Office renovations when renting are one of the most sensitive topics in the relationship between landlord and tenant. This is where conflicts, misunderstandings, and financial losses most often occur. Someone expects to receive a turnkey premises, someone expects to be compensated for invested funds, and someone simply doesn't document the agreements in the contract, hoping for common sense. In practice, common sense without legal documentation doesn't work. The Civil Code of Ukraine provides basic rules regarding repairs and improvements to leased property, but most nuances are left to the discretion of the parties. That's why it's so important to properly document tenant improvements in the office lease agreement. In this article, we'll examine who should pay for office renovations when renting, how current repairs differ from capital repairs, what property improvements are, and how to document all this properly in the contract to avoid disputes.
Office Renovations When Renting: What the Law Says
The Civil Code of Ukraine establishes a general approach to distributing repair obligations for leased property. By default, the landlord is responsible for capital repairs, and the tenant is responsible for current repairs. But this rule applies only when the contract doesn't provide otherwise. In practice, most office lease agreements deviate from the "classical" model. Business centers often lease premises in shell & core condition or with basic renovations, transferring most work to the tenant. And this is legally permissible, provided all agreements are clearly documented in writing.
Current and Capital Repairs: What's the Difference
Understanding the difference between current and capital repairs is key to properly allocating costs. Current repairs are works aimed at maintaining the premises in working condition. This includes painting walls, replacing floor coverings, minor electrical repairs, doors, or plumbing. These costs are generally the tenant's responsibility.
Capital repairs relate to structural building elements and engineering systems. This includes replacing floors, repairing load-bearing walls, roofs, and major utilities. Such works are usually the landlord's obligation unless the parties agreed otherwise. The biggest problem arises when the contract doesn't contain a clear list of works considered current or capital. In such situations, any serious breakdown becomes a subject of dispute.
Tenant Improvements: What Does It Mean
Tenant improvements usually refer to adapting the premises to specific business needs. This may include replanning, installing partitions, setting up conference rooms, server rooms, kitchens, or reception areas. Such renovations aren't always necessary for the building's operation but are critically important for the tenant. That's why the question of who does the renovations when renting an office and at whose expense should be resolved before signing the contract. In practice, there are several common models: renovations entirely at the tenant's expense, renovations at the landlord's expense, or a mixed model where costs are shared between parties.
Build-to-Suit (BTS): Custom Office for a Specific Tenant
Build-to-Suit (BTS) is a lease format where premises are designed, built, or deeply reconstructed for a specific tenant with their business needs in mind. This isn't just about renovations, but creating an office that's initially "tailored" to the company's processes: planning, engineering, network loads, security, and logistics.
The main difference between BTS and classic tenant improvements is that all key decisions are made at the design stage. The landlord invests in the property, and the tenant, in turn, commits to long-term lease, usually for 7-15 years. Construction or reconstruction costs are incorporated into the rental rate and gradually recovered.
From a legal standpoint, Build-to-Suit is always comprehensively documented: in addition to the lease agreement, technical specifications, budget, work timelines, and party responsibilities are recorded. That's why BTS is considered one of the most transparent models from the perspective of renovations and improvements. Here it's clear in advance who pays, what's considered an improvement, and how the landlord recovers their investment.
Who Should Pay for Office Renovations When Renting
There's no single correct option. Everything depends on the condition of the premises, lease term, business center class, and the parties' negotiating position. If the office is leased without renovations or with minimal finishing, the tenant usually bears the costs. In return, they may receive rent-free periods, a reduced rate, or a long-term contract. In premium business centers, the landlord may provide part of the renovations or basic finishing. However, individual solutions for a specific tenant are almost always paid for by the business itself. The worst option is when parties verbally agree on compensation but don't document it in the contract. In such cases, proving the right to reimbursement is almost impossible.
Improvements to Leased Property: Legal Aspect
Property improvements are a separate category often confused with repairs. These are changes that increase the property's value or functionality and cannot be separated without damage to it. The Civil Code of Ukraine distinguishes between separable and inseparable improvements. This determines whether the tenant has the right to compensation after the contract ends. Inseparable improvements can only be compensated with the landlord's consent. Without such consent, the tenant risks losing invested funds.
Property Improvement Agreement: How to Document Arrangements
If serious renovations or property improvements are planned, it's advisable to enter into a separate property improvement agreement or include a detailed section in the lease agreement. The document should clearly define what works are considered improvements, who finances them, whether they're subject to compensation, and within what timeframes. It's also important to stipulate the fate of these improvements after the lease ends. The more detailed these conditions are documented, the fewer risks for both parties. The contract should specify:
- A detailed list of works considered improvements
- Estimated cost of these works
- Source of financing (tenant, landlord, or shared funds)
- Conditions for compensating tenant's expenses
- Compensation mechanism (one-time payment, rent reduction, credit toward future payments)
- Compensation timelines
- What happens to improvements after the lease ends
- Terms for early contract termination
Financial Mechanisms for Compensation of Renovation Costs
There are several common ways to compensate tenant's renovation costs:
Rent-free periods — the simplest option. The tenant doesn't pay rent for a certain period during which they complete renovations. In fact, renovation costs are compensated through rent not received by the landlord.
