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 landlord but has integrated notes with important explanations and drafting and negotiating tips for both parties.
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 for securing the landlord’s consent to any proposed alterations.
When considering alterations to retail space, a landlord’s most common concerns may include:
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:
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:
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.
Certain terms that are capitalized in this Standard Clause should be defined elsewhere in the lease agreement (for example, Additional Rent, Building, Building System, Business Days, Event of Default, Governmental Authorities, Interest Rate, Landlord, Lease, Lease Expiration Date, Master Lease, Mortgage, Person, Premises, Legal Requirements, Rules and Regulations, Security Deposit, Shopping Center, and Tenant). If the lease uses different defined terms than are used in this Standard Clause, then the drafter should modify either the lease or the terms used here. The drafter should ensure that this Standard Clause is fully integrated into the lease agreement and work seamlessly with, and is consistent with, the other provisions of the lease agreement.
This Standard Clause assumes that:
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.
Section 1.01 Landlord’s Consent and Tenant’s Obligations
(a) Landlord’s Consent. 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, which consent may be granted or denied in Landlord’s sole discretion; provided, however, if Landlord grants its consent to any Alterations, the terms and conditions of this Article [NUMBER] hereof shall govern such Alterations.
(b) Tenant Work. Tenant agrees that all work performed by Tenant in completing the Alterations (the “Tenant’s Work”):
(i) Shall be completed at Tenant’s sole cost and expense;
(ii) Shall be completed in a first class, good and workmanlike manner;
(iii) Shall not impair or affect the structure of the Building;
(iv) Shall not affect or require changes to any other part of the Shopping Center other than the Premises;
(v) Shall not affect the functioning of any Building System;
(vi) Shall not affect the exterior of the Premises or the Shopping Center;
(vii) Shall not violate or render invalid the certificate of occupancy for the Shopping Center or any part thereof;
(viii) Shall not cause any liens to attach to all or any part of the Premises, the Building, or the Shopping Center;
(ix) Shall not affect or interfere with the rights of any other tenant or occupant of the Shopping Center; and
(x) Shall comply with the provisions this Lease, the Rules and Regulations, and all Legal Requirements.
Tenant shall obtain, at its sole expense, all permits required for Tenant’s Work.
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 shopping center.
Most retail leases restrict the tenant’s ability to perform any:
Section 1.01(a) is a pro-landlord clause that prevents the tenant from making any improvements without the landlord’s consent. Often in a retail context, it may not be plausible for the tenant to go to the landlord for consent for every little alteration it needs to make to its space. Shopping center tenants may need the ability to make updates or cosmetic changes to comply with evolving brand standards during the lease term. The parties should negotiate what makes the most sense under the circumstances.
Section 1.01(b) provides that if the landlord does grant its consent to alterations, the tenant must ensure that:
(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 sole and absolute discretion of Landlord. Tenant shall be solely responsible for ensuring that the plans and specifications reflect Tenant’s requirements for each proposed Alteration. Landlord reserves the right to disapprove any plans and specifications in part, to reserve approval of items shown thereon pending its review and approval of other plans and specifications, and to condition its approval upon Tenant making revisions to the plans and specifications or supplying additional information. Any review or approval by Landlord of any plans and specifications or any preparation or design of any plans by Landlord’s architect or engineer (or any architect or engineer designated by Landlord) with respect to any Alterations is solely for Landlord’s benefit, and without any representation or warranty whatsoever to Tenant or any other Person with respect to the compliance thereof with any Legal Requirements, the adequacy, correctness, or efficiency thereof or otherwise. Tenant shall reimburse Landlord for all costs and expenses incurred by Landlord in connection with the review and inspection of Tenant’s Work, including, but not limited to architects’, engineers’, consultants’, and attorneys’ fees incurred by Landlord in connection with the review of the Tenant’s plans and specifications for Tenant’s Work, all changes and modifications thereto, and the Landlord’s inspection of Tenant’s Work;
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 provides that the landlord has sole and absolute discretion to:
Landlords usually require the tenant to reimburse the landlord for the costs of reviewing the plans and specifications. Here the tenant must reimburse the landlord for all costs and expenses incurred by the landlord related to its review and inspection of any alteration work, including fees associated with:
(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[, it being agreed that all filings with Governmental Authorities to obtain such permits, approvals, and certificates shall be made, at Tenant’s sole cost and expense, by a Person designated by Landlord]. 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 (provided that the provisions of the applicable Legal Requirement shall require that Landlord join in such application) and shall otherwise cooperate with Tenant in connection therewith, provided that Landlord shall not be obligated to incur any cost or expense, including, without limitation, attorneys’ fees and disbursements, or suffer any liability in connection therewith; and
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:
In some jurisdictions, the landlord may insist that the tenant use a permit expeditor familiar with the landlord, the shopping center, and all prior applications.
