Ohio Kentucky

Restoration Clauses in Commercial Leases, A potentially costly going away present from the Landlord

By Soniya Gokhale posted Jul 13, 2016 07:23:38 PM

  

For many End Users immersed in lease negotiations for a new office or industrial lease, the Restoration Clause appears to be a seemingly harmless part of the lease which typically doesn't raise immediate cause for concern. Especially in the context of complex, protracted lease negotiations whereby the tenant's key focus is to take possession of the space as expeditiously and economically as possible, why should this clause be examined any more closely than the numerous other high impact negotiations points for corporate occupiers?

A Restoration Clause legally obligates a tenant to restore, at the landlord’s request, the premises back to the condition it was in before possession of the space by the tenant.  Through the course of my work in Commercial Real Estate as a Brokerage Professional, and currently on the Occupier side of the equation,   it has become abundantly clear that a Restoration Clause can result in being a very costly going away present to the landlord should they exercise their right.

Typically, tenants can negotiate the 'teeth' out of this provision or have it deleted in its entirety .  Often, many landlords won’t require tenants to restore the space because a subsequent tenant may benefit from the leftover improvements.

Office & Industrial owners are pushing harder than ever for Restoration in lease negotiations.  Why such an emphasis on this clause? Some of this can be attributed to the 180° shift in how offices are being built out, and the fact that tenants are increasingly demanding open floor plans & layouts instead of hard walled, private office build outs.   For Occupiers in the Life Science, R & D, and  Manufacturing sector with unique space configurations that must accommodate Pilot Plants, Labs, a wide array of open/closed offices and meeting rooms with adjacent Warehouse space, there is high impetus by potential Landlords/Owners to ensure that a Restoration clause makes its way into the commercial lease.  

Unfortunately, if an exiting tenant has landlord-centric restoration language in their lease and the new, incoming tenant wants an open office, it is with great certainty that the landlord will be pushing the cost of demolition onto the exiting tenant via the Restoration Clause. That also means that if the incoming tenant desires an open plan and wants the landlord to tear down 30 perimeter private offices, the landlord is going to try very hard to preserve their right to obligate that tenant to restore them at the end of their term if the next 'new' tenant doesn’t want this office configuration.

So what can tenants do to protect themselves from this cost prohibitive exposure? Firstly, fight hard in the initial lease negotiations to completely strike the restoration clause and put this negotiation point at the top of your list of 'must haves'.   If this little gem (i.e. Restoration Clause) is already in the lease, a competent Corporate Real Estate professional will be able to provide their opinion of the long term implications as well as to outline a sound negotiation strategy to reduce overall financial exposure to the tenant. 

For corporate occupiers of Office & Industrial space in North America, it is important to recognize the financial implications which can come with a Restoration Clause.  The good news is that if Corporate Occupiers/End Users are cognizant of this potential liability and they are paired with an experienced, capable real estate advisor, both can strive to have this point taken off the proverbial negotiating table to the benefit of the Tenant.   By ensuring that this item is prioritized during the lease negotiations, the Restoration Clause need not be a costly going away present for the Landlord.



#leases #BestPractices
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