Extend Deadline on Installation Removal to Help Market, Re-Let Space

If you’re not careful when drafting your lease with a tenant that wants to customize its space with a large-scale installation, you could be left footing the bill for removing it after the tenant moves out. But there is a leasing strategy you can use to make your space more marketable and lower your costs when the tenant moves out. And because the strategy has benefits for the tenant, too, unlike with some of your other requests during lease negotiations, you probably won’t have to deal with pushback. Here’s how you can use such a strategy to make things flow smoothly when transitioning from one tenant to the next.

Make Space More Marketable

“Typically, a lease will give you the option of keeping an installation when the tenant moves out or making the tenant remove it and restore the space to its original condition; but you must make your choice before the lease ends,” explains New York City attorney Barry Levine. However, you’ll face a dilemma if the space remains unrented as the lease draws to an end, he warns. That’s because you’re forced to make a decision, but whatever you decide may have a negative impact on the marketability of the space.

Say a tenant rents two floors and has built a staircase between those floors. If you have the tenant remove the staircase and restore the space when it leaves, you make the space less attractive to any prospective tenant that might want two floors. Meanwhile, the departing tenant pays for an expensive and unnecessary staircase removal. On the other hand, keeping the staircase may deter prospective tenants that want to rent only one floor. In that scenario, you may have to remove the staircase later at your own expense to re-rent the space.

“It’s smarter to extend the deadline for making your decision on keeping the installation to a date after the lease ends—from three to six months later. Extending the deadline for your decision past the end of the lease gives you greater marketing flexibility,” says Levine. That’s because you have more time to offer the space to two types of prospective tenants: those who want the installation and those who don’t. This widens the range of prospective tenants, and if you find a new tenant that wants the installation, your former tenant will benefit by saving the expense of removal and restoration, Levine points out.

When to Use This Strategy

This strategy can be used for installations like internal staircases and raised computer floors. But you can apply the strategy to any big installation—such as a drive-thru window or walk-in refrigerator. You’ll want to extend the deadline in your lease for exercising your option whenever an incoming tenant plans a major installation that conceivably might not be useful to a subsequent tenant. Or, if an existing tenant takes additional space during the lease and builds a major installation at that time, make sure there’s an extended option deadline in your lease modification or amendment. You’ll also want an extended option deadline if a tenant asks to put in a major installation during the lease, without taking additional space. Insist on a lease modification including this option as a condition to your consent to the work.

Carve Out Reasonable Time Frame

How long you should wait to decide is one of the aspects that tenants might object to. You don’t know how long it will take to re-let space after a tenant leaves, Levine points out. Ideally, you want as much time as possible after the lease ends—say, a year—to decide if you want to keep or get rid of the installation, he suggests. But tenants will almost certainly object to staying in flux for that long. They’ll probably try to keep the decision-making period as short as possible, even though an extended deadline could help them by saving restoration costs.

You can start by trying to negotiate for a six-month period after the lease ends in which to exercise your option—and go from there. A three- or four-month period is a fair amount of time for both sides, says Levine. And there’s nothing to prevent both you and the tenant from being flexible at the time the option expires. Suppose you’re close to signing a lease with a prospective tenant that wants an installation. You and the former tenant can agree to extend the option period.

Get Key Protections

Extending the deadline for making your decision isn’t as simple as just putting a later date in the lease. You should get the protections in our Model Lease Clause: Extend Option to Keep or Remove Big Tenant Installations, as well.

Make option survive lease term. Since your option continues after the lease ends, you must say in the lease that the option right “survives” the end of the lease, warns Levine. Otherwise, after the lease ends, the tenant may refuse to pay for the installation’s removal. It may claim that the lease—and the option in it—are no longer in effect [Clause, par. c].

Do restoration work yourself. If you decide to remove the installation and restore the space, don’t let the tenant do the restoration work. You’re dealing with a tenant that has either moved out of the space or is getting ready to leave. Restoration work is often very complicated—especially if there has been slab penetration between floors. The tenant has no incentive to do a good, clean job—just as inexpensive a job as possible. Even if you pre-approve the tenant’s contractors, the quality of the work may be poor because the tenant hasn’t paid for the best materials. Instead, be sure the lease says that you’ll do the work yourself [Clause, par. b(2)].

Make tenant pay restoration costs. Make the tenant reimburse you for all the restoration costs, suggests Levine [Clause, par. b(2)]. Don’t let the tenant off the hook just because you’re doing the restoration work. The tenant may be worried that, with the restoration work solely in your hands, these costs may be too high. In response to this concern, you can agree to make the tenant pay for “reasonable” costs only, says Levine.

Hold onto, draw from security deposit. Give yourself the right to continue to hold the tenant’s security deposit after the lease ends. You may need to use the security deposit if the tenant doesn’t pay you for the restoration costs, warns Levine. To do this, get the right in the lease to hold onto the security deposit until the earlier of the date you opt to keep the installation, or the date the tenant reimburses you for the costs of removing the installation. If your time to decide on keeping or removing the installation expires before either of these events, you’ll have to keep the installation and return the security deposit to the tenant [Clause, par. e].

Once you’ve got the right to hold onto the security deposit, make sure you can use it. Get the right to reimburse yourself for restoration costs if the tenant doesn’t repay you within a set time—say, 30 days—after it gets the appropriate bills and receipts from you, says Levine [Clause, par. f].

Be aware that sometimes major tenants don’t give a security deposit. Or the security deposit may not be big enough to cover restoration costs. If you anticipate this problem, try to set up an alternative way to ensure that you’ll get reimbursed by the tenant, says Levine. He suggests a letter of credit from the tenant, a performance bond, or an escrow account.

Collect all restoration costs. Don’t let your access to the security deposit limit your right to collect all the restoration costs from the tenant. If it turns out that the security deposit doesn’t cover these costs, be sure you have the right to take the tenant to court to get the rest of the money [Clause, par. g].

Get clear title to the installation. If you decide to keep the installation, make sure your ownership of it isn’t affected by any claims. Otherwise, you may inherit an installation that’s subject to a mechanic’s lien or a bank loan [Clause, par. d]. You might consider hiring a title company to run a title search—just to double-check.

Insider Source

Barry Levine, Esq.: 320 East 23rd Street, New York, NY 10010.