While negotiating a commercial lease, the inevitable issue of maintenance of the building, premises and building systems may prove to be one of the tougher issues facing landlords and tenants. Although the LOI negotiations on basic terms such as rent, term , options, square footage and other rights and responsibilities of the parties are often sorted out early, maintenance and repair are often not specifically defined (carve out here for dynamite manufacturers and buildings that have significant deferred maintenance issues). However, many well intentioned business people leave the issues of who maintains and repairs what in general terms even in the drafting of the lease agreement. In addition, tying in generic terms relating to casualties and indemnity can lead to uncertain results if not examined carefully for each transaction.
Concerns of Landlords and Tenants
For owners, the basic concern is protecting the asset while minimizing cost. For tenants (except for their specific improvements) the chief concern is minimizing the scope and costs, specifically related to the structure, building systems common areas and even certain improvements which may be deemed fixtures that have to be surrendered at the expiration of the lease. Costs are the common denominator, but there is often more at stake. Take the tenant who has injected thousands of dollars into upfits and permanent improvements or the landlord who has retrofitted the premises to fit tenant tenant needs. Then the issues get sticky….
Less Sticky Situations
In some lease scenarios, these issues may be more easily resolved and defined, such as:
- Ground Leases
- Build to Suit Transactions
- Single Tenant Occupancy
- Outparcel Leases
- Franchised Tenants
- Substantial or Complete Retrofit by Tenant
- Tenant with Extensive Renewal Options
- Tenant with an Option to Purchase
In these situations either landlord or or tenant will likely want to substantially control the protection of their asset or improvements. Landlords desire to protect the structure, building systems, fixtures and alteration approval. Tenants generally want landlords to pay for the maintenance and repair of as much as possible, except for tenant-specific or custom alterations and personal property. Many LOIs in these situations come tailor made for the final lease and are essentially non-negotiable on these issue. But what about the rest?
What’s in the the toolbox to help?
Great question. But over time, real estate professionals have gathered and honed many methods to deal with the issues of maintenance and repairs. By no means a complete list, the items below can help guide the parties to a final agreement knowing that protections and securities have been built in to deal with the lease, such as:
1. Insurance – ideally both landlord and tenant should maintain separate policies that name the other other as additional insureds where appropriate.
2. Maintenance Contracts – especially for building systems, a solid and reliable maintenance agreement obtained by one or both of the parties can prevent problems from arising. As for the structure (except in ground leases and other situations where the tenant is constructing and fully controlling the building), most tenants look to landlords to cover.
3. Indemnities – these animals can create a good umbrella to cover negligence, third party damage and other unforeseen circumstances. Again, the party with more to protect will want want a stronger, tighter and broad scope clause included in the lease. Key to this discussion will be the financial status of the parties.
4. Casualty Responsibilities – Likewise, by dividing the risk, responsibilities and rights if there is unpredictable damage to the building and its contents, the parties should know what the consequences will be for themselves.
5. Approval for Improvements – This is often a tug of war between landlords and tenants. Many times setting a requirement for approval of improvements costing above a certain dollar amount can allow the landlord to be assured the building is not substantially modified without their blessing, while allowing tenants the right to make routine changes and replacements without having to wait for the landlord to respond to their requests.
6. Guarantors – Often a tool to insure that landlords have additional security for unpaid rent, TICAM etc., personal or corporate guaranties can assuage concerns of how risk may be otherwise allocated in the lease agreement.
The touchstone for negotiation of maintenance and repair responsibilities should be what does each party want to protect or control and what are the costs and benefits of the physical items, fixtures or structure to be maintained.