How to Negotiate Leasehold Improvement Costs with Your Landlord

The moment feels like a scene from a movie: you stand before a vacant commercial space, its raw concrete floors and bare walls a blank canvas for your entrepreneurial dream. Whether it’s a chic cafe, a bustling franchise, or a sleek retail store, you can already picture the final product. But then, reality hits with the force of a contractor’s sledgehammer. Transforming that empty shell into a functional, branded environment comes with a staggering price tag—a cost many Filipino entrepreneurs mistakenly assume they must bear alone.

For decades, the unwritten rule of Philippine commercial leasing has been brutally simple: the tenant pays for the fit-out. The landlord provides the space; the tenant funds the transformation. This dynamic has left countless new business owners starting deep in the red before their doors even open. But the ground is shifting. In a rental market growing more competitive, and with tenants becoming more sophisticated, the power dynamic is slowly being renegotiated. The era of blindly accepting all fit-out costs is fading. A new trend is emerging, one where savvy tenants are successfully negotiating these once-immovable expenses, turning a major financial burden into a strategic advantage. This isn't just about saving a few pesos on paint and partitions; it's a fundamental reshaping of the landlord-tenant relationship that can determine the very survival of a new enterprise.

Deconstructing the Blank Space: What Exactly Are Leasehold Improvements?

Before you can negotiate, you need to speak the language. In the world of commercial real estate, the changes you make to customize a rental property for your business are called leasehold improvements, often referred to as "fit-outs" or "build-outs." These aren't minor decorations; they are the substantial, often permanent, alterations that make the space yours.

Think of them in two main categories:

1. Structural and Functional Improvements: These are the heavy-duty changes that alter the core of the space. This includes building interior walls and partitions, installing major electrical systems to handle specialized equipment, adding plumbing for a salon or restaurant, installing complex kitchen ventilation (HVAC), or constructing a new shopfront.
2. Aesthetic and Finishing Improvements: This covers the cosmetic but crucial elements that define your brand’s look and feel. Examples include specialized flooring, custom lighting fixtures, painting, built-in cabinetry and counters, and installing signage.

Under the Civil Code of the Philippines, the default principle is a stark one for tenants. If your lease contract is silent on the matter, any "useful improvements" you make become the property of the landlord at the end of the lease, with no obligation for them to reimburse you. This legal backdrop makes the negotiation of these costs not just important, but absolutely critical. Understanding the full scope of potential franchise fit-out costs from the very beginning is the first step toward controlling them.

The Money Question: Who Pays and Why It’s Changing

The conversation about leasehold improvements always circles back to a single, pivotal question: who foots the bill? The answer is no longer as straightforward as it once was, evolving from a rigid rule into a spectrum of possibilities.

The Traditional Model: Tenant Pays All
This has long been the standard arrangement in the Philippines. The landlord’s logic is that the improvements are tailored specifically to your business needs and brand identity. The custom kitchen for your restaurant or the specialized plumbing for your laundromat might be useless to the next tenant, who might want a simple office space. Therefore, the financial responsibility—and risk—falls squarely on your shoulders.

The Modern Shift: Shared Responsibility and Landlord Contributions
So, what changed? Several market forces have converged to give tenants more leverage. An increase in available commercial spaces in key business districts means landlords have to compete harder for high-quality, long-term tenants. They are beginning to realize that an empty unit generates zero income, and offering concessions is better than waiting months for a tenant willing to accept all costs.

This has led to the rise of more collaborative financial models:

• Shared Costs: This is a common compromise. A landlord might agree to cover the cost of fundamental improvements that add long-term value to their property—like upgrading the base electrical wiring or restoring the main plumbing—while the tenant pays for the brand-specific, cosmetic fit-out.
• The Tenant Improvement Allowance (TIA): This is perhaps the most significant development in favor of tenants. A TIA is a fixed amount of money that the landlord provides to the tenant to help cover the cost of construction and improvements. It’s typically calculated on a per-square-meter basis. For example, a landlord might offer a TIA of Php 5,000 per square meter on a 100-square-meter space, giving you a Php 500,000 budget to work with. This concession is a powerful negotiating tool that can dramatically lower your initial cash outlay.

Navigating these options requires a deep understanding of leasing practices, making a solid guide on commercial lease agreements an invaluable resource before you even begin discussions.

The Art of the Ask: Your Strategic Negotiation Playbook

Negotiating leasehold improvements is a delicate dance. You need to be firm yet reasonable, prepared yet flexible. Success rarely comes from just asking for a discount; it comes from building a business case that presents a partnership, not a demand.

