Hello,

Many leases impose significant obligations on tenants to remove the alterations and improvements in their premises at the end of the lease term. Essentially, the landlords in these situations are attempting to impose on their tenants "turnkey" work required to deliver the premises to the next tenant.

In today's newsletter, we suggest five methods to avoid this costly burden.

Sincerely,

Alan Katz

Mintz & Gold LLP 

Everybody loves the smell of a new car. Although no doubt the fumes of toxic chemicals, the new car odor stimulates the Pavlovian excitement of a new toy.

My family mostly leases our cars. Today, it seems easier to finance with a lease while burdened with college tuitions, but for many years it made more sense than buying based on the astounding amount of damage that our three young boys could inflict. A family of four could live for two weeks on the food on the floor of our cars.

But as with anything that you lease (segue alert), at some point you have to return it.

At the end of each car lease, I break out in a cold sweat about the inspection. Finance company inspectors can see scratches not visible to the naked eye and can find bumps in the fenders not perceptible to mortal man.

Even if the car is in decent condition, dread overcomes me as if I were Ferris Bueller and his friend Cameron Frye, taking an unauthorized day off from school and trashing Cameron's father's prized Ferrari.

Yet, despite everything your mother told you about returning what you borrow in the same condition as you found it, that advice is not always correct.

Many office and retail leases require that tenants leave their premises at the end of the term in the same condition as they found it.

However, putting aside reasonable wear and tear, the demolition costs to return a space to its original condition can be prohibitive.

These demolition and other costs to ready a space for the next tenant should be the obligation of the landlord. The landlord will either require that the next tenant conduct such demolition or will perform the demolition itself and reflect the cost in the rent.

Another trap for the unwary tenant is that towards the end of the term many landlords will try to pressure tenants to remove items that the landlord has no intention of removing. Of course, the tenant does not know this, and to avoid the time, expense and brain damage involved may agree to pay the landlord to do such work. The item in question may never actually be removed, since that particular improvement might prove useful to the next tenant.

Protect yourself from becoming your landlord's demolition contractor by following the following five suggestions:

• Limit your removal obligation to non-standard or extraordinary alterations. These "Specialty Alterations" are generally defined as alterations that are unusually difficult or expensive to remove (costing more than a customary demolition) and/or atypical for normal office or retail tenants (as appropriate), such as kitchens (other than pantries), auditoriums or other special use areas, cafeterias, vaults, private restrooms, reinforced security areas, staircases, raised or above-slab reinforced flooring and slab cuts.

• Specifically exclude items that might fit under the definition of a "Specialty Alteration" but which should be excluded as part of the business deal. This often means excluding initial alterations to ready the space for your use, whether constituting "Landlord Work" performed by landlord or "Tenant Work" performed by you. It also should mean excluding any existing alterations in the premises at the time of lease commencement.
  
  You should consider any other specifics that you wish to exclude, e.g., supplemental HVAC equipment, additional risers or other wiring or conduit installed by you.

• Require that your landlord specify in writing whether any alterations are Specialty Alterations at the time of the landlord's plan approval. Such notice will allow you to plan ahead and not be blindsided with expensive removal/demolition work at the end of the term. Many leases allow the landlord to first provide notice of a tenant's removal obligations with only 60 or 90 days left in the lease term.
  
  You should be aware that some landlords will require the right to provide notice near the end of the term that you not remove certain Specialty Alterations. Be careful to make sure that any Specialty Alteration that you intended to keep is specifically excluded (e.g., a generator, satellite dish or HVAC equipment).

• Consider addressing the cost of removing large ticket Specialty Alterations up front during lease negotiations. If you are required to remove and slab over a staircase, or remove large systems (e.g., HVAC) or raised flooring, the cost can be very expensive and the time necessary to do the work can eat into your lease term (or even put you at risk of a holdover if the work is not timely completed). If you agree to pay the reasonable cost to remove such items in order to shift the burden to the landlord, you may end up paying for a removal that never happens.
  
  One approach is to obtain the right, upon notice, to require your landlord to obtain competitive bids for such work and to post in escrow a reasonable security deposit so that your landlord can remove such Specialty Alterations and you can be relieved of the responsibility. If the landlord does not remove such Specialty Alterations within an agreed upon period of time, or removes them and there are excess funds, such sums would be returned to you. Make the landlord provide reasonable back-up documentation evidencing how such monies were spent and allow any disputes to be handled by expedited arbitration.

• Make sure that there is no limitation on your ability to remove your own equipment and trade fixtures. There should not be any limitation on your ability to remove your own valuable equipment and trade fixtures. Your obligation should be limited to the repair of any damage caused by such removal, reasonable wear and tear excepted.

As Ferris Bueller noted during one close call, "Only the meek get pinched. The bold survive." Take Ferris' advice and boldly place reasonable limits on the end of term removal obligations under your lease.