Tenant Improvements and Betterments: Who Insures the Buildout?

What the phrase covers, and what sits outside it

Improvements and betterments are whatever a tenant adds to the premises that becomes part of them. If removing it would take a contractor and a repair, it is probably inside the phrase: walls and glass fronts, ceilings, lighting, flooring, a pantry, the ductwork and wiring that serve your rooms.

Furniture, computers, phones and other equipment are a separate category. They leave with you, and nobody disputes whose they are. The line between the two is drawn by the lease's own definitions, so read them. The buildout entry describes the work itself.

The lease decides who owns the work and who insures it

Two clauses do the deciding. The alterations or surrender clause says who owns what is built, and under a typical New York office lease the answer is the landlord, from installation or from expiry. The insurance clause says who must carry coverage on that work during the term, and that is usually the tenant, even for work the landlord will end up owning.

Ownership and the duty to insure can therefore point in different directions. Our allowance entry makes the same point about work the allowance funded: most leases put it on the tenant's policy.

The landlord's building policy and the tenant's own

In plain terms, the landlord insures the building it delivered: the structure, the lobby, the elevators and the base systems. The tenant insures what it brought and, under most leases, what it built. After a fire or a flood, the casualty clause sets what the landlord must restore and how long it has. Ask whether that restoration reaches your buildout or stops at the base building.

We can describe how leases usually divide this. We cannot tell you what a policy covers, how much to buy or how a claim would be valued. Those are questions for a licensed insurance professional.

Questions for the lease attorney and the insurance broker

For the lease attorney, before signing:

• Who owns the improvements during the term, and at the end of it?
• Which party must insure them, and does that include work paid for by the landlord's allowance?
• After a casualty, what does the landlord have to rebuild, and what is left to us?
• What certificates of insurance must we deliver, and when?

For the insurance broker, once the scope is priced:

• Does our property coverage include improvements and betterments, and is the limit high enough for the value of the buildout?
• Does anything change while the space is under construction?
• If we cannot use the office after a loss, what covers the interruption to the business?

Two moments to check: at signing, and when the buildout is finished

At signing the lease wording is still open, and one sentence can change who carries the risk. Lease red flags lists other clauses to read at the same sitting.

When construction ends, the number changes. The buildout now has a final cost, and limits chosen when the lease was signed may not reflect it. Send your insurance broker the final cost of the work and the lease's insurance clause together.