Spell Out When and How You'll Refurbish Tenant's Office Space

Office building tenants with long lease terms may be concerned that their office space will begin to look shabby in the future. These tenants argue that the rent they’ll be paying in the last few years of the lease won’t reflect the reality of wear and tear like peeling paint and stained and frayed carpeting. If they demand that you refurbish items in the space at a set future date—and pay for all or part of the work—should you agree to it in the lease?

This concession isn’t relatively risk-free. If you ever want to take out a mortgage or sell your building, you’re likely to find that a prospective lender or buyer will look closely at this refurbishment obligation. And if the lender or buyer thinks that the obligation in the lease is too open-ended, it may lower the loan amount or purchase price. Even worse, it may refuse to lend you money or buy your building. That’s why it’s crucial that you set limits on your refurbishment obligation in the lease.

Keep Refurbishment Under Control

A refurbishment obligation in the lease may be a red flag to the prospective lender or buyer if it’s unclear what work you must do, when you’ll do it, and how much you’ll spend. The lender or buyer will probably want some assurance that the obligation is written carefully enough so that it doesn’t become bigger and more expensive than expected. Spelling out exactly what is and isn’t covered might assuage the lender or buyer. Set these limits on the refurbishment obligation and include them in your lease:

Define “refurbishment” work. If you’re like most office building owners, you’ll want to do all the refurbishment work in the tenant’s space yourself. Doing it yourself ensures that you’ll have total control over the work quality. But it’s important that you carefully define what “refurbishment” work you’ll do. Don’t simply say in the lease that you’ll “refurbish” at a later date. Then there’s no limit to what the tenant may demand of you. Instead, list the types of work that you’ll do [Clause, par. a].

Very minor work such as painting and recarpeting is reasonable. The tenant might also want you to agree to end your list with some kind of catchall phrase like “any minor modifications that are reasonable.” Try not to give in to this demand. Otherwise, you and the tenant may get into a dispute over whether a specific modification is minor and/or reasonable.

Set time frames. You and the tenant will need to negotiate when the refurbishment work will be done. Try to set this date no earlier than the halfway point of the lease (say, the beginning of year six in a 10-year lease) [Clause, par. b]. There are two critical questions to ask when deciding when to refurbish: Will the refurbishment be late enough in the lease so that the space still looks decent when you show it to a prospective new tenant at the end of the lease? Will the refurbishment be done early enough so that you get back through the rent all the money you spend on the refurbishment? Many tenants have been flexible about selecting a date. In a very long lease, you may set two refurbishment dates (say, years seven and 14 in a 20-year lease).

Cap refurbishment allowance. Put a cap on the cost of the refurbishment. By setting a cap, you agree to pay for the refurbishment cost provided the refurbishment doesn’t cost more than a set amount. The cap, called a “refurbishment allowance,” is important because painting the tenant’s space may currently cost, say, $1,500, but in five years there’s no telling what the cost will be [Clause, par. d].

Some tenants like to see the allowance broken down into a square foot amount. If you agree to this, make sure to add that the allowance won’t increase if the tenant expands by renting more space in the building in the future.

What happens if all the refurbishment work costs more than the cap? You can work this out with the tenant at the time of the refurbishment: the tenant will pay the overage; you’ll pay the overage; you’ll negotiate a split of the overage with the tenant; the refurbishment work won’t be done; or the refurbishment will be done only up to the allowance amount.

Keep unspent allowance. It’s a good idea to make it clear that if the refurbishment cost is less than the refurbishment allowance, you—not the tenant—keep the difference [Clause, par. e].

The tenant might argue that it’s entitled to the full allowance amount, because it’s really paying you for the refurbishment allowance through its rent—its rent would be lower without a refurbishment allowance. If you must compromise on this point, require the tenant to put the unused remainder of the allowance toward improvements to the space, such as rewiring for new telecommunications systems. This will make the space more valuable and keeps the money working for you. It won’t simply go into the tenant’s pocket.

Schedule refurbishment during business hours. Make sure that you have the right to do the refurbishment work on weekdays during business hours [Clause, par. c]. If the lease doesn’t include this right, the tenant might argue that you must do the work when its office is closed for the weekend, or after normal business hours on a weekday. Even though your refurbishment costs are capped, you’ll want to be sure you’re getting the most work for your money. Because labor for weekend and after-hours work is usually more expensive than work done during normal business hours, you’ll get less value for your money. Plus, you may need to pay one of your employees extra to oversee this work.

Reserve right to enter space. Also, give yourself (and your contractor) the right to enter the tenant’s space to perform the refurbishment [Clause, par. h]. Otherwise, even though you have the right to do the work during normal business hours, a tenant that doesn’t want you working in the space on a weekday can refuse to give you access.

Use “building standard” materials. The tenant will undoubtedly want some control over the material—such as paint or carpet—you use for the refurbishment. For example, it will want to pick out the paint color. But say that you aren’t required to use any material other than “building standard” material [Clause, par. f]. These are materials that are of acceptable quality and that you’ve used in other space in the building. Otherwise, the tenant might insist, for example, that you use very expensive—but nondurable—carpeting. This will drain the refurbishment allowance without giving you value for your money. But if the tenant demands instead that you agree to use certain name brands—for example, the paints must be Benjamin Moore brand–that’s an acceptable compromise.

Allow only permanent work. It’s a good idea to say that you’re only required to make—and pay for—work that’s permanent in nature. In other words, the refurbishment allowance can’t go toward an interior decorator’s fees or furniture [Clause, par. g].

Disavow liability. Say in the lease that you and your contractors will take “reasonable” steps not to inconvenience the tenant during the refurbishment work. But other than that, you won’t be responsible for any negative effects that the refurbishment work might have on the tenant. And the tenant can’t demand a reduction or abatement in its rent due to any inconvenience it suffers during the refurbishment [Clause, par. i]. Otherwise, a tenant may argue that it’s entitled to a rent abatement because part of its space was unusable while you were painting.

Make tenant move personal property. Before the refurbishment can start, most or all of the tenant’s furniture and equipment will probably need to be covered or moved. Make the tenant responsible for moving its own belongings out of the space [Clause, par. j]. Even if the tenant doesn’t do this, you’re not responsible for any damage to its belongings as long as you took reasonable steps toward protecting them [Clause, par. i].

Make default a deal-breaker. Your promises to refurbish the space and pay the refurbishment allowance are concessions to the tenant. Be sure you don’t have to go ahead with the refurbishment if the tenant is in default at the time the refurbishment is scheduled [Clause, par. k].