August 02, 2016

How to Avoid Unexpected Maintenance Expenses When Structuring a Commercial Lease

About to enter into a long term commercial lease? You may be subject to additional expenses beyond rent. Landlords often require that tenants accept certain repair and maintenance obligations during the term of the lease (a maintenance provision), and also that they make sure that the rental premises are in the same condition at the end of the lease as they were at the beginning (a surrender provision). When the parties are negotiating for occupancy over a long term period, these requirements can lead to substantial unanticipated expenses.

A tenant’s obligation to maintain the premises does not always simply end upon termination of the lease. Rather, if the lease contains a provision requiring the tenant to maintain the premises (or a portion of the premises, such as electrical, plumbing, roof, etc.) during the term of the lease and a surrender provision requiring the premises to be returned in the same condition as when originally leased, the tenant may very well be liable for such substantial costs as a new roof, a new furnace or even new asphalt.

1. The ‘It Was All Used Up’ Defense Rarely Works

Tenants faced with expenses under maintenance or surrender provisions often argue that the item needing repair deteriorated slowly over time during the period of the tenancy until, at the end of the lease term, there was nothing left. In other words, a long-term tenant may assert that it is not responsible for replacing the roof at the termination of the lease period because, despite the fact that it made all necessary repairs to the roof during the lease term, the roof or other item was “all used up” and needed to be replaced. This defense rarely works if the lease contains both maintenance and surrender provisions. Under the maintenance provision, tenants usually must perform repairs as necessary to keep the premises in the condition it was in at the time of leasing. The surrender clause requires the tenant to leave the premises in the same condition it was in at the time of leasing, excluding normal wear. Therefore, assuming the roof was not leaking at the time of leasing, regardless of whether it was “all used up” during a lease term, the tenant will likely be responsible for necessary repairs/replacements.

2. The Tenant Will Actually Have to Maintain the Premises to Avoid Additional Liability

Absent a specific lease provision to the contrary, the tenant is not usually required to replace components in the premises at the end of the tenancy—as long as the tenant performed the maintenance needed during lease term. For example, if a tenant made regular repairs to the furnace, but the furnace continued to malfunction, it is likely that a new furnace was needed during the tenancy and “maintenance” may actually require installation of a new furnace. On the other hand, if a tenant makes repairs and the furnace performs during the tenancy, the tenant will not likely be responsible for replacement if a new furnace is needed at the termination of the lease. In the former case, repairs were insufficient to fulfill the tenant’s maintenance duties, and the tenant should have recognized its responsibility to replace the furnace. In the latter, repairs were sufficient maintenance to resolve the problem, so the tenant met its responsibilities.

3. Normal Wear and Tear Will Not Allow the Tenant to Avoid Replacement Costs

The tenant who argues that it is not responsible to make repairs or purchase a replacement because the item was the subject of normal wear and tear faces a significant uphill battle. As the tenant is obligated to maintain the premises, it must actually maintain the premises. That means that when a component or structural item fails to perform, the tenant is responsible for remedying that malfunction. The claim that the component or structure wore out slowly during the period of the lease does not relieve the tenant of that responsibility.

In one case in Indiana, a commercial restaurant tenant who was faced with a leaking roof stopped operating during the last year of its tenancy, but continued to pay rent. At the end of the lease, the tenant surrendered the premises without replacing the roof. The tenant argued that the roof had deteriorated over the term of the tenancy and was past its useful life. Therefore, the tenant argued that the roof was the product of ordinary wear and tear which was excepted from the maintenance and surrender provisions. The court disagreed, holding that the tenant was responsible for replacing a component that failed entirely during the lease term.

4. Specify Which Repairs/Replacements Belong to the Landlord and Which to the Tenant

One sure way to avoid end-of-lease litigation is to simply specify which maintenance and repair items belong to the tenant and which belong to the landlord. Rather than using general maintenance and surrender provisions, the parties can take the time to clearly identify who is responsible to maintain specific big ticket items. A tenant who is responsible for repairs and maintenance to a roof or other significant components during a tenancy does not necessarily bear responsibility for replacing that roof unless the tenant agrees to accept that obligation.

Taking the time pre-lease to review and ensure that the lease terms you agree upon actually reflect only those obligations you are willing to accept will save substantial time and money at lease termination and, hopefully, assist in avoiding litigation.

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