Reduced rental rate — for a certain period (for example, the first year of lease) the tenant pays reduced rent. The difference covers their renovation costs.
Fixed compensation — the landlord compensates part of the tenant's expenses with a one-time payment after work completion and cost confirmation.
Credit of expenses toward future payments — the tenant has the right to withhold part of the rent until full coverage of agreed renovation costs.
Increased rental rate upon contract extension — the tenant completes renovations at their own expense, but upon lease extension the landlord commits not to raise the rate, effectively recognizing the value of improvements made.
Each of these mechanisms has its advantages and disadvantages from the perspective of tax and accounting records, so choosing a specific option should be coordinated with financial specialists from both parties.
Guarantees and Party Liability
Tenant improvements are always associated with risks. The landlord worries about the property's condition, and the tenant about their investment. The contract should provide quality guarantees for completed work, liability for violations of building codes, and the procedure for approving changes. This is especially relevant for replanning and work affecting the building's engineering systems. The landlord has the right to require that renovation work be performed by qualified contractors with necessary licenses and permits. It's also possible to provide for the landlord's right to monitor the renovation process, receive information about materials and technologies used.
From the tenant's side, it's important to document guarantees that if improvements are agreed upon and properly completed, the landlord won't demand their removal or restoration of the premises to original condition upon return. It's also worth stipulating the procedure in case hidden defects in the premises are discovered during renovations. If the tenant discovers serious problems (for example, leaks, electrical wiring issues) that weren't visible during inspection, who bears the costs of remediation?
Features of Different Types of Office Premises
The approach to renovations differs significantly depending on the type of premises and business center class.
Shell & core — premises are leased with basic engineering utilities but without interior finishing. The tenant performs all renovations independently. This format provides maximum freedom but requires significant investment.
Warm shell — premises with basic finishing (for example, white walls, floor screed, basic electricity and heating). The tenant adds finishing coverings, partitions, and furniture.
Ready office (plug & play) — fully finished renovations, furnishing, and equipment. The tenant moves in and starts working immediately. Such offices are usually more expensive but require no initial investment.
The choice of format depends on the company's strategy, budget, and lease term. For long-term lease, investing in shell & core may be economically justified. For short-term needs or startups with limited budgets, a ready office is better suited.
Common Mistakes When Agreeing on Renovations
The most common problems arise when parties don't detail their agreements. Verbal promises, absence of cost estimates, vague compensation wording — all this almost certainly leads to conflicts. Another typical mistake is ignoring the issue of improvements in case of early contract termination. Without clear conditions, the tenant is practically unprotected. Other common mistakes include:
- Absence of written approval for the renovation project
- Uncoordinated list of contractors
- Absence of work completion timelines
- Unclear definition of quality standards
- Ignoring property insurance during renovations
- Absence of work acceptance certificate
- Failure to document improvement costs
Also, copying standard clauses from internet templates without adapting them to the specific situation is a mistake. Each lease agreement is unique, and the approach to renovations should consider the specifics of the premises, business, and party relations.
Acceptance Certificate After Renovation
After renovation work is completed, an acceptance certificate must be prepared that documents the premises' condition and improvements made. This document is proof that work was completed and serves as the basis for possible compensation. The certificate should describe in detail all completed works, materials used, record the condition of engineering systems, and indicate the cost of improvements with supporting documents (invoices, estimates, contractor work completion certificates).
Returning the Premises After Lease Ends
A separate question is in what condition the tenant should return the premises after the contract ends. Should they dismantle all installed partitions? Do they leave built-in furniture and equipment? If this issue isn't addressed in the contract, it will inevitably become a source of conflict. The optimal option is to agree upon the final condition of the premises upon return when entering into the contract. Possible options: return in original condition (dismantling all changes), return in post-renovation condition (all improvements remain with the landlord), or a mixed option with a separate list of what's dismantled and what remains.
Conclusion
Office renovations when renting aren't just a construction issue, but an important legal and financial aspect of lease relations. Clear cost allocation, a properly documented property improvement agreement, and detailed renovation conditions protect both parties' interests. The more carefully these issues are worked out at the contract signing stage, the calmer and more predictable office use will be in the future. Investment in quality legal preparation of the lease agreement with a detailed section on renovations and improvements always pays off, as it allows avoiding expensive conflicts and protecting funds invested in the premises.
FAQ
Who should do office renovations when renting according to law?
According to the general rule of the Civil Code of Ukraine, the landlord performs capital repairs, and the tenant performs current repairs. However, parties can change this distribution in the contract.
Can the tenant demand compensation for renovations done?
Compensation is possible only if the renovations or improvements were agreed upon with the landlord and this is expressly provided in the contract. Without written consent, chances of reimbursement are almost nonexistent.
What's considered an improvement to leased property?
Improvements are changes that increase the property's value or functionality and cannot be dismantled without damage to it. These works most often cause disputes.
What happens to improvements after the lease ends?
This depends on contract terms. If compensation isn't provided, inseparable improvements usually remain with the landlord without reimbursement.
Can replanning be done in a leased office?
Yes, but only with the landlord's consent and compliance with building codes. All permits and approvals should be documented in writing.