By Stephen A. Cross
What do heating, ventilation and air-conditioning systems, and water heaters, have in common? They both wear out.
Specifying whether the landlord or tenant is responsible for repairing or replacing them are important topics of negotiation in commercial leases. There are nuances and issues specific to HVAC systems and water heaters.
In full-service leases, also known as gross leases, the landlord maintains, repairs and replaces the HVAC systems at the landlord’s expense and delivers conditioned air during certain periods known as “building hours,” typically 7 a.m. to 6 p.m. Mondays through Fridays and in the morning on Saturdays.
If a tenant wishes “after hours” conditioned air, there may be a requirement to pay an additional usage fee. In my experience, building-hours and after-hours charges are negotiable, especially if a business wants only a few additional hours during weekdays, on weekends or seasonally.
If a specific temperature range is important to the business, make certain that it is clearly stated in the lease. To illustrate: A physician or dentist may require that the temperature be 70 to 72 degrees for the comfort of the patients, while the occupants in a typical office may be comfortable at 74 to 76 degrees.
If the landlord does not deliver conditioned air at the agreed-upon temperatures, or fails to repair a malfunctioning HVAC system in a timely manner, the tenant may have been “constructively evicted,” and may be entitled to vacate the premises. This is especially important in very hot or cold locations, where conditioned air is critical for the comfort and safety of the occupants. Consult with an experienced real estate attorney to understand your rights and remedies in the event the landlord fails to live up to its obligations.
Most triple-net (NNN), industrial-gross (I/G) or modified-gross (M/G) leases contain boilerplate language that requires that the tenant not only provide and pay for regular maintenance service, but also foot the bill in the event the HVAC system(s) require repair or replacement. As the date a unit may break down is unpredictable, the likelihood of incurring repair expenses is much like playing musical chairs, and you don’t want to be the tenant in possession when the music stops (i.e., the compressor fails).
Therefore, during the negotiation process for NNN, IG or MG leases, I suggest requesting the landlord warrant the HVAC systems, including evaporative coolers, for the entire period of occupancy (i.e., the base term and any exercised option periods). Alternate strategies could include, among others, obtaining a full warranty for a period of time (say, the first 6, 12 or 24 months of the initial term) and/or capping the tenant’s out-of-pocket expenses for repairs or replacements at a specific amount (say $300 per occurrence or $500 per year).
If an extended warranty or expense cap cannot be negotiated, it is critical to stipulate that, in the event the unit(s) require replacement, the landlord will replace the unit(s) and the tenant will be responsible for no more than a prorated share of the cost based on the remaining lease term, actual cost at the time of replacement and the manufacturer’s estimated useful life (typically 144 months).
This also can be used as general guidelines for the repair and maintenance of water heaters. Of note is that not all sinks have hot-water service so, before signing a lease, make certain to confirm whether the bathrooms and kitchen/break room sinks are equipped with water heaters and that they are in good operating condition.
Stephen A. Cross, CCIM, owns CROSS Commercial Realty Advisors and advocates exclusively for tenants and buyers. Contact him at 480-998-7998 or firstname.lastname@example.org.