Handling Improvements Made to Rental Property by Tenant

Many tenants crave putting their personal stamp on rental properties. However, landlords have valid concerns about alterations impacting their valuable assets. This guide outlines an approach for rental improvements that work for both tenants and landlords.

By
Nichole Stohler
|
Last Updated
April 9, 2024
Handling Improvements Made to Rental Property by Tenant

When renting a property, customizing it to suit the tenant's preferences and needs helps make the property feel like home and increases their chances of staying longer. Landlords, meanwhile, may benefit from certain upgrades that increase property value. However, landlords and tenants may not always see eye to eye on what's considered an improvement, making it important for landlords to oversee changes to the property to protect their investment.

This guide covers the key considerations for tenants and landlords regarding rental property improvements. You'll learn what qualifies as a temporary versus a permanent change and how to handle ownership of fixtures and alterations after a lease ends. We'll also cover how to request that a tenant remove improvements and ways for landlords to address unauthorized alterations.

You'll gain an understanding of how to enhance the property without causing conflicts, unapproved modifications, or confusion over who is responsible for changes.

What is considered a tenant improvement?

In residential real estate, tenant improvements are changes that renters make to customize their living space. Examples might be painting or adding new lights.

In commercial real estate, tenant improvements refer to when a tenant makes improvements to the property to support their business needs, such as adding interior walls or redoing plumbing.

In both cases, tenants make these changes to improve the function of the leased premises, make it look nicer, or make them feel more comfortable. But, in residential real estate, tenants need the landlord's consent to make any changes.

Differentiating repairs and improvements

Although they may seem similar on the surface, there are major differences between repairs and improvements to a rental property:

Repairs

Most leases delineate tenants' responsibilities for minor repairs to the property. These can include changing lightbulbs, fixing minor leaks, and maintaining the cleanliness of the property. These responsibilities typically aim to preserve the property's current condition without altering its value or functionality and do not require the landlord's permission.

Improvements

Improvements are changes that make the property better, more useful, or more attractive. These changes are permanent and can impact how the property looks or works, sometimes even making it worth more. Here are some examples of what tenants might do to improve their space:

  • Painting walls a different color.
  • Putting in new floors or carpets.
  • Upgrading appliances or fixtures in the kitchen.
  • Adding shelves or other storage.
  • Fixing up the garden or yard.

Removal of fixtures

If a tenant adds improvements to a property that involve fixtures, they often lead to questions about who owns these fixtures once the tenant decides to move out.

Fixtures refer to items that are permanently attached to the property, making them a significant part of the property's overall value and function. Examples include:

  • Light fixtures.
  • Custom-built shelving or cabinetry.
  • Faucets or shower heads.

To avoid conflict over ownership of these items upon move-out, the lease agreement should specify whether the tenant must leave fixtures they installed with the property or if they can remove them.

What can landlords do about unauthorized tenant improvements?

Landlords have several options when they discover that a tenant has made alterations to the rental property without permission:

  1. Acknowledge the improvements: Send the tenant a written notice acknowledging the home improvement project and that you did not give permission to make these changes before the work started.
  2. Inform the tenant of the lease violation: Inform the tenant that the unauthorized improvements violate the lease agreement. Point out the specific clause in the lease that prohibits changes without the landlord's approval.
  3. Prohibit further improvements: Communicate to the tenant that they can't make any more unauthorized improvements. Encourage them to discuss any ideas for changes or upgrades with you first, because you may be open to approved improvements that could benefit the property.
  4. Outline potential consequences: Explain the possible consequences the tenant may face because of the lease violation. These could range from requiring them to remove the changes, pay for it through deductions from the security deposit or even eviction, depending on the lease agreement and how serious the problem is.
  5. Document the situation: Keep a detailed record of your written communication with the tenant about the unauthorized changes they made. You will need this record if you have to take legal action in the future.

Key lease clauses to include

The lease agreement should clearly lay out the rules for any changes that tenants want to make to the rental property. This helps both landlord and tenant understand what they're responsible for. Here's what the agreement should include:

  • Approval process: Make it clear that tenants need written permission from the landlord before changing or improving the rental property. Explain how tenants should submit their proposals and how the landlord will review them.
  • Permitted improvements: Share what improvements tenants can make without approval and list any changes they cannot make without permission.
  • Restoration requirements: Explain that tenants must return the property to its original state when the lease ends unless the landlord decides to keep the changes. Also, clarify who will pay for the restoration work.
  • Ownership of improvements: Determine if the improvements will become the landlord's property when the lease ends. Specify which fixtures or upgrades the tenant should leave behind.
  • Damages and liability: Clearly state that the tenant will be responsible for any damages caused by their improvements and outline the potential consequences.

Tenant-made improvements without landlord permission

Tenant-made improvements in rental properties require collaboration and an understanding of the rules. Before signing the lease, both parties should discuss and agree on what changes tenants can make to the property.

Landlords need to address unauthorized improvements promptly to keep their properties in good shape and protect their investments. At the same time, residential tenants should get approval before making significant changes to avoid conflicts or financial issues.

Landlords and tenants can build a positive relationship and make sure property improvements benefit everyone by communicating openly and sticking to the lease agreement.

Improvements made to rental property by tenant FAQs

How are tenant improvements accounted for?

In commercial real estate, tenant improvements are capital expenditures on the property owner's balance sheet. These costs can be depreciated over the improvement's useful life, offering tax benefits. The lease agreement often dictates who must bear the cost and how to handle it financially, requiring either the tenant to directly invest or the landlord to potentially adjust the rental rate.

What type of improvement is a non-mandatory improvement?

A non-mandatory improvement is any change or enhancement that the tenant makes without the lease agreement requiring it. These improvements are done at the tenant's discretion to better suit their needs or preferences, such as upgrading interior decorations or installing additional features not originally provided by the landlord.

Can a tenant deduct leasehold improvements?

Yes, commercial real estate tenants can deduct the cost of leasehold improvements from their tax returns in some situations. These improvements must be for the tenant's business and have a useful life of 15 years or less. Under Section 179 of the IRS code, tenants may have the option to deduct the full cost of these improvements in the year they are made rather than spreading the cost over the lease term.

Important Note: This post is for informational and educational purposes only. It should not be taken as legal, accounting, or tax advice, nor should it be used as a substitute for such services. Always consult your own legal, accounting, or tax counsel before taking any action based on this information.

Nichole Stohler

Nichole co-founded Gateway Private Equity Group, with a history of investments in single-family and multi-family properties, and now a specialization in hotel real estate investments. She is also the creator of NicsGuide.com, a blog dedicated to real estate investing.

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