(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 Landlord’s contractor(s) or by contractors, subcontractors, or mechanics approved by Landlord. If Tenant engages any contractor set forth on the list attached hereto as Exhibit [LETTER], Tenant shall not be required to obtain Landlord’s consent for such contractor unless Landlord shall notify Tenant that such contractor has been removed from the list before the earlier of: (A) entering into a contract with such contractor; and (B) the commencement of work by such contractor. Notwithstanding the foregoing, with respect to any Alteration affecting any Building System, Tenant shall select a contractor from a list of approved contractors furnished by Landlord to Tenant and the Alteration shall, at Tenant’s sole cost and expense, be designed by Landlord’s engineer for the relevant Building System;
(ii) Compliance. All Alterations shall be made and performed in strict conformance with the plans and specifications therefor as approved by Landlord, all Legal Requirements, the Rules and Regulations, and all rules and regulations relating to Alterations promulgated by Landlord in its reasonable judgment. If, as a result of any Alterations performed by Tenant, any alterations, installations, improvements, additions, or other physical changes are required to 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 necessary and Tenant, within [NUMBER IN WORDS] ([NUMBER]) [Business Days/days] after demand therefor by Landlord, shall provide Landlord with such security as Landlord shall require, in an amount equal to 125% of the cost of such Resulting Alterations, as estimated by Landlord’s architect, engineer, or contractor. 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[, it being agreed that all filings with Governmental Authorities to obtain such certificates of final approval shall be made, at Tenant’s sole cost and expense, by a Person designated by Landlord];
This clause provides that:
This clause also requires that the tenant provide a security deposit to the landlord if there are alterations that must be performed in the shopping center outside the premises. It is not uncommon for a landlord to require a performance bond or additional security to hedge against any risk that a tenant cannot complete necessary work and obtain necessary sign offs to ensure the shopping center is compliant with all laws. The number of days the tenant should deposit the additional security can be negotiated, but a typical time period is five days after the landlord’s demand for security for the 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. In addition, no Alteration shall be undertaken prior to Tenant’s delivering to Landlord either: (A) a performance bond and labor and materials payment bond (issued by a surety company and in a form each satisfactory to Landlord), in an amount equal to [NUMBER IN WORDS] percent ([NUMBER]%) of the cost of each such Alteration (as estimated by Landlord’s architect, engineer, or contractor); or (B) such other security as shall be satisfactory to Landlord or required by any Lessor or Mortgagee. Within [NUMBER IN WORDS] ([NUMBER]) [Business Days/days] (or such shorter period if required by the terms of any Master Lease or Mortgage) 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 and Tenant shall indemnify and defend Landlord against and save Landlord harmless from all losses, costs, damages, expenses, liabilities, suits, penalties, claims, demands and obligations, including, without limitation, reasonable counsel fees, resulting therefrom. If Tenant does not comply with the foregoing provisions, Landlord may discharge or bond around any such lien, charge, order, or encumbrance, and Tenant agrees to reimburse Landlord (as Additional Rent) for all losses, costs, damages, and expenses resulting therefrom or incurred in connection therewith, together with interest thereon (at a rate equal to the Interest Rate), promptly upon demand. [All materialmen, contractors, artisans, mechanics, laborers, and any other persons now or hereafter furnishing any labor, services, materials, supplies, or equipment to Tenant with respect to any portion of the Premises, the Building, or the Shopping Center, are hereby charged with notice that they must look exclusively to Tenant to obtain payment for same. Notice is hereby given that the Landlord shall not be liable for any labor, services, materials, supplies, or equipment furnished or to be furnished to the Tenant upon credit, and that no mechanic’s or other lien for any such labor, services, materials, supplies, or equipment shall attach to or affect the estate or interest of the Landlord in and to the Premises, the Building, or the Shopping Center];
This clause requires the tenant to:
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, such as up to 45 days.
A landlord should request a bond amount that is greater than the projected costs of the alteration. 125% of the projected costs is a common amount.
In some jurisdictions, landlords can include the optional language at the end of subsection (iii) to disclaim any responsibility for paying the tenant’s contactors if the tenant fails to do so.
