Published on November 13, 2012
Posted in: Blog
Many of the provisions of a commercial lease serve the purpose of allocating costs as between the landlord and the tenant in various contexts. The provisions that describe the landlord’s work and the tenant’s work are obvious examples. Other examples are the provisions in a commercial lease that address the parties’ obligations when the lease has run its course and the Term has come to an end. The underlying issue then is: What condition must the leased premises be in when they’re returned by the tenant for reletting by the landlord?
In broad conceptual terms, a fair outcome when a commercial lease comes to an end would probably be one where all leasehold improvements made by the tenant during the Term would remain behind and would become the property of the landlord and the tenant must return the leased premises to the landlord in good condition (consistent with its maintenance and repair obligations under the lease) but should not be required to return the leased premises to the condition they were in when possession of the leased premises was delivered to the tenant by the landlord. The tenant should also be afforded a reasonable opportunity (say, 7 to 10 days) to remove its personal property (namely, its furniture, fixtures and equipment) from the leased premises after the lease has come to an end. As is the case with most commercial contracts, however, the content of a commercial lease is ultimately a function of the parties’ relative bargaining power, rather than a reflection of what fairness and equity may require in the abstract.
In a case where the landlord is the party with greater bargaining power, a commercial lease will often indicate that, at the end of the Term, if requested by the landlord, the tenant must return the leased premises to the landlord in the same condition they were in when possession of the leased premises was delivered to the tenant by the landlord. Obviously, if the leased premises consisted of “four bare walls and a roof” when possession was delivered to the tenant by the landlord, and (as is usually the case) the tenant made extensive improvements to the leased premises in order to start operating its business, being obligated to return the leased premises to “four bare walls and a roof” at the end of the Term can result in the tenant being forced to incur some very significant demolition and repair costs.
By contrast, in a case where the tenant is the party with greater bargaining power (think of a dominant retailer, like Walmart, or a dominant franchisor, like McDonalds) a commercial lease will often indicate that, at the end of the Term, the tenant must return the leased premises to the landlord in the condition that the tenant was required to maintain the leased premises in under the terms of the lease, subject to normal wear and tear, insured perils and the landlord’s own maintenance and repair obligations under the lease. In other words, at the end of the Term, subject to the modest qualifications noted above, the tenant will be entitled to remove its furniture, fixtures and equipment from the leased premises, and may then simply vacate the premises after leaving them in broom swept clean condition.
The relative bargaining power of a landlord and tenant in a typical commercial lease negotiation usually lies somewhere in between the spectrum that’s represented by the “very powerful landlord” at one end and the “very powerful tenant” at the other that’s described above. The issue of the condition that leased premises must be in when they’re returned to the landlord at the end of the Term, however, should be addressed in a nuanced manner regardless of the relative bargaining power of the landlord and tenant. As a starting point, the lease should clearly identify and differentiate between leasehold improvements and tenant’s fixtures, in order to avoid a post-Term dispute regarding what property the tenant was required to leave behind at the leased premises (namely, the leasehold improvements that were made by the tenant) and what property the tenant was entitled to remove from the leased premises (namely, its tenant’s fixtures). Then, from the above typical default position, care must be taken to ensure that the lease thoughtfully addresses any special facts on the ground. For example, if the tenant operated a bank, it would be entirely reasonable for the lease to provide that the landlord may require the tenant to remove its vault at the end of the Term, if the leased premises will be undergoing a change of use, regardless of the fact that the vault would likely qualify as a leasehold improvement which, according to the typical default position noted above, would otherwise have to remain behind when the tenant vacates the leased premises. Conversely, if a tenant will be operating a luxury four star restaurant, for example, and it knows that it’s going to be installing ultra expensive fixtures in its restrooms, that tenant had better ensure that it at least tries to bargain for the right to remove those fixtures (and to replace them with standard quality fixtures) at the end of the Term or it may be precluded from doing so since restroom fixtures are typically considered to be leasehold improvements.
Like all the provisions of a commercial lease whose purpose is to allocate costs as between the landlord and the tenant, the provisions of a commercial lease that address the parties’ obligations when the lease comes to an end must be drafted with great care to ensure that they achieve the results that the parties intended. Far too frequently, such provisions are addressed by legal boilerplate without regard to any special facts on the ground – and that can lead to unintended consequences that could end up being very costly to the landlord or tenant whose interests were not properly protected by appropriately drafted end-of-Term lease provisions.