Here’s a comprehensive, practice-oriented guide to Lease Agreements with Lessee-Funded Renovations (a.k.a. “fit-out” or “tenant improvements”) and Payment Terms in the Philippines—how to structure the deal, default legal rules you need to override, tax/permits/insurance, cash-flow models (TIA vs. rent offsets vs. amortization), end-of-term “make-good,” and sample clauses you can adapt. (No web search used.)

1) What you’re dealing with (and why it matters)

When a tenant (lessee) pays to improve the premises—buildouts, partitions, MEP upgrades, storefronts—you’re juggling property law (who owns improvements), contract (who pays, when, and what happens later), regulatory (permits/condo or building admin approvals), tax, and risk.

Golden rule: Put everything in the lease. Don’t leave improvements to default Civil Code rules; they’re blunt and can bite at turnover.

2) Default Civil Code ideas you should consciously accept or override

(Black-letter, simplified—exact article numbers omitted.)

Improvements & ownership. As a rule, fixtures/accessions attach to the property owner (lessor). Lessees may remove movables and non-permanent installations that don’t damage the property, unless the lease says otherwise.
Necessary vs. useful vs. luxurious expenses. The law distinguishes between: Necessary (preserve the property); Useful (increase value/utility); Luxurious (for comfort/ornament). Rights to reimbursement and removal differ by class and by whether the lessor consented.
With consent vs. without consent. If the lessor consented in writing to the lessee’s improvements, reimbursement/retention rules are more favorable to the lessee (or at least negotiable). Without consent, the default tends to favor the owner, and removal rights get narrower.
End-of-lease. Absent agreement: improvements may accede to the lessor without indemnity (especially if permanent), or the lessee may remove them if it can be done without substantial injury and if the lessor does not opt to keep them (often with some compensation). 👉 Practice tip: Don’t rely on defaults. Hard-code (a) ownership during and after the term; (b) removal rights; (c) restoration standard; (d) buy-out formulas.

3) The 6 common payment architectures (pick, mix, or stack)

Pure Lessee-Funded Fit-Out (no reimbursement).
- Tenant pays 100% of capex; rent may be lower or with a rent-free fit-out period (e.g., 30–120 days).
- Tenant keeps ownership of trade fixtures; landlord owns structural/immovable works at end, usually without payment.
Tenant Improvement Allowance (TIA).
- Landlord gives a cash allowance (lump sum or progress-billed) against approved costs; any excess is tenant’s.
- Often conditioned on COA, permits, lien waivers, as-builts, and photo documentation.
Rent Offset / Abatement.
- Tenant funds works; recovers via credits against base rent for a defined period or cap.
- Structure as (a) percentage credits per milestone, or (b) fixed monthly abatements.
Amortized Recovery (Capex → “Additional Rent”).
- Landlord funds capex (or reimburses tenant) and amortizes over the term (straight-line with interest) as additional rent.
- Includes prepayment or acceleration on early termination/tenant default.
Cost-Share (Hybrid).
- Landlord funds base building (e.g., risers, core MEP); tenant funds above-standard specs.
- Clear scope split + change-order governance.
Turnkey by Landlord.
- Landlord builds to agreed Landlord’s Work; rent begins on Substantial Completion; tenant pays only incidental upgrades via variation orders.

Cash-flow tip: For SMEs, combine (1) with a short rent-free fit-out and a cap on restoration. For anchors, negotiate (2)+(3) or (4) with step-up rent.

4) Approvals, permits, and building/condo rules

Design approvals. Require pre-approved plans, material specs, shop drawings, signage drawings; no works until written landlord approval.
Government permits. Building Permit, Ancillary permits (electrical/mechanical/plumbing/FDAS), and Occupancy/Completion. Typically tenant applies with an Owner’s Authorization (landlord countersigns as titled owner).
Building/Condo Admin approvals. Work hours, deliveries, hoarding, hot works, lift bookings, noise/dust controls, house rules, security bonds.
Utilities tie-ins. Metering, tapping points, capacity checks; cost allocations for upgrades.
Fire safety. Plans stamped by a Fire Safety Practitioner; acceptance tests with BFP.

Who applies? Usually the tenant’s contractor on tenant’s dime, with owner’s written authority. Spell it out.

5) Risk allocation during construction

Contractor selection. Require licensed contractors; submit PCAB license, DOLE compliance, and OSHA plan.
Insurance (must-haves).
- Contractor’s All Risks (CAR) covering works, materials, and equipment;
- Commercial General Liability (3rd-party injury/property damage);
- Worker’s accident insurance;
- Tenant’s property/stock and business interruption after fit-out.
- Name the lessor as additional insured, with waiver of subrogation and 30-day notice of cancellation.
Performance security. Either a performance bond (10–20%) or retention money (5–10%) on progress billings; defects liability period (e.g., 12 months).
Change orders (VOs). Written only, with cost/time impact and landlord approval.
Delays & LDs. Define Substantial Completion (punchlist allowed) and Liquidated Damages against the party responsible for delay (tenant if late opening, landlord if late delivery of premises/utilities).

