Get Flexibility to Decide on Removing Tenant Installations When Lease Ends

When a tenant customizes its space with extensive or large-scale installations, you need to think ahead about what you’re going to do to maximize the marketability of the space when the tenant moves out. You may want the tenant to remove the installation and restore the space to its original condition, or it may make sense to keep the installation in place for the next tenant. The good news is that many standard leases give the landlord the right to make this election. The bad news is that they require the landlord to make the election before the lease ends. 

Having to decide before termination may create a dilemma when the lease is drawing to a close but the landlord hasn’t yet lined up a new tenant to take over the space. Example: A law firm tenant that’s leased two floors of office space and installed a staircase connecting them is getting set to move out. Keeping the staircase in place would enhance the space’s marketability for prospective tenants seeking to rent two or more adjacent floors but have the opposite effect on smaller prospects interested in just one or part of a floor. Since you don’t know which kind of prospects you’ll be dealing with, the election to restore or retain becomes a guessing game. And if you guess wrong, you may end up driving prospects away. Worse, you may have to spend a fortune to undo your decision either by dismantling the installations you elected to retain or reinstalling the installations you elected to remove. 

A New York City attorney recommends a way to avoid this dilemma: Extend the election deadline to a date that falls after the lease ends. The extended deadline is a classic win-win. It gives landlords more time to decide what to do about the installation and it gives tenants the possibility of not having to pay removal and restoration costs if the new tenant wants the installation. Here’s a briefing on the strategy along with a Model Lease Clause you can use to implement it.

Get 8 Key Lease Protections

The New York City attorney has used the strategy for staircases and raised computer floors but says it will work for almost any kind of major installations, from drive-thru windows to walk-in refrigerators. You just need to get the right lease protections. Like the Model Lease Clause, your provision should include eight elements.

1. Clarification of tenant’s initial installation rights. To start, give tenants the right to make certain kinds of described installations in the space but set specific conditions:

• The tenant must make installations at its sole cost and expense;
• The landlord must approve the installation’s location;
• The tenant must, at its sole cost and expense, submit the architect’s plans and specs to the landlord for prior written approval;
• The tenant must comply with all applicable laws and secure all necessary permits and licenses; and
• The tenant must comply with all other applicable lease terms [Clause, par. a].

2. Deadline for landlord’s election. Next, establish the landlord’s right to elect to either retain or remove the installation at the tenant’s sole cost and expense within a specific deadline after the lease ends. How long should that deadline be? Answer: The longer the better since you can’t predict how long it will take to re-let the space. But tenants will likely want a shorter deadline because they’re basically in limbo until the landlord makes up its mind [Clause, par. b]. 

Negotiating Strategy: Propose a deadline of six months after the lease ends and negotiate from there. But don’t settle for anything less than three months, the New York attorney advises. And if the deadline looms and you still haven’t re-let the premises, consider approaching the former tenant to negotiate an extension. While former tenants will want closure, the extension may be appealing if there’s a good chance that the next tenant will want to keep the installation thereby sparing them from paying the costs of removing it. 

3. Landlord’s right to do removal and restoration work at tenant’s expense. If you elect to remove the installation and restore the property, you want to be able to do the work yourself and not have to entrust it to a tenant that has or is getting ready to move out and whose primary incentive will likely be minimizing costs rather than doing the job right. Reserving control over the work is especially crucial for projects requiring elaborate or intricate work, such as removal of slab penetration between floors. The clause should also make it clear that while the landlord will carry out the work, the tenant still must pay for it [Clause, par. b(2)]. 

4. Survival of landlord’s election rights. Expressly state that the landlord’s election rights “survive” lease expiration or earlier termination of the lease term. Otherwise, the tenant may claim that all of the lease’s rights and duties ended when the lease itself ended, including the landlord’s right to elect [Clause, par. c].  

5. Tenant’s duty to transfer clear title. Electing to retain the installation could expose you to liability to lien holders and others who have a legal interest in the property. So, require the tenant to covenant that it’s the sole owner of the installation with clear title and that the property is free of liens and other encumbrances [Clause, par. d]. 

6. Landlord’s right to keep security deposit after lease ends. Electing to remove and restore carries the risk that the former tenant won’t honor its lease promise to pay removal and restoration costs. To guard against this, get the right to retain the security deposit after the lease ends until whichever of the earlier occurs:

• You elect to keep the installation; or
• You elect to remove the installation and the tenant reimburses all of your removal and restoration costs.

To placate the tenant, be prepared to agree that you’ll keep the installation and return the security deposit if neither of these things happens before your election rights expire [Clause, par. e]. 

7. Landlord’s right to draw from security deposit. Having established the right to retain the security deposit, give yourself the right to draw on it to cover your removal and restoration costs if the tenant doesn’t repay you within a specific time after receiving the bills and invoices you send it. Thirty days is an appropriate repayment deadline, according to the New York City attorney [Clause, par. f].

Caveat & Strategic Pointer: Relying on the security deposit to guard against failure to reimburse may not work when, as is sometimes the case with major tenants, the tenant doesn’t provide a security deposit or the security deposit isn’t big enough to cover your removal and restoration costs. Faced with this situation, set up an alternative arrangement to ensure reimbursement from the tenant such as a letter of credit, performance bond, or escrow account. 

8. Landlord’s right to collect excess removal & restoration costs. If the security deposit isn’t enough to cover your removal and restoration costs, you may want to sue the tenant for the balance. But the tenant may argue that the intent was to limit its liability to the security deposit amount. That’s why you should state that the security deposit rights provided for in the clause are intended as neither a waiver nor a limitation of the landlord’s other legal rights and remedies [Clause, par. g].