Lease Reinstatement: 11 tactics to prevent costly surprises when your lease ends

Minimising your lease reinstatement costs

What is Lease Reinstatement?

When you enter into a commercial lease, it is essential to consider the associated costs of each phase of your commercial lease lifecycle – Entry, Occupation, Exit. 

Lease reinstatement obligations only occur in the exit phase of your commercial lease lifecycle. The extent of the tenant’s obligations will depend on the wording of the specific lease documents.

Most leases obligate a tenant to reinstate the premises by removing all installed items such as partitions, racking, HVAC, lighting, signage, etc. Additionally, you must patch, plaster and paint the walls and return floors and ceilings to their original condition. 

If you have not complied with your maintenance or redecoration obligations (if any) during the occupation phase of your lease, your landlord can require that you address these outstanding jobs on exit before releasing you from liability under the lease.

For example, you don’t repair the pothole in the driveway caused by container drops during your lease term.

What is your lease reinstatement standard?

The lease reinstatement standard outlines the steps required to return premises to their original condition at lease commencement, excluding reasonable fair wear and tear. However, this is often a subjective (and sometimes expensive) standard depending upon:

  1. Your lease obligations – I once encountered a lease requiring a total repaint internally and externally plus new carpet, with no fair wear and tear exemption in addition to the usual obligations.
  2. How well you have maintained the premises during your occupation.
  3. Whether or not you and your landlord can agree on the reinstatement standard.

This is often a subjective standard, with the landlord wanting a new building and the tenant wishing to minimise costs.

The best way to manage lease reinstatement is to proactively address it upfront during lease negotiation and your occupation.

Lease Reinstatement Tactics

Below are our top tactics to manage your lease reinstatement obligations and prevent time-consuming, expensive and stressful reinstatement arguments at the expiry of your lease.

 

    1. Negotiate your lease reinstatement obligations 

Before entering into a lease, “begin with the end in mind”.

When negotiating your commercial lease, address your reinstatement obligations upfront. At this stage of the process, you have the most negotiating power, and it pays to clarify and agree on what you will do to reinstate the premises.

For example, you could negotiate that:

      • The new tenant can choose to take or leave the fit-out at their discretion.
      • The tenant will leave certain parts of the fit-out behind on lease expiry, e.g. HVAC, bathrooms or kitchenette.
      • The tenant is not required to reinstate any work which the landlord has consented to during the lease.
      • The tenant will not have to complete any reinstatement if the landlord intends to demolish the premises once the tenant moves out.

 

    1. Ask the landlord to take care of the fit-out or install fixtures.

As part of your lease negotiations, request that the landlord undertake some of your fit-out requirements or install fixtures as part of your lease incentives. E.g., HVAC, kitchenette, boardroom etc.

The landlord will then own fit-out and fixtures installed at your request and these will be excluded from your reinstatement obligations. E.g., you can walk out and leave it all behind you.

 

    1. Get a Premises Condition Report

Get a Premises Condition Report at the commencement of your lease before carrying out any work. At the very least, do a walk-through and take photos and a video to establish the condition; this will be the condition to which you need to reinstate the premises on exit.

Lack of evidence of the condition and state of the premises at lease commencement is a significant factor in reinstatement disputes. It makes it difficult for the parties to agree on the reinstatement standard, especially if the lease has run for a long time or, has been renewed several times; this issue can also be exaggerated if the landlord or tenant changes during the lease term.

The Premises Condition Report should contain photos and a detailed description of the condition and state of the premises before the lease starts.

Lastly, make sure you annex the Premises Condition Report within the lease.

 

    1. Include Fixtures and Fittings Lists in Your Lease

When negotiating the lease, make sure that it includes:

      • A detailed list of which fixtures, fittings and chattels belonging to the landlord (and must therefore stay when the lease ends)
      • A detailed list of which fixtures, fittings and chattels belonging to the tenant (and may have to be removed when the lease ends)

This reduces the uncertainty and confusion over what fixtures, fittings, and chattels should be removed as part of the lease reinstatement. 

This information is also helpful for rent reviews (don’t pay rent on the fit-out you have installed), maintenance (capital replacement by the landlord), and in scenarios where the landlord changes during the lease term.

    1. Maintain the Property

Comply with your maintenance obligations during the lease and ensure the landlord does likewise; this prevents maintenance from building up during the term of your lease and avoids the cost of undertaking deferred maintenance on lease expiry, which is generally more expensive than the cost of the original preventative action.

    1. Alterations or Additions

If you undertake any alterations or additions to the premises during your lease term, negotiate with your landlord that it becomes the landlord’s property on lease expiry and that you are not required to reinstate.  

E.g., if you change the shopfront, entrance to the premises, or build a mezzanine floor etc., negotiate to leave this behind when you leave.

 

    1. Keep Good Records

Keep a record of the condition of the premises at the start of the lease. Note any changes during the term, including alterations, remediation or maintenance work.

If the landlord fails to maintain the roof or building structure, keep a record of how it impacts the condition and state of the premises so that you can exclude premises degradation from your reinstatement obligations.

    1. Lease Assignments

If you are taking an assignment of lease, make sure you understand what fit-out and work the previous tenant(s) has undertaken and the condition and state of the premises at the commencement of their lease.

You are obliged to reinstate the premises to the condition it was in when the lease commenced, not the state of the premises when you took over the lease.

You can prevent costly surprises by documenting in your deed of assignment with the landlord the fit-out, fixtures, fittings, and alterations required to be reinstated when the lease ends.

 

    1. Plan Your Exit Strategy Early

Allow plenty of time to plan and undertake your reinstatement before the lease expires.

Depending on the circumstances, it may be prudent to engage a building surveyor to prepare a dilapidation report which accurately reports on the condition and state of the premises. A dilapidation report references the original lease documentation and any evidence of the condition of the premises with its current state. It will also quantify the cost of reinstatement work.  

Depending on what fit-out work and base building systems you have changed, you may require building consent to reinstate the building systems. E.g., automated fire systems and automatic entrance doors.

If your reinstatement stretches beyond your lease expiry date, you could be up for additional rental and penalties.

 So, plan early and engage the appropriate advisors. Engage with the landlord, and undertake the reinstatement work before your lease expires.

 

    1. Financial Settlement in Lieu of Carrying out Reinstatement Work

Negotiate with the landlord to agree to a financial settlement instead of carrying out the reinstatement work. It may be cheaper and quicker.

However, you may need to obtain a dilapidation report to determine the payment range.

 

    1. Sell Your Fit-Out to the Incoming Tenant

If you can find out who the incoming tenant is, you may be able to establish whether they have an interest in your fit-out. You can negotiate to sell it to them, avoiding the need to reinstate it.

I have sold racking and pylon signs to incoming tenants, thus avoiding the need to remove the items and the cost of reinstating flooring while recovering some of the original fit-out costs.

 

So, think about the lease lifecycle and negotiate your reinstatement obligations before entering the lease and make sure you document everything correctly.

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Marcus Bosch

Marcus Bosch

Managing Director

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