6) Who owns what—during, at completion, and at end of lease

Trade fixtures & equipment (tenant’s brand signage, gondolas, servers, specialized machinery): Tenant-owned; removable without material damage.
Integrations & permanent fixtures (hard partitions, floor finishes affixed, MEP extensions, ceilings, storefront glazing): typically accede to the landlord unless expressly reserved.
MEP “take-offs” (taps, risers, metering): often landlord’s once installed.
IP & drawings. As-builts licensed to landlord for operation and future works; contractor retains copyright in standard details.

Practice clause: “Landlord’s Work vs. Tenant’s Work Exhibit” with color-coded plan; then an Ownership & Removal clause mapping each item to: (i) remove & restore; (ii) remove w/ patch only; (iii) remain/cede to landlord for ₱0 (or buy-out formula).

7) Payment terms for lessee-funded renovations (menu with levers)

A) Progress billing reimbursement (TIA)

Milestones: e.g., 20% mobilization (bond posted), 30% MEP rough-in, 30% finishes, 20% Substantial Completion.
Documents: progress photos, architect’s certificate, supplier receipts, lien/claim waivers from contractor/subs.
Payment clock: 15–30 banking days after complete doc set.
Cap: “Not to exceed ₱___ (VAT-inclusive).”

B) Rent offset

Credit cap: e.g., up to 6 months base rent or ₱___, whichever first.
Start date: upon Opening for Trade.
Carryover: unused credits do/do not carry over past month __.
Default: credits suspend upon tenant default (beyond cure period).

C) Amortized “Additional Rent”

Principal: reimbursable capex ₱___; rate: ___% per annum; term: coterminous with lease or __ months.
Prepayment: allowed/not; Acceleration: outstanding balance accelerates on early termination (except landlord default/casualty/condemnation).

D) Mixed

Base building by landlord; above-standard by tenant; landlord pays a fixed grant plus rent-free fit-out of __ days.

8) Taxes & invoices (practical, non-exhaustive)

Rent VAT & withholding. Commercial rent may be VATable; tenants may have to withhold a percentage on rent. Align your rent offsets/TIA so both sides can invoice properly (e.g., landlord issues OR for rent; TIA is documented via official receipt for reimbursement, not netted informally).
Leasehold improvements accounting. Tenants typically capitalize and amortize over the shorter of useful life or remaining lease term (including renewal periods that are reasonably certain).
Input VAT on construction materials/services—tenants (if VAT-registered) can claim where eligible; landlords should not be made to “eat” tenant’s input VAT unless your model intends an all-in grant.
Documentary stamp tax (DST) on the lease applies to rent; not to ordinary reimbursements for works (but keep paper trails).

Tax positions vary—align with your accountant; reflect the agreed treatment in the payment schedules.

9) Make-good, removal, and buy-out at end of term

Standards. Define “Base Building Condition” and “Original Condition” (shell, core services, slab/soffit, landlord paint), then say whether tenant must: (i) Return-as-is, (ii) Make-good (remove tenant works, patch, repaint, safe/clean), or (iii) Leave in place (landlord to retain).
Buy-out formula (if landlord keeps tenant’s improvements): Buy-out = (Agreed Cost Basis) × (Unamortized balance / Original Amortization Period) – or a flat ₱/m² matrix for specified items.
Restoration cap. Many tenants negotiate a peso cap on make-good (e.g., ₱___ or __% of initial fit-out) excluding ordinary wear, landlord-requested items, and code-mandated removals.
Abandonment. If tenant leaves items beyond the removal deadline, landlord may dispose at tenant’s expense after __ days’ notice.

10) Early termination, default, and casualty

Tenant default. Landlord may forfeit rent credits, accelerate amortized balances, call performance bond, and set-off unpaid amounts against security deposit.
Landlord default/delay. Tenant may get day-for-day rent abatement and extension of fit-out period for late delivery of premises/utilities/approvals; in material breach, a termination right with recovery of unreimbursed capex actually spent (subject to caps).
Casualty/condemnation. Who gets insurance proceeds for tenant improvements? Usually: landlord gets for base building; tenant gets for tenant improvements to the extent insured by tenant. Add rebuild vs. terminate triggers.

11) Compliance and safety net clauses you should include

No mechanics’/contractors’ liens. Contractors/subs must look to the tenant (not the landlord) for payment; tenant keeps premises free of liens and indemnifies the landlord (Philippine law doesn’t have U.S.-style mechanics’ liens, but claims and encumbrances can still arise—treat it contractually).
Indemnities & limits. Mutual but tailored—personal injury/property damage arising from the other’s negligence; carve-outs for gross negligence/willful misconduct; cap on indirect damages.
Step-in rights. If tenant’s works endanger building/safety or violate codes, landlord may stop work and step-in to cure at tenant’s cost (after short notice).
As-builts & manuals. Tenant delivers as-built drawings, O&M manuals, warranties, and equipment schedules at completion.
Warranties. Contractor warranties assigned to landlord for items that will remain with the building.