(iv) Approved Architects, Contractors, Mechanics, and Laborers. All Alteration(s) shall be performed only under the supervision of an independent licensed architect approved by Landlord. Tenant shall not, at any time prior to or during the Term, directly or indirectly, employ, or permit the employment of, any contractor, mechanic, or laborer in the Premises, whether in connection with any Alteration or otherwise, if such employment would interfere or cause any conflict with other contractors, mechanics, or laborers engaged in the construction, maintenance, or operation of the Shopping Center by Landlord, Tenant, or others, or of any adjacent property owned by Landlord. If any such interference or conflict exists, Tenant, upon demand of Landlord, shall cause all contractors, mechanics, or laborers causing such interference or conflict to leave the Shopping Center immediately; and
This clause provides that the alterations work is to only be performed by independent and licensed architects approved by the landlord. It also provides that the tenant cannot hire contractors, mechanics, or laborers if their employment by the tenant interferes with other contractors, mechanics, or laborers employed by the landlord, whether in the shopping center or in an adjacent property owned by the landlord. For example, if the landlord employs union labor, the landlord wants to avoid any disruptions to shopping center operations that may result from the tenant using non-union labor.
(v) Hours. Tenant shall be permitted to perform Alterations during the hours of [SHOPPING CENTER HOURS OF OPERATION] [on Business Days/every day], provided that such work shall not interfere with or interrupt the operation or maintenance of the Shopping Center or interfere with or interrupt the use and occupancy of the Shopping Center by other tenants. Otherwise, Alterations shall be performed at such times and in such manner as Landlord may from time to time [reasonably] designate.
Section 1.02 Ownership of Alterations. Within thirty (30) days of the Lease Expiration Date, Landlord shall indicate in writing to Tenant: (a) whether the Alterations shall be owned by Landlord; (b) if Landlord will require that the Alterations be removed by Tenant before the Lease Expiration Date; and (c) if Landlord will remove the Alterations on Tenant’s behalf before or after the Lease Expiration Date. 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, 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.
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.
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:
This section gives the landlord the right to notify the tenant 30 days before the lease term expires whether:
Tenants are likely to request that the landlord notify them when approving the alterations, rather than close to the end of the lease term, whether the alterations must be removed so that the tenant can:
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.
When determining ownership of the alterations, the landlord elects whether it intends to allow the tenant to remove the alterations or whether the landlord intends to perform that work itself. Restoration work is often complicated, especially if there has been a major installation, such as where there is slab penetration between floors. The tenant has no incentive to do as good a job as the landlord in repairing the premises. For this reason, it is important for the landlord to have the option to do the removal itself. All costs to bring the premises back to its pre-alterations condition should still be at the tenant’s expense.
Section 1.03 End of Term Restoration. Tenant shall remove at its sole cost and expense all Alterations required by Landlord 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 the same condition the Premises were in prior to installation of the Alterations unless otherwise provided for in this Lease. Tenant shall repair at its sole cost and expense all damage directly or indirectly caused to the Premises or the Shopping Center by the removal of any Alterations or Tenant Owned Property. If Tenant fails to remove Alterations or Tenant Owned Property as required hereunder, such failure shall constitute an immediate and uncurable Event of Default and, in addition to all of Landlord’s rights and remedies hereunder, Landlord may elect (but shall not be obligated) to remove same and Tenant shall pay to Landlord, within fifteen (15) days of receipt of demand, all costs and expenses incurred by Landlord in connection with such removal. For any Alterations designated under Section 1.02 to be removed by Landlord on Tenant’s behalf, Tenant shall pay to Landlord, within fifteen (15) days of receipt of demand, all costs and expenses incurred by Landlord in connection with such removal. Notwithstanding anything in Article [ARTICLE NUMBER FOR SECURITY DEPOSITS] to the contrary, Landlord may retain Tenant’s Security Deposit until it has been reimbursed all amounts due under this Section 1.03. If Tenant fails or refuses to pay all costs and expenses of removing Alterations or Tenant Owned Property as outlined herein, Landlord may apply all or any portion of such Security Deposit toward the payment of such unpaid costs relative to the removal of Alterations and Tenant Owned Property. The retention or application of all or any part of the Security Deposit shall not constitute an election of remedies by Landlord or a waiver of any of Landlord’s rights or remedies hereunder. Tenant’s obligations under this Section 1.03 shall survive the expiration or earlier termination of this Lease.
Section 1.02 allows the landlord to decide whether:
Under Section 1.03, the tenant must remove any alterations deemed by the landlord to be owned by tenant and if the tenant fails to do so, the landlord may remove them at the tenant’s expense. The tenant is to leave the premises in the same condition as when it moved in.
This section also provides that, if the tenant fails to remove its alterations, the landlord may remove the alterations and the tenant must reimburse the landlord for the cost of doing so.
The landlord gives itself the right to retain the tenant’s security deposit until it has been reimbursed all costs for removal of alterations, whether because the landlord elected to do the work or because the tenant failed in its obligation to do the work.
All of these concepts are extremely landlord favorable.
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