Negotiate ‘standard’ terms to avoid unexpected obligations

Kelley Shirk
Member, Hall & Evans LLC

Tenants generally are responsible for maintaining a rented property and ensuring that it is restored to the conditions that existed at the beginning of the lease. While repair and maintenance obligations are typical for tenants under commercial leases, that does not mean there is no way to reduce unknown risks and unintended consequences of these obligations. However, too often, the lease is silent on the landlord’s express obligations or the tenant’s duties are too broadly described, which can come back to haunt the tenant either during the lease term or upon termination.

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When entering into a commercial lease, tenants often gloss over the terms they assume are “standard,” and therefore unable to be negotiated. However, every term should be carefully considered and examined under a lens that starts with: What business will be operated out of this space. Leasing industrial space as a warehouse for large construction materials is vastly different from leasing a brick-and-mortar store in a shopping center. Those differences can have financial impacts when considering tenant obligations for repair and maintenance.

Let’s consider two examples. First, a construction supplier is leasing a stand-alone warehouse in an industrial park for a 20-year lease term and has agreed to very broad repair and maintenance obligations with respect to the leased premises, which, as defined, includes all pavement in the large industrial parking lot. Second, a high-end retail clothing seller has leased a brick-and-mortar shop in a ritzy shopping center at a very popular ski resort for a two-year lease term and has agreed to maintain, including replacement if necessary, all heating, ventilation and air-conditioning systems servicing its space. In both of these examples, the tenants failed to consider their business needs, the lease term and the broad definitions used for their repair and maintenance obligations.

Under the first example, at the end of the 20-year term, after the supplier had large semi-trucks consistently carrying heavy loads over the parking lot for the entirety of the 20-year term, the landlord demanded full payment for repairing the parking lot to its original state. At that time, the landlord’s contractor opined that only a fully engineered replacement of the parking lot could return it to its original condition due to the tenant’s failure to consistently maintain the lot during the lease term. That full replacement was estimated to cost nearly $500,000. Had the tenant carefully considered the nature of its business and the length of the lease term, it might have been able to negotiate better repair obligations at the outset. For example, the tenant may have been able to negotiate performing routine maintenance over the lease term – expressly stated to be in lieu of any replacement work. Then, at the end of the term, if the tenant could prove that the agreed-upon routine maintenance was performed throughout the life of the lease, it would be off the hook for any final repairs or replacements specific to the parking lot upon termination. Alternatively, the tenant may have been able to specify that repairs and maintenance did not include full replacement value, that its repair obligations did not require returning the parking lot to its original condition (20 years prior) or that its repair obligations were to be capped at a specific figure.

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Under the second example, during the two-year lease, the tenant’s neighbor complained of heating issues during the winter months, which led to a service call and discovering that the very old HVAC equipment that serviced both spaces needed to be replaced. Even sharing the replacement expense with the neighbor required payment of an unexpected cost that the tenant had not budgeted for and could barely afford, being a seasonal business. Had the tenant had an appreciation for how short its lease term would be, the shared space and the broad language that included an obligation to replace the entire system that serviced its space, it might have been able to negotiate more limited repair obligations related to building systems or a cap on repair obligations specific to certain building systems. Something else that is commonly ignored is inquiring about the age of building systems that tenants may be agreeing to replace. In this instance, the HVAC equipment predated the tenant’s occupancy by more than its useful life, and in light of the shorter lease term, the landlord may have been willing to at least share in those costs.

Under both examples, there is a lot to be gained from understanding the needs for the leased space and how that may be relevant to a tenant’s obligations in a commercial lease. No lease clause should be accepted as “standard.” Every obligation should be viewed in light of the nature of the tenant’s business, the length of the term, the age of the space and its components being leased, the definitions being used for important terms in the lease, the impact of third parties during the lease term, along with many other considerations. Creativity is necessary in commercial lease negotiations in order to understand these obligations, the negative consequences that could arise from accepting standard language, and alternative agreements that strike a balance between the landlord’s requirements and the tenant’s needs. Don’t get caught in the trap of thinking there is nothing that can be negotiated in a standard lease term – often, it’s what’s missing that could make all the difference in interpreting leases when a dispute arises.

Featured in CREJ’s June 3-16, 2020, issue

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Edited by the Colorado Real Estate Journal staff.