AUTHOR: Attorney Jeff Ammon, Miller Johnson
Leases often involve improvements to be made before the tenant moves in. sometimes the landlord makes these initial improvements; sometimes the tenant does the work. And sometimes these improvements occur after the tenant is in the space. But in both situations, the same question arises when the lease ends: what happens to those improvements? Do they stay, or do they go with the tenant?
Most leases attempt to answer this question. A typical lease may say that when the term ends, “fixtures” or “improvements” stay and “trade fixtures” go with the tenant. But “fixtures” and “trade fixtures” are confusingly similar labels for improvements that get treated very differently in typical leases. Besides, these labels are vague , overly broad terms that have no specific legal meaning. Hence they invite confusion, misunderstanding, and disputes when the term ends.
A recent Michigan case illustrates this problem. In this case a hair-salon tenant learned the hard way that a special counter with sinks was not a “trade fixture” that the tenant could remove when the term ended. Instead, the counter belonged to the landlord.
When the lease was being negotiated, the prospective tenant wanted a counter with sinks installed in the space. The tenant would have purchased and installed this counter, but it didn’t have the cash. So the landlord agreed to purchase and install the counter. The rent would be increased to cover the landlord’s $60,000 cost. The landlord told the tenant the tenant would own the counter at the end of the lease term. So far, so good.
But unfortunately, the lease language didn’t read that way. It stated that improvements made by the landlord remained the landlord’s property. The tenant could remove, at the end of the term, only those improvements that that tenant had installed. So the counter stayed, because the tenant wasn’t the one who installed it.
Someone didn’t take a few minutes to compare the lease description with the actual deal. You can do better for your leasing clients.
What can we learn here?
Lesson #1: as hard as it may be when the lease is being negotiated, take the time to identify what happens to each improvement when the lease ends. Avoid relying solely on vague terms like “fixtures” and “trade fixtures”. Consider:
1. What improvements are we talking about? Counters, partitions, special lighting, plumbing fixtures such as sinks, etc.
2. Who installs each improvement? Who pays for each one?
3. What happens to each item on this list when the lease term ends? Your choices include:
1) The item stays, period.
2) Landlord has the option to require the tenant to remove the item (and restore the space to original condition).
3) Tenant must remove the item (and restore the space)
4) Tenant has the option to remove the item or leave it behind.
5) For possible improvements the tenant may want to make later on during the term, agree that if the landlord gives its consent, the topics of removal and restoration will be addressed at that time.
Lesson #2: remember the landlord’s promise that the tenant would own the counter when the lease term ended? Unfortunately for the tenant in this case, the lease had a standard so-called “zipper clause”: a statement that the written lease controlled over anything either party may have said to each other. So the landlord’s promise was unenforceable. The lesson: take a little time with your client to make sure any oral promises that matter are written into the lease.
You’ll serve your lease clients well by getting them to focus up front on what happens when the lease term ends. You’ll be avoiding disputes that can lead to litigation, and no landlord or tenant wants that.