“Mommy’s all right, Daddy’s all right, they just seem a little weird… Surrender, Surrender but don’t give yourself away”
The immortal words of Cheap Trick are words to live by in industrial real estate.
In past blogs we have discussed some of the ways that landlord-favorable, lease language can place the burden of expensive building repairs onto tenants.
Specifically, we discussed certain capital improvements that can be passed through to the tenant during the term of the lease.
Another repair risk that is often overlooked involves the tenant’s obligation to the landlord at lease expiration when they move out of the building.
These obligations are typically addressed in a lease clause called the surrender clause.
Surrender clauses typically dictate not only the tenant’s obligations, but also the landlord’s rights, when the tenant returns the space to the landlord.
Now, let’s talk about the importance of documenting your space with photos and detailed notes before moving your operations in.
In a perfect world, vacating a building would be relatively cut and dry. You remove your property, repair any damage you may have caused, sweep up behind yourself, and return the building in the same condition you found it.
Unfortunately, it’s usually not that simple.
This is because Original Condition can be a very subjective term. Consider that the owner of the building at the beginning of your lease term is likely not the same person who owns it at the end of the lease. If you are a tenant in a building for ten or twenty years, the building may have changed hands four or five times!
So, how can anyone really determine the original condition way back when?
Often, it is your word against the landlord’s. This is a game of “he said, she said” that you definitely want to avoid.
The solution to this potentially expensive and certainly frustrating situation is relatively simple. Create a baseline by documenting the existing (original) conditions before moving into a building! This baseline provides the necessary evidence to compare the original condition to the existing condition at the end of the lease.
What sort of documentation do you need to create a baseline?
In order to create a sound baseline, you will need photographic evidence, extremely detailed notes, and written inspection reports.
- Before your move-in date take pictures of EVERYTHING: everything that you can think of.
- Get written inspection reports from qualified trades people on conditions of the roof, HVAC, warehouse floors, parking lots, finished office space, plumbing fixtures, loading dock equipment, any remaining mechanicals, and anything else that a landlord may potentially want to replace using your money.
When you create a baseline for your responsibilities five, ten or even twenty years down the line, you are protecting yourself from potentially significant capital expenses.
Thoroughly documenting your space is a practice you should continue throughout your lease. This practice combined with your baseline is a great way to protect personal property.
Racking, material handling equipment, or production equipment are clearly the personal property of a tenant. On the other hand, non-structural improvements (upgrades), such as electrical switchgear, buss-ducting and electrical drops, storage silos, and non-structural mezzanines are less clear. These improvements increase the building’s value and attractiveness to future tenants; so, your landlord may suggest that they belong to him/her. Without proper documentation you stand to be caught in the middle of another game of “he said, she said”.
When you sign a lease, you should have a program in place to document existing conditions with
- Detailed records
- Photographs and
- Expert opinions from vendors and trades.
Once you have moved in your operations you should continue to document any alterations or improvements made to your space.
Be sure to download our free pre move-in checklist to make your documentation process a whole lot smoother. If you'd like documentation managed for you, we would be happy to take care of it. Contact us for more information.