1. Arm Yourself with Data Before Day One
Your negotiating power is directly proportional to your level of preparation. Walking into a meeting unprepared is a recipe for failure.

• Get Concrete Quotes: Don't rely on estimates. Engage one or two contractors to provide detailed, line-item quotes for your entire fit-out. This is your most crucial document. It transforms a vague request for "help with costs" into a specific, data-backed proposal: "My fit-out will cost Php 1.2 million. I am requesting a TIA to cover 40% of this amount."
• Research the Market: What are the going rental rates in the area? Are there many vacant units nearby? A quick survey of competing properties can reveal if other landlords are offering TIAs or rent-free periods, giving you valuable leverage.
• Profile Your Landlord: Is the property owned by a large corporation or an individual? A large real estate firm might have standard TIA policies, while an individual owner might be more flexible and open to creative solutions.

2. Frame Your Value as a Tenant
You aren't just a renter; you are an asset that brings value to the landlord's property.

• Highlight Your Brand's Strength: If you are a franchisee of a popular and respected brand, emphasize this. A strong brand draws foot traffic, which benefits the entire property and makes neighboring spaces more attractive.
• Showcase the Quality of Your Fit-Out: Explain how your proposed improvements will enhance the property's value. Using high-quality materials, upgrading electrical systems, and creating an attractive storefront makes their unit more valuable for the future. You're not just spending money; you're investing in their asset. This strategic positioning proves your business is a strategic fit for their site selection and location.

3. Master the Negotiation Toolkit
Once you're at the table, use a variety of tools to achieve your goal. If you want to truly excel, you need to master the art of negotiating a commercial lease in its entirety, not just one component.

• Prioritize the Tenant Improvement Allowance (TIA): This should be your primary ask. It provides a direct cash contribution that significantly eases your financial burden. Be ready to justify your requested amount with your contractor's quotes.
• Negotiate for a Rent-Free Fit-Out Period: This is a very common and effective alternative. Ask for a rent holiday for the duration of your construction. If your fit-out takes three months, that's three months of rent you save, which can then be funneled directly into your construction budget.
• Propose Graduated Rent: If the landlord is hesitant about a large upfront TIA, suggest a "step-up" or graduated rent structure. You pay a lower, below-market rate for the first year or two, allowing you to recoup your fit-out investment. The rent then increases to the full market rate in subsequent years.

Putting It in Writing: The Indisputable Power of the Lease Contract

In the Philippines, the principle of "freedom of contract" reigns supreme in commercial leasing. This means that a verbal agreement or a handshake deal is functionally worthless. Whatever you negotiate must be meticulously documented in the final lease agreement. The contract is your only true protection.

Pay forensic attention to these critical clauses:

• The Improvements Clause: This is the heart of the matter. It must explicitly state the exact amount of the Tenant Improvement Allowance, the process for claiming it (e.g., upon presentation of receipts), and a detailed description of the work that is being covered.
• The "Make-Good" or Reinstatement Clause: This clause dictates the condition in which you must leave the space at the end of the lease. Many standard contracts require you to demolish all your improvements and return the unit to a "bare shell" condition. This can be an unexpectedly massive expense. Negotiate to leave behind improvements that add value, or have the landlord explicitly waive the make-good requirement for specific items.
• Ownership of Improvements: The contract should clearly state what happens to the fit-out when the lease ends. While the default is that they revert to the landlord, you can sometimes negotiate terms for compensation, especially for significant, high-value installations.

The legal language in these documents is dense and can contain hidden pitfalls. This is precisely why having legal counsel for reviewing documents is non-negotiable. A lawyer’s fee is a small price to pay to avoid a multi-million peso mistake locked into a ten-year contract.

The New Bottom Line

The narrative of the powerless tenant is a relic. Today, armed with research, preparation, and a strategic approach, Filipino entrepreneurs have a genuine opportunity to shift a significant portion of the fit-out cost burden. Negotiating leasehold improvements is no longer an audacious request but a standard and essential part of smart business practice.

Success hinges on your ability to transform the conversation from one of cost-cutting to one of mutual investment. By demonstrating your value as a long-term partner and presenting a clear, data-driven case, you can secure the concessions needed to protect your capital and build a strong financial foundation. In the end, the negotiation over that empty space is about more than just walls and wires—it’s about building a launchpad for your success.