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The dangers of fit outs: Tenant inducements in commercial leases

Any leasing agent knows that tenants love their tenant inducements. The most common form is the landlord promising to build and pay for the costs of “fitting out” (renovating, providing fixtures) the tenant’s unit. After all, who wouldn’t want to shift the headache of paying for and managing a construction process to someone else? And who wouldn’t want to then reap the benefits of a unit customized for one’s specific needs? Seems simple and wonderful, until it hits you, or more likely your client… nothing in life is free.

Read this before you sign up your client for a tenant inducement – or risk negligence claims!

We all know nothing in life is free. So why do we believe this to be the case with tenant inducements? Inducements are not free. Rather, inducement costs are imbedded into the tenant’s rental rate – the tenant is paying for its fixtures through its “inflated” rent. It gets better – the tenant also makes the landlord richer because the improved space increases the value of the building, the building’s rental rates and, therefore, the landlord’s investment.

All that aside, here’s where it truly gets problematic: what happens to all of those customized fixtures once the lease is over? It makes sense for the tenant to keep those specialized lighting structures, kitchen equipment and flooring. After all, it’s the tenant’s fixtures that the tenant paid for… right? Wrong! Just because you paid for it, it doesn’t mean that you can keep it. This seemingly unjust outcome could be avoided if you simply glance over the tenant’s “make good obligations” and follow the steps below.

What are “make good” obligations? They are usually found under the “Termination”, “Decommissioning”, “Landlord Work” or “Tenant Work” clauses and dictate the condition in which the tenant must leave the premises once the lease is terminated.

Tenants are typically required to remove their trade fixtures, refurbish any damage to the premises due to moving the fixtures and leave the premises in the same standard that the tenant was required to maintain the premises. For example, tenants will have to leave the place in good condition and repair and make replacements, as would a prudent tenant.

While these stipulations may seem cumbersome, if properly written and documented, making good obligations can avoid rehabilitation charges or the landlord holding onto the tenant’s deposit due to the tenant’s failure to leave the premises in an acceptable standard. So, what’s the problem?

While there are many potential issues with make good obligations, the three greatest sources of litigation are as follows:

  1. Lack of clarity around whether it’s the tenant or the landlord who owns and gets to keep the fixtures;
  2. Confusion after an assignment of lease as to whether or not the assignee or the assignor is responsible for the make good obligations as the assignee typically takes the space in an “as is” condition; and
  3. Vicious ownership disputes in situations where the tenant replaces the landlord’s old fixture and the tenant then claims ownership over the new fixture.

The solution to preventing confusion is simple – document, document and document again. And document before you sign the lease, before you move in and after you move out. Whether you’re signing or assigning a lease, replacing a landlord’s old fixture or negotiating a tenant inducement, create a clear record of what fixtures the landlord claims is part of the property and, therefore, are the landlord’s to keep, and what fixtures are owned by the tenant (or subsequent assignee) and can be removed.

It is also necessary to state clearly in the lease the responsibilities of each party and who keeps what in the event of an assignment, replacement of an old fixture and if a tenant inducement is offered in the future. It’s also good practice to take pictures and document the “clean up” following the move-out.

Just like anything within a lease, a clause can cost your client millions if missed and it can cost you your reputation. The essential defence is writing it down and getting it signed or, better yet, shift the risk by getting a lawyer.