Building improvements - when your walls come tumbling down

Congratulations! You are a new business owner. 

You have secured financing from your local bank and are ready to find that perfect location to operate your business.  You find out that retail space is very expensive and somewhat limited but decide on space in a new strip mall going in close to your residence and in an area that has great curb appeal.

You meet with the landlord and find out that your space is actually a rectangle consisting of 1200 square feet. 

“Where are the walls?” you ask. 

After a little more discussion, you find out that they can be put in to meet your specifications. The cost is $25,000.  Yes, this is your cost.  Let’s call it an improvement or betterment.

Although a tenant may have made or paid for improvements and betterments, they ordinarily become part of the property of the landlord as soon as they are attached to the building. 

Finally, things are in place and everything is running smoothly.  Customers are starting to notice your prime location and you are getting walk-in traffic.  Then the unexpected happens. 

There is a car accident involving two cars that occurs in the front of your building.  One car ends up in your store causing damage to your office by fire.  The owner of the car that went through your store is uninsured and has no assets.  Where do you turn for coverage?

You call the landlord and he says he carries insurance and will call his agent. 

Meanwhile you also call your agent because you have no place to work. 

Your agent files a claim as well. You have some business interruption and extra expense coverage that will soon be kicking in.  As time goes by you notice that reconstruction of your office is underway. 

You walk in but there is no ceiling, no walls, no fixtures.  Remember, this is a new building and your landlord did not add to his policy any work that you did to improve the location. 

When you called your agent, he came in and never asked about any improvements to the location.   They thought that was the way it was when you signed the lease.  Welcome to your 1200 square foot space again.

In past blogs I have spoken of business interruption and extra expense.  I have also mentioned it is in your best interest to read your lease and communicate with your landlord as much as possible. 

In this case, I want to point out a coverage that can help you.  The coverage is improvements and betterments. 

This category covers a tenants, "use interest"  in improvements and betterments that the tenant has added to the landlord’s building.  These improvements generally change the property and enhance its value and ordinarily become the property of the landlord as soon as they are attached to the building. This is where the term "use interest" comes from.

This leads into the Leasehold Interest Coverage Form that will be discussed in my next blog.