The Surrender Clause in a Lease can have a Tenant Waiving the White Flag

Surrender clauses can be tricky, and can stick a tenant with unexpected costs if not entered into carefully. Does this situation sound familiar?:

A tenant, at the end of a 10-year lease, removes its equipment, inventory and fixtures from the premises, and leaves the premises in good condition.  After turning the keys over to the landlord, the tenant has met its final obligations, right?  Wrong. 

Three weeks later, the tenant gets a surprise invoice from the landlord for $40,000.00 to coveranticipated construction costs.  It turns out that the lease required the tenant to put the premises back in the condition that existed as of the date of the lease.  Ten years earlier, before opening for business, the tenant combined two spaces by knocking down a demising wall and removing a bathroom.  The landlord now requires the tenant to pay for those improvements to be reconstructed.

No tenant likes surprises like this one.  Unfortunately, tenants frequently overlook the “surrender” clause of a lease, resulting in unanticipated costs.  That can be a critical mistake.

Surrender clauses must be carefully analyzed within the context of each situation. Several factors should be considered when negotiating a surrender clause, such as the initial condition of the premises; the improvements the tenant intends to make; the length of the lease term; and the items the tenant will want to keep once the lease term is over.  Many tenants only budget for the initial costs of moving into a space. Tenants must also plan for the costs of moving out. 

Many surrender clauses contain provisions that can be grouped into three basic categories.  The first is those clauses that require the premises simply be left in good condition.  This generally means that the mechanical systems should be in operating condition and that a new tenant could step in, with minimal work and start operating in the premises.  It is important, however, to qualify this language and include the phrase “reasonable wear and tear excepted.”  This will eliminate the tenant’s obligation to perform repairs like repainting the premises because of minor dings and scrapes on the walls.  The condition of the premises when it is originally turned over to the tenant factors in as well.  If the premises weren’t in “good condition” when the tenant took possession, is it fair to require that tenant to turn it over in better condition than when received? At a minimum, the tenant should note the condition of the premises upon gaining occupancy to avoid a dispute later.

The second commonly used clause requires that the premises be left in "broom clean" condition.  Broom clean is likely the most favorable surrender clause to the tenant, as it only requires that the tenant’s equipment, goods and inventory be removed, and that the premises be left “clean” and free of rubbish. 

Finally, many leases require that the premises be left “in the condition that existed when the premises were turned over” to the tenant.  This and similar phrases are probably the most onerous and problematic for tenants.  These clauses imply that the tenant is potentially responsible for removing all of the improvements installed by the tenant during the lease term.  Depending upon the type of improvements (and considering the above example), removal of tenant’s improvements can be a costly (and unexpected) adventure. 

What if the tenant assigns the lease to a new tenant?  A subsequent tenant may have no idea what the “original” condition of the premises was.  This "new" tenant, as with any tenant, should understand and assess the implications of this clause before signing. She may want to question the assigning tenant about the initial condition of the premises and the extent of the improvements installed.

When a surrender clause requires removal of tenant improvements or similar variations, the tenant has a few options. One is to negotiate with the landlord at the outset what condition the landlord expects to receive the premises at the end of the lease, and have those expectations spelled out in the lease.  The tenant or lessee may discover that the landlord only needs certain improvements removed, thus saving the tenant time and money. By discussing this clause with the landlord, the tenant will at least know what to expect when the lease expires. What if the landlord adds language to the lease specifying improvements and fixtures the tenant must remove from the premises and leave in place at the end of the lease term?  Generally, a tenant will want the right to remove its inventory, goods, equipment and trade fixtures from the premises.  Some leases prohibit the removal of all or some of these items without the prior written approval of the landlord.  In addition, some leases require the removal of all fixtures installed by the tenant before surrendering the premises. 

To address this situation, the tenant can reach an agreement with the landlord prior to the time a leasehold improvement is made or installed - whether the landlord will require the removal of the improvement when the lease expires.  While this remedy will not eliminate the cost to the tenant, at least the tenant will be aware of the future obligations and will be able to prepare for the eventual cost.

It is critical that landlords and tenants confirm that the language governing removal of improvements and language describing the condition of the premises at the end of the lease are consistent. The surrender clause, like other frequently overlooked provisions in the lease, can be a dangerous trap for an unsuspecting tenant.  A thorough lease review by an experienced real estate attorney can prevent tenants from having an ugly exit.

Gary A. Kravitz