What are Leasehold Improvements?

Leasehold improvements are alterations to a building which are made by a tenant to make the space more usable. Some examples of leasehold improvements include: painting, installing retail counters, partitioning, replacing flooring, and building dressing rooms, among many other things. Leasehold improvements are also sometimes referred to as “build-outs,” and depending on the nature of the improvement, it may be considered the property of the tenant, or the property of the owner.

If a leasehold improvement can be removed without damaging the structure or violating the terms of the lease, the tenant has the right to remove it when he or she leaves. For example, the owners of a spa could opt to take their hot tubs, saunas, and body treatment equipment with them, stripping the space so that it looks like it did originally. On the other hand, if a tenant paints his or her house, removing the paint would obviously damage the structure, in addition to being rather silly, so the leasehold improvement is considered the property of the landlord.

Some landlords pay for leasehold improvements to make their leases more appealing, and in these instances, the improvements belong to the landlord. The landlord would also have the right to deduct the expense of the improvements and their depreciation over time from his or her taxes. Many landlords in spaces like malls offer leasehold improvements as part of their contracts, to lure in clients.

When a tenant undertakes leasehold improvements, the landlord must be consulted, whether the tenant plans to replace bathroom flooring or create a series of offices. Landlords can decide that they do not approve of the proposed improvements, and request that the tenant propose a different plan. The tenant is able to deduct the cost and depreciation of leasehold improvements he or she pays for, reflecting the fact that these renovations are necessary for the space to be usable.

Tenants should be aware that many nations have specific laws about the responsibility of the landlord. For example, landlords are often required to provide access to running water and electricity. Therefore, a tenant would not need to pay for the installation of access to water and a water meter, although the tenant might need to pay for specialized plumbing in the structure. Likewise, many landlords are expected to perform routine maintenance such as roofing and safety improvements, so tenants should not have to pay for these types of renovations.