INTRODUCTION TO REPAIR AND MAINTENANCE OBLIGATIONS IN LEASES Jim Henegan 2-26-14 Landlord’s Position In general, a Landlord wants to limit its maintenance and repair obligations in a lease to structure, foundation, roof and Common Areas and the Landlord wants to be able to pass through any costs incurred to maintain, repair or replace items to the tenants as Common Area Maintenance Costs.
The Landlord wants as close to a triple net lease as it can get. To that end, the Landlord wants to limit its obligations to make repairs. Generally, a Landlord form lease will provide that the Landlord will make certain specific repairs and the Tenant will do everything else, at least as relates to the Premises itself. The Landlord will want to pass through the cost of the work that the Landlord agrees to perform to the Tenants in the CAM charged to the Tenant.
Tenant’s Position A Tenant wants to limit its maintenance and repair obligations to what is located within the 4 walls of its Premises and to exclude structure, roof, and replacements. The Tenant wants the Landlord to be responsible for the cost of ownership of the Improvements.
The Tenant only wants to pay the Landlord the cost of maintaining the Common Areas, not the entire shopping center. It does not want to pay for the cost to replace portions of the Shopping Center – capital repairs or capital replacements - and if the Tenant does have to pay for those costs, it wants to amortize the cost over the useful life of the repair or replacement.
HVAC Which party maintains and repairs and ultimately replaces the HVAC units serving the Premises is a major business issue.
If there are separate HVAC units serving only the Premises, it is typical that the Tenant be obligated to maintain and repair the HVAC Units. Usually the Landlord wants the Tenant to provide a maintenance agreement from a third party company to provide maintenance per the manufacturer’s recommended maintenance specifications. If maintenance is not done per the recommended maintenance specifications, then the manufacturer’s warranty could be voided. Failing to do the required maintenance could make the Tenant responsible for replacement of a unit which breaks during the warranty period which otherwise would be the responsibility of the Landlord.
Replacement of the HVAC units is a hotly contested provision. It can be a large expense for a Tenant especially near the end of its lease term and Tenants will resist being responsible for replacement of the HVAC units. If the HVAC unit supplied at the beginning of the Lease Term is not a new unit, then the likelihood that it will be replaced is increased. Replacement of the heat exchanger and/or the condensing unit should be considered “replacement” and not a repair.
Plate Glass The Landlord wants the Tenant to be responsible for repairs and replacement of plate glass. If the Tenant has this obligation, it should make sure that its property insurance policy includes the replacement of plate glass. Most national tenants will self-insure this risk.
Plumbing The Landlord will want the Tenant to be responsible for the cost of any damage of clogging of the plumbing lines serving the Premises. Restaurants or other tenants who generate grease should have a grease trap or other grease interceptor to keep grease from going into and clogging the sewer. Some developments have common grease traps which tenants can hook up to and pay a share of the cost to maintain based usually on the square footage in the Premises of the other users.
Auto repair facilities often have oil-water separators. Grease which spills on the floor is washed into a floor drain and goes through an oil-water separator which collects the oil for disposal. The alternative is not to have floor drains and to have a floor scrubber which cleans the oil up off the floor.
Self-Help Landlord will want the right to cure Tenant’s maintenance default and charge the Tenant the cost plus interest. A large Tenant will want self-help rights against the Landlord, also with the right to offset against rent. A Landlord will generally resist this especially if they have limited the Landlord’s obligations to structure, roof and common areas. They do not want an in-line Tenant making repairs to structural elements or Common Areas which could impact other tenants. Off-set rights impact the ability to finance the Lease and often are limited to a percentage of the rent.
Free Standing Stores/Ground Leases Certain businesses such as drug stores, auto centers, auto part stores, fast food restaurants and banks often lease free standing facilities. Often the Landlord wants to sell the Premises to a passive investor, not a real estate professional, who wants to buy the income stream and have little or no responsibility for repairs and maintenance. The Premises typically includes the entire parcel, including the parking lot and landscaping.
In a build to suit lease of a free standing store, the Tenant typically wants the Landlord to be responsible for structure, roof, and replacement of the parking lot. The Landlord builds the improvements, so the Tenant does not want to take responsibility for these major items. If the Landlord has responsibility for these obligations, a purchaser of the Premises will discount the purchase price for the Premises based on its estimate of the cost which the Landlord will incur for these items over the term of the Lease.
In new construction there are generally 1 year warranties from the general contractor and major subcontractors which give some protection to the Tenant provided that the Landlord assigns the warranties to the Tenant. If the Tenant agrees to take on these obligations, the Tenant will want a rent reduction.
In a ground lease, the Tenant builds the improvements and it is common for the Tenant to have all maintenance obligations for the improvements which it constructs.
Additional Provisions The repair and maintenance provisions tie in to the CAM, casualty, insurance, indemnity and compliance with laws sections.
CAM The Landlord wants to include cost that it incurs in making repairs into CAM. Many Landlords want to include roof repairs in CAM. The roof is typically not considered to be part of the common area. A Tenant’s access to the roof is usually severely limited. Whether repairs to the structural portions of the improvements can be included in CAM are often hotly contested. Repairs that can be capitalized for accounting purposes should be amortized over their useful life.
Insurance/Casualty If the Landlord has an insurance policy – presumably partly or entirely paid for by the Tenant, and the insurance policy will pay for the cost of repairs to a portion of the Premises or Center, then the Landlord should make a claim on the policy and either use the proceeds to pay for the repair or make the proceeds available to the Tenant to pay for the repair.
If the Premises are damaged by a casualty, the repair or replacement should be covered by the Casualty Section and not by the maintenance or repair provisions. Usually the party who purchases the insurance should be responsible for restoring the property that is damaged.
Compliance with Laws The Tenant wants to be responsible for complying with laws that apply to its particular use of the Premises and not to general retail or office use.
The Landlord wants the Tenant to be responsible for complying with all laws affecting the Premises.
Much of the negotiation on this point is driven by the Americans with Disabilities Act. The cost of altering rest rooms, sales counters and doors to comply with the ADA can be very high and neither party wants to incur these costs. Most construction contracts require improvements to be built in conformance with the ADA, but that does not always occur. The statute and regulations can change and state and local requirements can be more stringent than the ADA. One way to deal with the issue would be to make the party who built the improvement (rest room, entrance, counter etc.) be responsible for making the improvement conform with the ADA. A Landlord will generally not negotiate much on this issue with a small tenant.
Office Leases Office leases of smaller office buildings often deal with maintenance on repairs in the same manner that retail leases deal with the issues. Larger office buildings usually have a central HVAC system for which the Landlord is responsible and the cost to maintain is passes through to the Tenant. Office leases often provide janitorial service to the Tenant. Landlord’s maintenance obligations are generally referred to as providing services.