Tenant Improvements and Betterments: Altering Rental Property

Tenant lease terms can get pretty obtuse, but as fancy as the phrase "improvements and betterments" comes across, it typically means just what it sounds like: alterations that tenants have made to a rental property in order to improve or better the space (in theory, anyway).

This term often comes up in discussions between a tenant and a landlord pertaining to just how much a tenant can legally improve the property in question and who's responsible for those alterations. But it also pops up frequently in the realm of commercial property insurance. Like the range of improvements and betterments a tenant might make — from painting a wall to remodeling a kitchen — these real estate laws vary widely.

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Unlike questionable DIY projects, the legal nuances of tenant improvements and betterments largely boil down to state tenancy laws. There is, of course, no federal law governing exactly what a tenant can alter in a rented space and, perhaps surprisingly, many state laws don't go into fine detail, either.

In the big picture, tenant improvements and betterments may include new fixtures, alterations, installations and additions made and paid for by a tenant to a building that they occupy but do not own. For commercial tenants, betterments and improvements may occur in the renting business owners' part of the building as they upgrade the property to better meet their business needs. Typically, "improvements and betterments" refers to renovations that substantially impact the property, including common items like new built-in appliances, flooring or large shelving units.

Writing for The Valley Business Journal in 2020, Craig Davis of Craig Davis Family Insurance expands on this, stating that "tenants improvements and betterments are paid for by the tenant but become part of the building. Unless a contract states otherwise, the landlord generally obtains ownership of the upgrades once they have been installed." Even if alternations are made on the up-and-up, removing them may not be legal as doing so may risk damaging the building.

Because state laws don't usually get deep into the weeds of betterments and improvements, legally binding agreements between the tenant and the property owner are absolutely vital. Lease agreements and written contracts between the renter and the building owner provide protection for both parties when dealing with tenant improvements and betterments.

Legal complications commonly arise when tenants make major alterations or reconfigurations to a rental unit, such as converting a garage into a living space. To circumvent such potential issues, it's very typical for a lease to contain a provision that clearly prohibits the tenant from making alterations to the rental property without the express written permission of the owner. In this way, tenants and landlords can make written agreements for each notable alteration performed by the tenant on a case-by-case basis.

Without a lease that prohibits tenants from making alterations, Bornstein Law of San Francisco points out that it may be legal for a renter to make changes to the property. However, it's would still be illegal for tenants to willfully damage the property. On the other hand, if a tenant makes an alteration that is clearly prohibited by the lease agreement, it may be up to that tenant to restore the unit back to its original condition if requested by the owner, lest the tenant face eviction.

When an agreement enables a tenant to make alterations, the tenant may remove the improvements they've installed within a reasonable time frame surrounding the termination of the lease, provided that the removal doesn't damage the real property. Of course, if the tenant made improvements without the property owner's permission, the tenant also forfeits their rights of removal.

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In some cases, tenant-made renovations can add value to the building. This is why tenant improvements and betterments often play an important role in commercial property insurance, where they're sometimes referred to as TIBs. Either the tenant or the building owner can insure TIBs, and a thorough lease will note exactly which party is responsible for this.

To avoid being underinsured, property owners can increase the limits of the property insurance coverage to account for the new TIBs. Alternatively, the lease may determine that the tenant takes on all responsibility for any potential damage to the TIBs.

When commercial tenants upgrade rented space, they typically maintain an insurable interest in those upgrades. An insurable interest is the basis of an insurance policy — objects that would create financial hardship for the policyholder if damaged or destroyed. However, as with residential buildings, it's common for a property insurance policy to specify that TIBs become the landlord's property once the tenant officially ends the occupancy.

Just as in the residential realm, the strength of legal arguments here often boils down to three words: contracts, contracts, contracts. When it comes to TIBs, a clear lease makes for clear ownership, transfer and responsibility.

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