expense, discharge of record or bond around such mechanic’s lien in a manner acceptable to Landlord, acting reasonably; and

Materials and Liens

This clause requires the tenant to:

• Perform its alterations work without any liens being filed against the shopping center by any contractors for labor or materials related to the tenant’s alteration work.
• Promptly discharge any mechanic’s liens filed by the tenant’s contractors.

The time a tenant has to discharge a mechanic’s lien is negotiable. A landlord typically wants a short time period, such as ten days, and the tenant typically wants a longer time period, typically up to 45 days.

(iv) Hours. Tenant shall be permitted to perform Alterations at all times, including during the hours of [SHOPPING CENTER HOURS OF OPERATION] [on Business Days/every day] provided that such work shall not unreasonably interfere with or interrupt the operation and maintenance of the Shopping Center or unreasonably interfere with or interrupt the use and occupancy of the Shopping Center by other tenants in the Shopping Center. Landlord shall ensure that Tenant has use of freight elevators and the loading dock at all times when Tenant is performing the Tenant Work.

Section 1.02   Ownership of Alterations. When granting consent for any Alterations, Landlord shall indicate in writing whether the Alterations shall be owned by Landlord or if it will require Tenant to remove those Alterations before the Lease Expiration Date. If Landlord fails to so indicate, the Alterations shall be deemed to be the property of Landlord and Tenant shall not be required to remove them. Unless otherwise indicated by Landlord, all Alterations made by Tenant shall become the property of Landlord and shall be surrendered to Landlord on or before the Lease Expiration Date. Notwithstanding the foregoing, movable equipment, trade fixtures, personal property, furniture, proprietary items, patented items, trademarked items, items with the tenant’s logo, or any other items that can be removed without material harm to the Premises will remain Tenant’s property (collectively, the “Tenant Owned Property”) and shall not become the property of Landlord.

Ownership of Alterations

Retail leases usually establish the ownership of the alterations during the term which ownership impacts the tenant’s restoration obligations at the end of the term (see End of Term Restoration, below).

Section 1.02 provides that, except as specifically requested by the landlord, any alterations made to the premises by the tenant become the property of the landlord at the end of the lease term.

Exceptions include:

• Moveable equipment.
• Trade fixtures.
• Furniture.
• Personal property.
• Proprietary, patented, or trademarked property.
• Items with the tenant’s logo.
• Any items that can be removed without material harm to the premises.

This section also requires the landlord to notify the tenant when it initially approves any alterations that it expects the tenant to:

• Own the alterations.
• Remove the alterations at the end of the lease term at its sole cost and expense.

The tenant wants this decision to be made when the alterations are made so that the tenant can:

• Plan for an orderly surrender of the premises at the lease expiration.
• Avoid disputes concerning restoration obligations.

However, it benefits landlords to be able to wait until closer to the end of the lease term to make that determination. Landlords are in a better position to identify possible new tenants and what their needs may be. It may be that a new tenant can benefit from the alterations, so the landlord wants to maintain ownership.

Section 1.03   End of Term Restoration. Tenant shall remove at its sole cost and expense all Alterations required to be removed by Tenant under this Lease and all Tenant Owned Property before the Lease Expiration Date and shall surrender the Premises to Landlord in “broom-clean” condition and repair, normal wear and tear excepted, unless otherwise provided for in this Lease. Tenant shall repair at its sole cost and expense all material damage directly caused to the Premises or the Shopping Center solely by the removal of any Alterations or Tenant Owned Property. Tenant’s obligations under this Section 1.03 shall survive the expiration or earlier termination of this Lease.

End of Term Restoration

Section 1.02 allows the landlord to decide whether tenant owns the alterations and must remove them on lease termination.

Under Section 1.03, the tenant must remove at its sole cost and expense:

• Those alterations that the landlord has determined are owned and to be removed by tenant.
• Other tenant owned property.

The tenant must leave the premises in broom clean condition, normal wear and tear excepted. The landlord may require a different condition for the premises (for example, the condition the premises were in when the tenant took control).

Landlords may require language that if the tenant fails to repair the premises, the landlord may do so at the tenant’s expense. A landlord may also require that it be given the option to perform the removal work itself so that it has control over the quality of the work.