Make Sure New Lease Requires Return of Space in Same Condition as Under Prior Leases

If a tenant wants to renew or renegotiate its lease, you and the tenant may decide that it's easier to sign a new lease, rather than amend the existing one. But when this new lease expires and the tenant moves out, what condition will its space be left in? You may expect that the tenant will be returning the space to you in the same condition as when it first took possession of the space under the original lease.

But if your lease is like many we've seen, it may have a loophole that will surprise you. That's because your lease may require the tenant to return the space in the condition it was in at the start of the new—not the original—lease. So, for example, if the original lease began in 1980 and the new lease began in 2000, the tenant may only be required to return the space to you in the same condition it was in in 2000. And that means the tenant won't be responsible for any changes it may have made to the space over those 20 years—changes that may prove costly to fix and that you don't want. The tenant may have ripped out doors, for example, and damaged walls and floors.

Owner's Lease Contains Loophole

Look at what happened to a New Jersey owner who found out the hard way about this loophole. Be-fore the original lease expired, the parties signed a second lease for expanded space. And when the second lease expired, the parties signed a third lease for even more space. When the tenant moved out of the space, the owner claimed that the tenant failed to keep the space in good repair and condition and didn't remove its alterations. The owner also claimed that the tenant had to return the space in the same condition as of the date when the tenant took possession of the space under its original lease.

But a New Jersey appeals court decided otherwise. The tenant had to restore the space only to the condition it was in at the beginning of the third lease. Each lease, the court said, required the tenant to restore the space to the condition it was in “at the beginning of the term, ordinary wear excepted.” And the court said, “beginning of the term” meant the beginning of the lease then in effect. Here, only the third lease was still in effect [Larken Assocs. v. Medicia Pharmaceutical Corp.]. So this owner may wind up having to pay to remove many of the alterations the tenant made to the space.

Take Two Steps to Protect Yourself

To plug this loophole and protect yourself from suffering the same fate as the New Jersey owner, take these two steps, says New Jersey attorney Ira Meislik:

Step #1: Delete harmful language. Check each new lease that you sign with a tenant and take out any language that says the tenant must return the space in the same condition it was in “at the beginning of the term,” says Meislik. This way, you avoid confusion as to which lease term you mean, he explains.

Step #2: Add new language. Then in each new lease, add language that says the tenant must return the space to you in the same condition the space was in when the tenant first got the space, says Meislik. So if the tenant got its first-floor space at the start of the original lease and expanded into a second-floor space at the start of a second lease, it must return the first-floor space in the same condition as of the original lease's start date and the second-floor space in the same condition as of the second lease's start date.

To do this, add the following language to a new lease, Meislik advises. Remember to define the term “Prior Lease” elsewhere in the new lease.

Model Lease Language

Tenant hereby acknowledges and agrees that the condition in which Tenant shall be required to return the Premises shall be that which existed when delivery of possession was first made by Landlord to Tenant under each Prior Lease as to the “Premises” described in that Prior Lease.

Practical Pointer: Expect a savvy tenant to say that it will return the space in the condition required but only if you agree to say that “reasonable wear and tear” is excepted, says Meislik. On that point, you should probably agree, he adds.

CLLI Source

Ira Meislik, Esq.: Partner, Meislik & Levavy, 66 Park St., Montclair, NJ 07042; (973) 783-3000.