When you sign a lease you focus on what the condition of the space will be when you move in because you want it to reflect the image of the company and be a great place for employees and customers. But few people consider what the space will look like at the end of the lease after they move out. Failure to address that may create major headaches in the future. On today’s podcast, Bob and Jan take an in-depth look at how to avoid pitfalls when leaving a leased space.
What do most leases say the condition of the space must be after the tenant moves out? First, it depends on the type of building as to what language is normal. Industrial and office won’t be the same. You would expect office to be more strict, but it’s actually the opposite. Offices leases often use the broom swept or broom clean language, but industrial leases often have a whole separate exhibit that’s a full page or two of all the things the tenant must do to the space when they move out.
It seems like the term “broom clean” is often used-exactly what does that mean? Broom clean just means that everything has been moved out of the space and it has been swept or vacuumed. The condition is subject to normal wear and tear, of course. But that may be just the beginning. Let’s consider office buildings first, what else is likely to be required of the tenant when moving out?
- All alterations, additions, betterments and improvements located therein in good repair and condition
- Deliver to landlord all keys to the premises and all access cards to the project (or pay landlord to replace any not returned)
- Remove all unattached trade fixtures, furniture, equipment and personal property unless paid for, in whole or in part, by landlord (through TI allowance) but landlord has the option to tell the tenant to remove it anywhere
- Remove any and all cabling (including conduit) installed in the premises
- Remove such improvements and tenant’s off-premises equipment as landlord may require and restore the areas surrounding such improvements
Wow, that’s a lot more than “broom swept”! It can be, but in most situations the tenant has all their stuff moved to a new location and they have the place cleaned and that’s the end of it. The only time we see landlords ask the tenant to remove any improvements is when they think it will make the space hard to lease to someone else or the cost to remove the item would be expensive. For example, I had a tenant once who painted all the ceiling grid and tile black. They were required to replace that with normal white grid and tile when they moved. If they painted any walls a weird color, the landlord may require them to paint it something more normal.
What about in a warehouse/industrial lease? I pulled up a warehouse lease and this is what is required of the tenant when moving out-hold onto your seat! Prior to vacating the premises, it must be left in good, clean condition with all systems in good working order. The items that will be inspected by lessor are listed below, but are not limited to the following:
- Service and repair all heating and air conditioning equipment, exhaust fans and hot water heater. Provide lessor’s office with a copy of the inspection and service report provided by the mechanical contractor
- All lights in the office and warehouse must be working-relamp and/or reballast the fixtures as necessary
- Overhead doors must be serviced and repaired
- All exterior metal doors, including hardware should be serviced or replaced as necessary
- All exterior glass doors and window glass, including hardware should be serviced and replaced as necessary
- Repair all damaged sheetrock in the office area and in the warehouse along the demising walls
- Office and warehouse floors should be left in good, clean condition
- Fire sprinkler system (if available) must have a current year inspection
- Any exterior signage must be removed; repair and repaint the fascia as necessary
- Return all front and back door keys, and all interior office door keys
- All broken or missing ceiling tiles must be replaced
Is that all subject to normal wear and tear? It is. Landlords shouldn’t expect new space when a tenant moves out although it sounds like they are getting pretty close to that, right? I had a landlord lease require a client to paint the space when they moved out. We deleted that language, of course. Where we see most of the rub at the end of a lease is in the definition of “normal wear and tear”. What does normal wear and tear look like for a tenant who’s been in the space two years? What about 20 years? The biggest problem is when the building sells and the new landlord has no idea what the condition of the space was when the tenant moved in. We’ve run into that problem before.
The time to address these concerns is when the lease is originally negotiated. If we know, in advance, what is planned, we can negotiate accordingly. But if the tenant does something two years into the lease term, the lease won’t address that specific work. So we recommend adding catch-all language to the lease that says the landlord can only require the tenant remove something at the end of the lease if they notified the tenant of that requirement when it was approved in the first place. It’s not fair for a landlord to approve something a tenant wants to do and later tell them to remove it if they weren’t told that would be required. The tenant might find a different solution if they know that.
I read an article which stated: “the underlying issue here is not about the tenant’s treatment of the space, it’s about the landlord’s increasing financial pressure to preserve precious cash.” That’s probably true. Landlords can reduce their expenses and increase returns to their investors if they can control expenses and one way to do that is to pass those costs to the tenants. But they signed up to be landlords and just because times get tough doesn’t mean they suddenly have the right to transfer costs to tenants.
So, how do we recommend our clients protect themselves?
- Read the lease
- Negotiate the language when you have the power to make changes – before it’s signed
- Require the landlord to return the security deposit within a specific period of time – 30-60 days
- As always, use a tenant rep and a real estate attorney with extensive commercial leasing experience
Bob Gibbons is a Real Estate Advisor & Tenant Advocate (also known as a tenant rep) with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.