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Surrender Clauses

Surrender Clauses

Most commercial leases have a “surrender clause” that establishes the requirements for the tenant’s surrender of the leased premises upon the expiration or earlier termination of the lease.  A typical surrender clause requires that the tenant surrender the leased premises to landlord on or prior to the expiration date of the lease in a “broom-clean condition” and in “the same condition as delivered to Tenant on the Lease Commencement Date, ordinary wear and tear excepted”.  For the reasons stated below, a tenant should negotiate that it will leave the leased premises in “as-is condition, provided that tenant may not intentionally, adversely and materially alter the leased premises prior to surrender”.

A common pitfall for tenants is that the condition of the leased premises delivered to tenant on the lease commencement date may be very different than the condition at the end of the lease term.  For example, if the landlord delivers a vanilla shell to the tenant and then the tenant makes its own tenant improvements, the tenant may need to remove all of its tenant improvements at the end of the lease and deliver a vanilla shell back to the landlord.  This could be very costly, especially if the tenant has highly customized the leased premises with a kitchen, walk-in freezer(s), permanent partitions or special flooring (such as hard to remove tile). The tenant should carefully negotiate the condition upon surrender in these instances.

In addition, the tenant should be aware of its maintenance and repair obligations under the lease.  The tenant may be obligated to maintain and repair costly items such as the air conditioning system and the roof.  The tenant may put off doing repairs to such items towards the end of the lease term.  This strategy could end up costing the tenant more.  If the tenant failed to make required repairs and that failure caused the item to need to be replaced, the tenant could be responsible for the replacement.  For example, if the air conditioning unit is not working properly and the tenant does not get it serviced, which causes the unit to breakdown, the tenant may be required to replace the unit, even if the lease term is over.

Also, landlords tend to sneak in additional surrender provisions in the alterations section of the lease.  Here, the tenant must obtain approval from the landlord in order to make any changes to the leased premises.  It is common for the lease to allow the landlord to pick and choose upon lease termination which improvements may remain and which improvements must be removed by the tenant.  When negotiating leases, I often require that the landlord indicate at the time of approval whether the improvement stays or goes at lease expiration.  In some cases, the tenant may elect to not make the alteration if undoing the alteration at the end of the lease will be too costly.

Finally, if there is not a surrender clause in the lease, the common law standard is generally that the tenant is required to return the leased premises in the same condition as when received, ordinary wear and tear excepted.

Prior to using any language or concepts from this blog entry, consult with an attorney.

Ryan Rosensteel is a real estate and construction attorney licensed in Arizona.  You can contact him at rrosensteel@rrlawaz.com.

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