Avoiding Disputes Over the Condition of Industrial Properties Upon Surrender

By Michael L. Allen, Esq.

In any well-crafted lease, clear and careful drafting avoids disputes between landlord and tenant—and the resulting acrimony and expense. This is no less true with provisions addressing the condition of the property upon tenant's surrender at the end of the lease term.

In a typical industrial lease, tenant is obligated to surrender the property to landlord at the end of the term in the same condition existing at the beginning of the term, "ordinary" (or "reasonable" or "normal") wear and tear excepted. Of course, this assumes that tenant, under separate lease provisions, has the primary responsibility to repair and maintain the building and all other site improvements during the lease term, which is typical for a long-term triple net industrial lease of an entire building, whether for traditional warehouse or specialized manufacturing use. Commonly, however, neither the maintenance and repair provisions nor the surrender provisions include a definition of the phrase "ordinary wear and tear."

In case of a disagreement between landlord and tenant that results in litigation over the meaning of "ordinary wear and tear," the court likely will resort to expert testimony to determine what constitutes "ordinary" or "normal" wear and tear of the particular building component or system at issue. Generally speaking, the court or jury must decide whether the deterioration of condition would have occurred notwithstanding routine maintenance, and if such a determination is made, tenant will not bear the cost to remedy the condition. To provide some clarity, it may be useful to include this or similar language in the lease: “‘ordinary wear and tear’ does not include any damage or deterioration that would or could have been prevented by good maintenance practices or by Tenant performing all of its obligations under this Lease.”

Better yet, prudent landlords should use leases that include detailed descriptions of the expected condition of the property at surrender, thereby eliminating or minimizing disputes. For example, such language could require tenant to: (1) remove stains and striping from the concrete floor slab without the use of grinding, sanding or similar methods that result in damage; (2) clean carpets and vinyl floor tiles in the office area and replace torn, chipped or perforated portions of the carpet or tile; (3) remove all tenant equipment, including racking, from the warehouse and cut anchor bolts at least 1/4" below the floor and fill holes with epoxy; (4) repair all holes in office walls and restore them to a “paint ready” condition; (5) test all HVAC units using a certified mechanical contractor to ensure their good working condition (and make any needed repairs); (6) remove tenant-installed rooftop equipment and repair any roof penetrations using a licensed and qualified roofing contractor; (7) ensure all truck doors, service doors, roll-up doors and dock levelers are in good working order, including repair or replacement of door panels (in case of denting) and repair of any condition that precludes proper tracking of the rollers; (8) repair tears in the dock seals and dock bumpers and replace any broken backboards; and (9) remove all exterior signs and patch and paint any resulting holes.

Prudent landlords also should inspect the leased property periodically during the term to ensure tenant is maintaining it as required by the lease—and landlords must confirm that the lease allows access to the property for this purpose. Inspection is particularly important when the lease term will soon expire. Depending on tenant's specific use of the property, inspections at one year, six months, three months and one month before expiration can identify needed repairs, which can then be made before expiration. It is also recommended that landlord advise tenant, at the time tenant requests landlord's consent to alterations or additions to the building, whether such alterations or additions must be removed at the time of surrender. In this way, expensive surprises can be avoided, and tenant can budget for the probable costs of any needed repair or removal and restoration.

Thoughtful lease drafting, paired with best practices for property managers of industrial buildings, can minimize disputes between landlords and tenants over the condition of industrial properties at the time of surrender and avoid the time and expense of litigation.

ABOUT THE AUTHOR: Michael L. Allen, real estate partner at Ballard Spahr LLP, works in the firm’s Salt Lake City office. He leads Ballard Spahr’s Leasing Practice Group and represents both landlords and tenants in industrial, office and retail leasing transactions.

This article was originally published in the March/April 2015 issue of BOMA Magazine.