Fixtures – How to Negotiate a Fixture Clause When Leasing a Site
Published on Tuesday, 8 October 2013 07:14:47 Written by Marc
All of us in the real estate lease management field know what fixtures are. After a few years in the business, it becomes a habit to think about fixtures when not only it is time to negotiate a new commercial lease, but also each time you make a renovation or add something to a site. It becomes even more important when leasing a commercial or industrial site. So what are fixtures again? By definition, fixtures are just about any physical property that is permanently attached to the real property. In the leasing world, it is normally anything that is permanently attached to the building. Some even add to the definition items that are not only permanently attached, but that if removed would damage the property (although the definition of what constitutes damage can be debated). All the rest that is installed by the tenant is normally classified as chattels as they not permanently attached to the building. Again, the notion of permanently attached is not clean cut. A piece of equipment that is physically bolted to the floor of a building is technically permanently attached… until the day it is unbolted. In any case, it is always better if the tenant and landlord clearly define what constitutes fixtures from the very beginning. This being said, you can often negotiate a lease on your own terms so that you can take back certain (normally expensive) items that you want to keep with you when you leave a site. For example, if you lease an industrial site on a triple net basis (where you pay just about everything under the sun) and a few years into the lease you end up paying for the replacement of some equipment, you might regret that you did not add a clause which would enable you to take back this equipment in the event that you would vacate the premises (at the end of the lease or before). In some cases, even if you could take back some equipment, it would not make much sense. For example, if you added a rooftop unit 10 years ago and you vacate the building at the end of your lease, it would not make much sense to keep it simply because a 10-year rooftop is nearing the end of its normal lifespan and is not worth the money to remove it and then reinstall it. However, if you installed that unit 6 months prior to your lease ending, that might be another story, since the unit is still brand new. While many landlords will tell you that base building equipment becomes fixtures once installed, I will say that anything can be negotiated before you sign that lease. Better yet, before you sign the offer to lease! Many landlords will tell you that they have a standard policy and some do, to the point they will not lease to you unless you respect these standards. However, many times these standards can be somewhat negotiated and if you do not ask, you will never know what is possible. Sometimes if the landlord really wants you as a tenant, you might be surprised at the flexibility he might show. Therefore, it is always wise to set a provision in the lease that would allow you to decide at your discretion, whether or not to keep certain equipment that you have installed and paid for during your lease. Again, not always easy to get, but if you do not ask… As much as I would like to give a complete list of lease fixture clauses, it is not clear-cut. It depends on the residual value or need of the equipment versus the trouble & cost to remove it and reuse/resell/reinstall it. Here are a few important items that you should look out for before signing a lease. Phone systems and IT cabling: You probably will want to leave this in place at the end of the lease so make sure it is crystal clear otherwise you might be forced to remove everything at your cost. Furniture: Depending on the state of the furniture at the end of your lease, you might want to either keep or leave at the site. Since it is often cheaper and simpler to leave everything at the site than to remove and dispose of, having a clause in the lease that gives you this flexibility could be interesting. Alarms, cameras, access control systems: Here also, depending on what you installed, when it was installed and your future needs, you might want to have a clause that allows you to either remove and take back with you or leave in place. Operations equipment: Normally the landlord will force you to remove them, but for some equipment such as a garbage compactor for example, depending on the status of the equipment and your needs, you might find it cheaper to leave in place. Compressed air lines and plumbing lines: These often cost more to remove than their value. Having the possibility to leave in place often makes sense. Electrical distribution: For some equipment, you might want to remove and for other you might prefer to leave it in place. This is a case-by-case analysis. Hvac (process & base building): This is often an area where the landlord will often prefer that you take back your process HVAC equipment but will want that you leave base building HVAC in place. However, since it is sometimes difficult to predict the state in which the HVAC system will be when your lease ends, try to insert a clause in the lease that allows you to take back any HVAC system(s) that you add during the span of your lease. Just a note here, I am referring to new equipment that was not in the building when you first leased the site, if you simply replaced existing equipment, good luck trying to convince the landlord in taking it back later. However, for new added equipment it is often possible to negotiate something. Other things on the roof (antennas, satellites dishes): These you probably will want to get permission to leave there. Allow me to end this article by telling you story about a landlord we had a few years ago. The company I had joined at that time had recently completed an acquisition. This acquisition came with close to a dozen leased sites. Upon reading the leases, I noticed one that was seriously drafted in favor of the landlord even though my company had retained the services of a very well-known real estate broker. I did not give it much thought since the lease was already in place and there was nothing that I could do at this point except pay the rent and audit the lease yearly. However, three months later, we decided to invest substantial amounts of money in the site to upgrade the operations. New HVAC systems would be required and many electrical systems would be needed to support the operations. I went back to the lease to have a closer look at the fixtures clause, only to find out that any new equipment we added that served a purpose to the building would need to remain in place in addition to any added service that would support the operations. In other words, if we decided to pay for and install new building HVAC systems they became the possession of the landlord. Same thing if we decided to add a cable tray to feed our production equipment. Anything else that the physical production equipment needed would now be owned by the landlord. I raised the red flag but considering the stakes, we decided to go ahead and invest close to 10M in the site anyway. We added new HVAC systems to the tune of about 2M and the rest on systems to feed the production equipment as well as equipment for the production. Less than one year after we finished the project, we received orders from senior management to close down the site. The economy was starting to tank (remember 2008?) and our clients in the financial industry were either going bankrupt or barely surviving. In any event, the site was hastily closed. During the closing period, the landlord was quick to point out to me what he wanted us to leave the brand new state of the art HVAC system and all the electrical and compressed air systems (to name a few) that we had just finished installing and paying for. How nice of a gift was that? Moreover, we were still on the hook with our lease for about eight more years. Therefore, as you can see the lease that was drafted gave us zero flexibility with respect to what we could or could not recuperate. With a more flexible lease, we could have at least recuperated a good portion of the new equipment and used it for operations elsewhere. Next time you negotiate a lease, pay close attention to the fixtures clauses and think of what you would want to do should something unexpected happen. It might get you to think outside the box and adjust some of those clauses…
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