By Jennifer Tsyn
Whether your business is just starting up, expanding, or relocating, you are likely to find yourself negotiating a lease. Of major concern to most commercial tenants are the maintenance, upkeep and repair of their space and the entire building. These issues should be carefully negotiated and then written into the lease.
1. Who is responsible for repairs and maintenance of the tenant’s space?
Commercial leases often require that tenants maintain, repair and replace those portions of the HVAC, electrical, plumbing, and water and sewer systems that are located inside or outside of the leased space, but which exclusively serve the leased space.
Tenants should always take steps to learn whether the heating, cooling and ventilation for their space will be provided by a shared HVAC unit or a designated HVAC unit, and whether that unit will be considered to be inside their space or outside of it (for example, if there is a rooftop unit). Similarly, tenants should make sure that they understand what parts of the electrical, plumbing, water and sewer systems that they will be responsible for.
In addition, tenants should be aware that maintenance, repair, and replacement are not the same thing, and each should be addressed. If the tenant is going to be required to “maintain” any of the HVAC or other systems, the tenant should make sure to know if they will need to enter into a contract for regular maintenance with an outside provider, and, if so, how much that is expected to cost.
If there is a major failure of any of these systems and they must be replaced (as opposed to repaired), the lease should be clear as to whether the tenant will need to pay for such replacement. If that is the case, the tenant should know how old the system is and then be sure to budget accordingly.
2. What are the landlord’s responsibilities for maintaining the common areas of the building?
Prospective tenants should make sure that the lease addresses the landlord’s obligations regarding parking lot maintenance, maintenance of walkways, and cleaning and repair of common restrooms and other common areas such as conference rooms or lunch rooms. Tenants should also not neglect to include requirements for the landlord to maintain landscaping and to promptly handle snow removal. In addition, tenants should consider what security services the landlord will provide. Tenants should try to negotiate with the landlord to include in the lease remedies for the tenant if the landlord is not providing these services as promised.
Tenants will want to be clear on when, or if, they can withhold rent for the landlord’s failure to provide these services (which landlords may not agree to), or even terminate the lease if the landlord’s failure is severe and ongoing. Tenants will want their customers or clients to easily access the leased space, and the failure of landlord to keep up these common areas can be detrimental to the tenant’s business.
3. What percentage of common area maintenance costs (CAM) will the tenant have to pay for?
Tenants will generally be asked to pay some portion of CAM, and the lease should be very specific about this issue. The tenant’s “share” of CAM is generally calculated based on the proportion of the tenant’s space to the entire building. However, tenants should be sure that the lease is clear as to whether the proportion will be calculated on the total square footage or the rentable square footage.
Tenants may be asked to pay their “share” of the total CAM costs, or they may be asked only to pay their “share” of increases, year over year, in CAM. If the tenant is being asked to pay its “share” of CAM increases, it is important to determine what “base year” will be used to calculate what the increase would be.
Another key issue to be addressed in the lease is what costs are included in CAM. Tenants and landlords may negotiate regarding which of the landlord’s costs should, or should not, be “counted” as CAM.
Examples of items that the parties may negotiate are: depreciation of capital improvements, machinery and equipment, amounts spent on licenses or permits, landlord’s insurance costs, landlord’s administrative and management expenses, amounts landlord paid in interest on its debt, and the landlord’s payments pursuant to ground leases.
Tenants may be able to exclude landlord’s costs related to things such as the amounts spent on preparing other spaces in the building for other tenants and similar costs that do not truly benefit the building as a whole.
Finally, the tenant should make sure that the lease is clear about when and how their “share” of CAM (or CAM increases) is to be paid. Frequently, landlords require tenants to pay their “share” in advance, either in a lump sum or monthly. If the tenant’s “share” of CAM (or CAM increases) is to be paid in advance, the lease should spell out how the landlord will report back to the tenant after the end of the year to determine whether the tenant overpaid or underpaid their share of CAM (or increases).
If the tenant has overpaid, the lease should spell out whether the tenant will get a refund or whether the tenant will be given a credit. The tenant may also try to include a provision in the lease giving them the right to review or even audit the landlord’s records regarding CAM payments.