Is there something like a law that says a tenant, at the end of a lease’s term, has to surrender the leased space in the same condition as it was at the start of the term? Does a common legal stationer’s form’s rendering of this requirement, “return the Rental Space to the Landlord in the same condition as it was at the beginning of the Term except for normal wear and tear,” have a single meaning, one that everyone would agree-upon once the space was inspected post-departure?
Before we deconstruct the word “condition” as used in the described context, Ruminations will look at the broader question – “In what condition should a tenant yield up the physical space it is vacating?” We think that question cannot be answered in the abstract. What’s the business deal?
Common decency (read that: society’s norms) informs us that we should clean up after ourselves. [“They were careless people, Tom and Daisy — they smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together, and let other people clean up the mess they had made…” – F. Scott Fitzgerald.] Common decency, however doesn’t tell us anything about removing a relocated wall and putting the old one back in or covering up the new paint with the same weather-worn paisley wallpaper used ten years earlier.
That’s not to say there isn’t a society of commercial property people or that it doesn’t have its own norms. There is, and it does. It’s called the market. But, there’s more than one market. [Some might say that there is one market, but many submarkets.] A common theme in the market, however, is that a landlord’s form lease will call for turning the clock back to when the tenant first took occupancy, and a tenant’s form lease will call for leaving the leased space as it became over the course of time.
As to submarkets, at one end, there are tenants with bargaining power. For the most part, regardless of the bargaining power of their landlords, these tenants get to leave the leased premises in broom clean, good condition, reasonable wear and tear and damage from takings, fire, and like peril excepted. At the other end are tenants who sign the landlord’s form lease, obligating themselves to put everything back the way they remember it was at the start of their occupancy.
Which is “right”? We don’t have a firm position. If any reader has an absolute answer to that question, send a comment (by using the comment feature at the end of this posting) and reveal the truth to all other readers. [You first may want to ponder the thoughts raised in an old blog posting by clicking HERE.] Even though Ruminations doesn’t “know” the answer, it leans to the “in good condition” side for a number of practical reasons. What follows is our attempt at listing a few questions that tilt us in that direction.
What was the condition of the leased premises when the tenant moved in? [Yes, we know, you can take pictures, even videos, and save them (and then, lose them).]
Does the landlord want the faded pink and charcoal walls returned at the end of the lease term (for the sake of nostalgia)?
When the tenant replaces the faucets, should it retain the old ones for later reinstallation?
If the tenant moves an office’s door, should it move it back again?
OK, make your own list.
We think there is something paradoxical about the following situation. In one common scenario, a landlord will deliver a “plain vanilla box” to its tenant and the tenant will adapt the space for its own use. In another common scenario, the landlord (for more rent) will deliver a turn-key (or near turn-key) space to its tenant. However, only in the first arrangement, will the landlord’s “default” or “standard form” position be that the tenant will need to return the space back to the “vanilla box.” Why?
Tenants don’t lease space just to be able to tell their friends they have leased the space. They do so for the purpose of conducting their businesses in that space. To do so, they need to fit the spaces out. Translated into an economic concept, tenants pay rent so that they can benefit from the space and to benefit from the space, they need to make improvements and alterations. Isn’t the rent being paid for that right? And, if it is, why isn’t the rent being paid for the right to leave the improvements in place at the end of the lease’s term?
Of course, it’s one thing to leave behind improvements that are generally usable by the next occupant of that kind of space, and another to leave behind those of interest to no one but the departing tenant. We’ve heard the argument that “new tenants don’t want what the old tenant wanted,” but, in practice, we’ve seen the opposite more often to be true, at least for small spaces where the “restoration” requirement is more common. Ruminations will grant that the “opposite” (i.e., acceptance of the old tenant’s improvements) rarely is the case with large spaces and big tenants, but, paradoxically (today’s vocabulary word), those are the leases least likely to require post-termination restoration. And, in those cases where the landlord made the initial improvements, we’ve never seen any landlord price the lease-end “restoration” costs into the rent.
Lastly, even where tenants remove mid-lease improvements, landlords still need to bulldoze the space for the next tenant so that new, modern improvements can be made. Why not just bulldoze the mid-lease changes at the same time and not require the departing tenant to burn money in the gutter restoring what isn’t going to remain anyway.
Here’s one more observation. Pretty often, when a (weak bargaining power) tenant, in a lease negotiation, asks to be allowed to leave the leased premises in good condition and not be obligated to return in to the way is was 15 years earlier, landlords agree.
We repeat. Ruminations really isn’t going to “take sides” today. As we’ve already written above, the market will dictate to what extent any particular tenant will be obligated to return its leased premises just like it was “way back when.” That doesn’t mean we aren’t perplexed that those tenants (the “small” ones) who pay the higher rents seem to be the same ones who are tagged with big restoration costs on the back end. Still, Ruminations isn’t “going there” today, though it might have seemed otherwise because the arguments and question we’ve presented today might seem to favor one party over the other.
What’s your experience with post-termination leasehold restoration? Share your thoughts by adding a comment in the space provided below?