12) Sample clause pack (plain-English you can adapt)

(a) Improvements; Ownership and Removal “Tenant may perform the works described in Exhibit T-1 (Tenant’s Work) once Landlord approves the final plans and permits are issued. Trade Fixtures and Tenant’s Equipment shall remain Tenant’s property and may be removed at any time provided Tenant repairs resulting damage. Fixed Improvements (partitions, ceilings, integrated MEP extensions, storefront glazing) shall, upon installation, become Landlord’s property without cost, unless Schedule 1 states they are Removable with Make-Good. At expiry or earlier termination, Tenant shall [make-good/return as-is/leave in place] as set out in Schedule 2 (Make-Good Matrix).”

(b) Tenant Improvement Allowance (TIA) & Reimbursement “Subject to compliance with this Lease, Landlord shall reimburse Tenant up to ₱___ (VAT-inclusive) for costs actually paid for Tenant’s Work, against progress claims at 20/30/30/20% milestones, within 15 business days after receipt of: architect’s certificate, ORs, photos, updated safety logs, and lien waivers.”

(c) Rent Offset “Effective on Opening for Trade, Tenant may credit ₱___/month against Base Rent until ₱___ total credit is exhausted. Credits pause during any uncured Tenant Event of Default.”

(d) Amortized Additional Rent “Landlord-funded improvements totaling ₱___ shall be amortized over __ months at __% p.a. and paid as Additional Rent. Upon early termination except due to Landlord default, casualty, or condemnation, the unpaid principal shall accelerate and become immediately due.”

(e) Permits and Approvals “Tenant shall secure all government and building/condo approvals at Tenant’s cost, under an Owner’s Authorization signed by Landlord. No work shall commence without such approvals.”

(f) Insurance “Before mobilization, Tenant shall maintain CAR (₱___), CGL (₱___ per occurrence), and workers’ accident coverage, naming Landlord as additional insured, with waiver of subrogation and 30-day cancellation notice.”

(g) Make-Good; Buy-Out “On expiry, Tenant shall [remove items in Column A and patch/paint], [leave items in Column B], and [remove Column C items unless Landlord elects to buy-out at Unamortized Cost = Agreed Cost × (Remaining months ÷ Amortization months)]. Make-good costs are capped at ₱___, excluding hazardous materials abatement and code-mandated removals.”

(h) Taxes & Invoicing “Reimbursements and allowances shall be documented via official receipts; rent offsets shall be shown on monthly SOA. Each party remains responsible for its VAT and withholding obligations under law.”

13) Negotiation playbooks

For Landlords

Tie any cash TIA to opening deadlines and use clauses.
Demand as-builts, key-spare lists, and assignment of warranties.
Cap buy-out exposure; avoid open-ended restoration.
Protect building: insurance, qualified contractors, step-in.

For Tenants

Lock in a rent-free fit-out period and delivery condition (levelness, power capacity, water points, fiber).
Get rent offsets or TIA rather than pure out-of-pocket.
Negotiate restoration caps and leave-in-place lists now (cheap today, expensive at exit).
Ensure permits and owner authorizations are the landlord’s obligation to sign within set days.

14) Practical checklists

Documents before mobilization

Final signed plans and scope split (Landlord vs Tenant Work)
Owner’s Authorization for permits
Contractor PCAB license, safety program, worker list
Insurance certificates; performance bond/retention agreed
Payment schedule and doc pack (photos/ORs/waivers)
House rules acceptance; security bond with building admin

At Substantial Completion

Punchlist agreed; DLP start date
As-builts (PDF/CAD), O&M manuals, warranties
BFP acceptance / Completion permit; meter numbers and readings
Keys/access cards inventory; signage approvals on file

At end of term

Make-good matrix walkthrough 60–90 days pre-expiry
Landlord election to retain or require removal of specified items
Buy-out computation (if applicable)
Final meter readings, surrender of keys, clearance of accounts

Bottom line

Write it down. Don’t rely on default property rules—state ownership, payment mechanics, permits, insurance, and make-good with precision.
Choose a cash-flow model: TIA, rent offset, amortized additional rent, or a hybrid. Match it with invoicing/tax treatment.
De-risk the build: approvals, qualified contractors, CAR/CGL insurance, change-order discipline.
Exit early: pre-agree removal vs. retention, restoration caps, and a buy-out formula to avoid end-of-lease fights.

If you want, tell me (a) landlord or tenant, (b) space type/size (office/retail/warehouse, m²), and (c) your preferred payment model (TIA, offset, amortized). I’ll draft a tailored clause set and a payment schedule you can drop straight into your lease.