Fit-out

What it means

Fit-out is adapting leased premises to the tenant's needs, such as partitions, flooring, lighting, air conditioning or IT cabling, after the space is handed over in shell or basic condition. It typically concerns offices, shops and warehouses in new buildings.

A distinction is made between shell and core, the building's basic structure and common areas, and fit-out, which turns an empty space into a working office or shop. Landlords often contribute a set amount per square metre towards fit-out as part of lease negotiations.

The lease agreement must state who pays for the fit-out, who owns it and what happens to it when the lease ends. Accounting and depreciation depend on this: whether it is the tenant's asset, the landlord's, or a technical improvement to leased property.

How it works in practice

If the tenant pays for the fit-out and the landlord consents in writing, the tenant can depreciate the works as a technical improvement to leased property. It records them as tangible fixed assets and depreciates them under tax rules even though the building belongs to someone else.

A landlord's fit-out contribution or a rent-free period are incentives spread over the whole lease term in the accounts. Under IFRS 16 they affect the measurement of the right-of-use asset and the lease liability.

At the end of the lease, the contract may require the premises to be reinstated, an extra cost, or the fit-out to be handed to the landlord with or without compensation. The undepreciated value of the fit-out must be expensed when the tenant leaves.

What to watch out for

Fit-out often exceeds the original budget because of changes during the works and building services requirements. The contract with the fit-out contractor should have a fixed price or a clear change procedure, and the project should have a contingency.

If the lease ends before the fit-out is fully depreciated, the company loses its investment. When planning, align the depreciation period with the lease term and, for large investments, negotiate an option to extend or compensation on early termination.