One of the main areas I recommend industrial occupiers pay close attention to in lease negotiations are the responsibilities of who maintains, repairs, and replaces building systems and components under a lease.
Leases follow the 80/20 rule. 80% of lease content most likely won’t impact operations or P&L. 20% of lease content will. Maintenance, repair, and replacement provisions are always in the 20%. Therefore, it is smart for companies to conduct due diligence and structure maintenance, repair, and replacement provisions in a way most suitable for operations.
As a starting point, I suggest companies assess what the impact will be if operations dedicates the time and resources to maintaining, repairing, and replacing building systems during the lease. Would the company be better off if the landlord was responsible and passed through the costs? Are there reasons the company would prefer responsibility, such as site security or, for larger firms, potential cost savings. Whatever the answer, it will help to inform any initial discussions with prospective landlords.
Next, companies should conduct due diligence on what the age, condition, and useful life are of the components of the space being potentially leased. It should be standard practice to find out the age, condition, and useful life of the major building systems (structural, roof, HVAC, electrical, parking areas, etc.) before agreeing to maintain anything in the letter of intent or proposal. A property condition assessment report can be helpful in this area.
Lastly, companies should protect themselves against unfair replacement practices. Exposure to capital replacement costs should typically be limited to the amount of time remaining on the lease term and amortized according to GAAP or other reasonable useful-life schedules. Normal wear and tear should be expected in exchange for the rent.
Nothing is free. The landlord and/or the tenant will bear the costs of maintaining, repairing, and replacing within a property. Therefore, I would suggest the focus for industrial tenants should be:
- What general maintenance, repair, and replacement arrangement is best for the operation
- What property systems or components should not be the tenant’s responsibility
- Preventing operational disruption by addressing the near-term replacement of building systems or components prior to signing a lease
- Outside of requirements caused by tenant improvements, are there requirements such as ADA which are not being met in the space currently
- Making sure there is limited exposure to unamortized capital replacements
- If a property management fee is charged, it is commensurate with the market rate and justified by the responsibilities of the property manager