Franchisee Real Estate Lease: LEASEHOLD IMPROVEMENTS

A leasehold improvement is a modification or addition made to the interior of a leased space to customize it for a specific tenant's business needs.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The complexity of the lease agreement for the commercial real estate that is used in the franchise operation can very easily equal, or even surpass, that of the franchise disclosure document and the franchise agreement, such that retaining the legal services of an experienced lawyer to decipher, explain and negotiate the commercial lease agreement and its schedules. And for over 25 years, we have been working with business owners, including franchisees, to understand and deal with commercial lease agreements that have been presented by landlords and are foundational to their business operations. To gain the most from our legal analysis and advice as to the commercial leasing arrangement, a franchisee would be well served to understand some of the most significant commercial leasing terminology, which we have undertaken to provide you with in-depth analysis.

With respect to commercial real estate leases, a leasehold improvement is a modification or addition made to the interior of a leased space to customize it for a specific tenant's business needs. These improvements are distinct from a landlord's standard building maintenance or repairs. Instead, they are tailored to make the space functional and desirable for a particular tenant.

Leasehold improvements are typically things that are permanently attached to the building and cannot be removed without causing damage. Examples include:

Interior Walls and Partitions: Adding or removing walls to create private offices, conference rooms, or specific work areas.
Flooring: Installing new carpet, hardwood, or tile.
Electrical and Plumbing Systems: Upgrading electrical wiring to accommodate specialized equipment or adding plumbing for a new kitchenette or bathroom.
Lighting and Fixtures: Installing unique lighting fixtures, recessed lighting, or specialized task lighting.
Built-in Cabinetry: Creating built-in reception desks, shelving, or storage units.
Upgrades to HVAC Systems: Modifying the heating, ventilation, or air conditioning to suit the tenant's layout.

The distinction as between leasehold improvements versus trade fixtures is critical in the context of commercial real estate leases.

Leasehold Improvements: These are modifications that become a part of the real estate. They are generally considered the property of the landlord once they are installed and cannot be removed by the tenant at the end of the lease.
Trade Fixtures: These are items the tenant attaches to the property for their specific business, but they are considered the tenant's personal property. As long as they can be removed without causing significant damage to the building, the tenant has the right to take them at the end of the lease.

The cost of leasehold improvements is a major point of negotiation in a commercial real estate lease. There are several common arrangements:

Landlord Pays (Turnkey): The landlord agrees to complete all the necessary build-out work before the tenant moves in. This is often called a "turnkey" project because the tenant receives a space that is ready to use from day one.
Tenant Improvement Allowance (TIA): The landlord agrees to provide a specific amount of money per square foot (e.g., "$25 per square foot") to the tenant to use for the improvements. The tenant manages the construction project and pays for any costs that exceed the allowance.
Tenant Pays: The tenant is responsible for all costs and management of the improvements. This is more common in "as-is" leases where the tenant takes the space in its current condition.
Rent Discount: The landlord may offer a period of free or reduced rent at the beginning of the lease to help the tenant offset the cost of the improvements.

Naturally, how the concept operates in the specific context of the particular lease agreement requires experienced legal analysis, such that you make the most out of your understanding of the commercial lease agreement for your franchise. For such legal analysis and advice for your franchise and its commercial leasing arrangements, we welcome you to contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com to schedule a confidential consultation.

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Review your Commercial Lease Agreement

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