- Leasehold improvements are the fit-out work a tenant installs in leased premises to make the space usable for its business — flooring, millwork, built-in counters and shelving, interior…
- Most commercial leases address what happens to leasehold improvements at the end of the lease term — often giving the landlord the right to keep them in place, or requiring the tenant to…
- The landlord holds the security deposit against the current tenant’s obligations under the lease.
When you buy or sell a business that leases its premises, two often-overlooked items travel with — or get left behind by — the lease: the leasehold improvements built into the space, and the security deposit sitting with the landlord. Sorting out who owns what, and who gets reimbursed for what, needs to happen before closing, not after.
Neither issue is complicated once you know what to look for. But both are easy to miss in the rush to finalize price and closing date, and both can turn into a dispute if the purchase agreement doesn’t spell them out.
What Counts as a Leasehold Improvement
Leasehold improvements are the fit-out work a tenant installs in leased premises to make the space usable for its business — flooring, millwork, built-in counters and shelving, interior walls, HVAC modifications, signage, and similar additions. Once installed, these items are generally treated as affixed to the premises rather than as separate, freestanding personal property.
This matters because it changes how they’re treated compared to movable business assets like inventory, loose equipment, or furniture that isn’t built in.
Who Owns Leasehold Improvements During and After a Lease Assignment
Most commercial leases address what happens to leasehold improvements at the end of the lease term — often giving the landlord the right to keep them in place, or requiring the tenant to remove them and restore the space, depending on the lease’s wording.
During a mid-term assignment, the situation is different: the improvements are part of what makes the leased premises what they are, and they generally pass along with the leasehold interest to the assignee (the buyer) as part of the space itself. The buyer isn’t usually required to separately “buy” them from the landlord — but the purchase agreement between buyer and seller should still expressly identify the leasehold improvements as included in the sale, since the parties (and their accountants) need to agree on how that value is allocated for tax purposes.
What Happens to the Existing Security Deposit
The landlord holds the security deposit against the current tenant’s obligations under the lease. On an assignment, there’s no single default outcome — it depends on the lease and on what the landlord is willing to agree to. Common approaches include:
- The landlord releases the existing deposit back to the seller and requires a fresh deposit from the buyer
- The landlord agrees to keep holding the existing deposit as ongoing security for the assigned lease, and the buyer reimburses the seller for it directly through the purchase agreement
- The landlord keeps the existing deposit and asks the buyer for a top-up, particularly if the buyer’s covenant is weaker than the seller’s
None of this is fixed by any general rule for commercial tenancies — it’s a matter of the lease’s terms and negotiation with the landlord. Whatever is agreed needs to be reflected clearly in both the assignment documents and the purchase agreement between buyer and seller.
Quick Reference
| Leasehold Improvements | Security Deposit | |
|---|---|---|
| What it is | Fixtures and fit-out affixed to the premises | Cash held by the landlord as security |
| Who holds it today | Generally treated as part of the premises | The landlord |
| What typically happens on assignment | Passes with the leasehold interest to the buyer | Negotiated — released, transferred, or topped up |
| Where it should be addressed | Purchase agreement (value allocation) | Purchase agreement + landlord’s consent documents |
Checking for Liens Before You Rely on What’s There
If the seller financed equipment or fit-out work, a lender may hold a registered security interest against some of the personal property in the space under the Personal Property Security Act (PPSA). A PPSA search before closing lets a buyer confirm whether any equipment or fixtures they’re expecting to receive free and clear are actually subject to an existing lien that needs to be discharged first.
This is a standard, inexpensive due diligence step and shouldn’t be skipped just because the improvements “look like” part of the space — financed equipment can be caught by a lien even where it’s been built in.
Addressing Both in the Purchase Agreement
To avoid a post-closing dispute, the purchase agreement should typically:
- List or describe the leasehold improvements being transferred as part of the deal
- Confirm whether any of them are subject to existing liens, and who is responsible for clearing those before closing
- State clearly how the security deposit is being handled — released, assigned, or reimbursed — and by whom
- Cross-reference the landlord’s consent to assignment, since the landlord’s own conditions may affect both items
Frequently asked questions
Do I have to pay the seller back for the security deposit?
Often, yes — if the landlord is keeping the existing deposit in place as security for the assigned lease, the buyer typically reimburses the seller for it as part of closing. This should be spelled out in the purchase agreement rather than assumed.
Can the landlord refuse to transfer the deposit and demand a whole new one?
A landlord can generally set its own conditions around a deposit, subject to what the lease itself says. If the landlord insists on a fresh deposit rather than continuing to hold the existing one, that becomes a cost the buyer needs to plan for.
Who owns leasehold improvements if I paid for them as the tenant?
Even where the tenant paid for the improvements, most commercial leases characterize them as becoming part of the premises once installed, subject to the lease’s own removal and restoration terms. Check your specific lease rather than assuming ownership follows who paid.
Does a PPSA search matter if I’m buying the shares of the company, not just its assets?
It still matters for due diligence, but for a different reason — in a share purchase, the company (and everything it owns or has pledged as security) comes with the deal, so you’re confirming what liabilities you’re inheriting rather than what you’re buying free and clear.
This is a business purchase or sale question
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