Should a tenant be required to pay for the replacement of pieces of the real property within or serving its leased premises? We don’t know. That’s because it isn’t a legal matter. It isn’t a moral matter. It isn’t a matter of logic. It isn’t a matter of fairness. It is part of the economics of the deal, one whose answer will be determined by the negotiating process.
At the end of the day, the issue isn’t about the “money,” it is about the risk – the uncertainty. Why does Ruminations dare to say it isn’t about the money when virtually every reader has already thought: “Are you out of your mind”? That’s because the “market” needs to make a profit one way or another. To assure there is a real estate market, the aggregate tenant rent at a property needs to be sufficient to generate that profit. In the aggregate, the industry will either generate acceptable investment returns or property values will drop to a point where an investment in property will “again” generate an appropriate return.
Now, is the “crowd” of our readers wrong in thinking Ruminations is availing itself of the increasingly available recreational drug of choice? No, it isn’t, because our readers are rightly thinking about the economics of a particular landlord-property owner dealing with a particular property. At the end of the day, but for disparities in bargaining power and market knowledge, the rent for any particular deal will be what other landlords in the area are getting adjusted by factors such as better or worse locations, etc.
So, like it or not, we are going to continue as if tenants, one way or another, are going to pay for replacement of items such as their own HVAC. That allows us to explore an approach that might wind up being an acceptable compromise for the “you will pay for replacement; no we won’t” bargaining that very often takes place even between landlords and large, strong bargaining power tenants.
If there is any logic to having a tenant pay for replacement of building parts it must be that they are paying “extra” for use of those building parts and what they are using is “exhaustible.” By exhaustible, we mean they wear out by “use,” kind of like tires. There are two ways to pay for wearing out such items. One could pay a little each month specifically tagged as the cost for wearing out the HVAC equipment or the water heater or things like that. An estimate of the item’s life and replacement cost could be made and a monthly charge could be calculated. But, no one does that. Either they build the cost of replacements into the basic rent or they expect a tenant to bear the risk of both the life of each exhaustible item and the risk of the cost of those items. What is more, most of the time negotiations over a tenant’s absorbing the cost to replace building components goes something like this: “Well,” the tenant will say, “reluctantly, we’ll pay, but not if the such-and-such needs replacement in the last (fill in the blank) years of the lease.”
Is there a different, presumably better, way to allocate the replacement cost of an exhaustible item? Ruminations thinks so. It’s not an entirely original one. All right already, what is it?
Why not have the tenant pay only a prorated share of the cost of the item based on its actual cost at the time of replacement and the manufacturer’s estimated life? Add it to the rent (with interest if you like). Basically, the tenant would be renting the item based on its expected life span.
Now, this isn’t the strangest thing readers will ever see. In fact, a few readers, perhaps too few, may already be taking this kind of approach though we’ve never seen it taken – except when it comes to parking lot pavement replacement.
Now, we don’t think a tenant should be paying for these items at all even though we know, pragmatically speaking, that the “market” has a different thought about this. But, laying out our idea, explaining it as a way by which a tenant only pays for what is “uses,” allows us to explain why we don’t think a tenant should be paying at all.
Basically, tenants pay a set rent and use the building’s components such as the HVAC system that serve its space. They don’t pay extra for the system. So, why should it start paying extra if what was included in the rent in the first place needs to be replaced? Tenants don’t want HVAC systems. They want heating, ventilating, and air conditioning, not equipment. The premises were rented as heated, ventilated, and air conditioned. They wouldn’t have rented the space if that wasn’t the case. So, why should the fact that the equipment has finally huffed its guts, coincidently when they were in occupancy, cost them extra? Having said that, if that’s the deal, at least a tenant shouldn’t be paying for that part of something’s life that reaches beyond the tenant’s occupancy.