By Liad Hadar – Director
This article concerns the obligations of commercial landlords and tenants regarding the handover and return of leased premises.
This is an interesting and nuanced topic worthy of discussion and clarification. It can unfortunately be a catalyst for a conflict-ridden end to an otherwise great working relationship. For the purposes of this article, I am referring only to commercial premises, but the same principles apply to retail, industrial and residential premises, with some slight variations to each case.
White boxing versus Reinstating
White boxing is the requirement for a landlord to ensure that leased premises comprise exterior walls, windows and doors, roofing, standard lighting and electrical and air conditioning (HVAC), together with the current flooring, e.g. carpeted, concrete, etc. Everything must be in a clean condition, as if untouched, with the walls generally freshly painted white.
Reinstatement is the requirement for the tenant to return the leased premises to the landlord in the same good condition in which it received them (with a fair degree of wear and tear excepted.) In other words, the tenant needs to return the premises to the landlord as a “white box”.
How it works
Prior to, or on conclusion of, a lease agreement, the landlord ensures that a particular space in its property is white boxed.
Generally, a tenant signs a lease agreement with a landlord and receives beneficial occupation (BO) in order to customise the space for their purposes. This is known as tenant installation (TI) and generally comes with a tenant installation allowance (TIA) provided by the landlord. During the BO period, the tenant has access to, and occupation of, the leased premises for purposes of its TI. The tenant’s contractors turn the white boxed premises into the final condition in which the tenant will trade.
How the story tends to unfold
The above scenario takes place at the most exciting and promising stage of the landlord-tenant relationship: the very beginning. The relationship is full of hope and ambition, with the landlord successfully placing a long-term, viable tenant who they hope will maintain the property in good condition (a topic for a different day). In turn, the tenant looks forward to a fresh new space in which to successfully operate their business from.
Fast forward a few years and the lease agreement is reaching a close.
The landlord expects the tenant to return the leased premises in the same good condition in which it was handed over. The tenant recognises their obligation to do so, but this is often where expectations can become misaligned.
The big question is this: legally, what are the specific conditions the leased premises must be restored to (and who bears the financial responsibility for this)?
By way of example, Hadar Inc’s standard commercial lease agreement contains the following reinstatement clause:
Upon the termination of this agreement, whether by effluxion of time or by cancellation in terms of the provisions hereof, the Lessee shall re-deliver the premises to the Lessor in the same good order and condition as that in which it received same, fair wear and tear excepted.
In addition, should the Lessor require it, the Lessee must also remove all fixtures and fittings, interior work, alterations, repair damages to the walls or doors and provide an Electrical Certificate of Compliance.
This is where the points of contention can arise as subjectivity prevails and everyone seeks to protect their own financial interests:
- What constitutes fair wear and tear?
- What if there’s been a change of ownership at the tenant’s business and the original custodian is no longer present to clarify the original condition?
- What if the original condition wasn’t documented?
- At the point of handing over the white boxed leased premises:
- Carefully prepare a handover pack containing photographic evidence (in colour) of the condition of the premises.
- List specifications of the white box finishes to the premises (i.e. when it was painted, what colour was used, the material of the flooring etc). Be meticulous and helpful.
- Have the Tenant sign the handover pack to confirm not only the condition in which the leased premises are received, but also an undertaking that it will return them to the exact same condition.
- Ensure that your lease agreement specifically deals with reinstatement.
- Clarify what constitutes reasonable wear and tear upfront.
- Several months before the lease period is nearing its termination:
- Communicate with the tenants regarding their reinstatement obligations
- Suggest that your operations team meet with the tenant to discuss the original white box state and offer to manage the reinstatement process for them (at a fee).
- Prior to moving into your new leased premises:
- Ensure that you have read the reinstatement clause in your lease agreement and understand it, and the cost implications, before signing.
- Thoroughly check the condition of the premises prior to taking occupation and signing the handover pack.
- Create a snag list of any items of concerns for the landlord to either remedy before you take occupation or to note the condition in which it is in.
- Understand that carpets, for example, suffer fair wear and tear by regular movement on them but that a hole caused by negligence is your responsibility to repair.
- Several months before your lease agreement is due to end:
- Meet with the landlord to agree on the reinstatement plan of action. This can help to avoid spending on incorrect or inadequate reinstatement undertakings.
- Explore whether existing fixtures or fittings may be of value to the landlord, before incurring costs to remove them.
If all else fails, call a property law specialist
Should the parties still disagree on who bears the responsibility for reinstatement, our specialist property law team at Hadar Incorporated can help mediate a resolution to the matter swiftly and efficiently. Be sure to schedule a consultation before the relationship reaches breaking point; a simple and technical conversation mediated by an expert and objective third party can often be all that is required!