Looking forward to a new chapter in your business, you just moved into your new office space. Your old office building is, however, haunting you after receiving an invoice from your prior landlord for restoration obligations. Most office leases contain a relatively innocuous provision commonly referred to as the “Surrender Clause” which spells out the obligations of the tenant to restore their premises to a certain condition upon lease expiration or termination. Many tenants pay little attention to this provision in lease negotiations based on the conventional wisdom that the landlord will likely demolish their space and rebuild it for a new tenant. In this post, I outline what tenants should consider in limiting their liability when surrendering their premises.
Earlier this month it was reported by Crain’s Chicago Business that Zurich North America, after recently moving into its new highly acclaimed HQ building, is being sued by its former landlord for its failure to maintain its former HQ (800K sf) plus holdover rent since the repairs were not completed by lease expiration. Here’s a link to the article: Landlord accuses Zurich of leaving former HQ in disrepair.
Surrender Provision. This provision establishes liability for wear and damage to the leased premises during the lease term. It typically requires the Tenant, upon lease expiration or early termination, to: (a) surrender the Premises in the same condition (excluding ordinary wear and tear) as of the commencement date of the lease; (b) remove from the Premises its furnishings (including telecommunications wiring) and trade fixtures, while repairing any damage resulting from the removal; and (c) remove any alterations.
In negotiating this Surrender Provision, office tenants should avoid assuming any of the landlord’s obligations. Specifically, tenants should exclude from their restoration obligation:
- the removal of the initial improvements to the Premises and/or any requirement to return the Premises to a “white box” or shell condition;
- any damage resulting from casualty loss;
- damage caused by any repair or maintenance obligations of Landlord or a third party;
- any changes that may be needed due to a change in law after lease execution;
- alterations which do not require landlord consent or where consent is given but its removal is not required by such consent.
While this issue is rooted in the “Surrender” provision, it also impacts several other areas of the lease that need attention to provide consistency to capture these exclusions to the restoration obligation: alterations, tenant improvements (work letter), repair, casualty, signage provisions, holdover and sublease.
In negotiating the lease and to limit its restoration liability, tenants should be mindful of:
- any improvements or alterations, which are unique to the Tenant, where the Landlord is justified in requesting their removal and any incidental restoration work. There, the parties should stipulate as to what improvements are to be removed and create an inspection process following removal to minimize disputes;
- the repair obligations of Tenant being limited in scope to the Premises;
- any signage that is installed within the Premises or, where permitted, on the exterior of the Building;
- any assignments or subleases entered should incorporate these “Surrender” obligations to prevent the subtenants (assignees) from running afoul of these obligations. Also, tenants would be wise to end their sublease term 30 days prior to the lease expiration date to allow adequate time for restoration, if necessary;
- not allowing a breach of these “Surrender” obligations to trigger the “holdover” provision which can expose the Tenant to 150% (or more) rent as well as consequential damages (i.e., landlord’s lost leasing opportunities);
- removing their telecommunications cabling which is typically now a local code requirement.
While moving out is the last thing the prospective tenant is thinking about when negotiating a new lease, a thoughtful negotiation on the Surrender Clause and its related lease provisions will save the tenant considerable money and time in the end.
Blackacre Advisors LLC
DISCLAIMER. Our writings are from a real estate transaction perspective and for informational purposes only. Nothing herein shall be considered legal, accounting, tax, or architectural advice. Please consult with the appropriate professional(s).