The Restoration Clause That Came Due at Move-Out

The move that ran three weeks long

An electrical and HVAC shop of 22 people had spent seven years in a 6,000 square foot warehouse unit. In those years it had built the place into a working shop: a steel mezzanine over the parts room for overflow stock, a wash bay with a trench drain and an oil-water separator tied into the sanitary line, a 240-volt subpanel feeding a compressor, a welder and a row of bench circuits, and an epoxy coating on the shop floor.

The new building was signed, the move was scheduled for the last two weeks of the old lease, and the plan was to walk out of the old unit with the keys and the deposit. Instead the shop stayed three weeks past the end of the term, paid holdover rent for those three weeks, ran two moves' worth of labor at once, and got back about 60 percent of its security deposit.

The owner's first reaction was that the landlord was acting in bad faith. That was wrong, and the useful part of this case is why: the owner had done the careful thing at every step, and the lease still came due exactly as written.

What the owner had done right

This is not a story about a shop that built things without asking. The record was good.

• Written consent for every alteration. The lease required the landlord's prior written consent to alterations. The shop asked for it, in writing, for the mezzanine, the wash bay and the electrical work, and got three signed consent letters.
• Permits and licensed work. The mezzanine went in under a building permit with stamped drawings. The drain and separator were installed by a licensed plumber under a plumbing permit. The subpanel and circuits were installed by the shop's own licensed electrician under an electrical permit. All three were inspected and closed.
• Copies kept. The consent letters, permits and inspection cards were in a folder in the office.

The owner read all of that as settled: the landlord had agreed to the improvements, the town had approved them, and they would stay with the building. That reading was the diagnosis, and it was the right diagnosis of the wrong question. Consent answers whether you may build something. It says nothing about who takes it out.

The clause, read again

When the landlord's notice arrived, the owner took the lease back out and read the alterations section to the end. In substance it said:

• Tenant may not make alterations without the landlord's prior written consent.
• All alterations become part of the premises when installed, except the tenant's trade fixtures.
• At the end of the term, the landlord may elect, by written notice given at least 90 days before expiration, to require the tenant to remove any or all alterations and restore the affected areas to their condition at the start of the lease, reasonable wear and tear excepted, at the tenant's cost.
• Tenant shall surrender the premises broom clean, with the floor in its original condition.

Nothing in the three consent letters waived that election. Each said the landlord "consents to the alterations described" and nothing more. So the landlord kept the right to choose, at the end, which alterations it wanted left and which it wanted gone, and it chose with full knowledge of what it was choosing. A wash bay drain in a unit the landlord meant to re-let to a distribution tenant was a liability, not an improvement, to them.

This is a lease question, governed by the lease's own words and the law of the state it names. This is not legal advice, and the owner's mistake here, which the owner now says plainly, was not calling a real estate attorney when the notice came in.

The notice, and what each line took

The landlord's notice arrived 96 days before the end of the term, 6 days earlier than the 90 days the clause required, so the election was valid. The office filed it under "talk to landlord at move-out". The shop started restoration work 30 days before the end of the term, thinking that was ample. The notice and what it turned out to need:

LANDLORD RESTORATION NOTICE, 96 DAYS BEFORE END
ITEM                       WHO        PERMIT  DAYS
1 remove mezzanine         own crew   demo    4
  patch anchor holes       own crew   no      1
2 wash bay: cap sanitary   plumber    yes     1
  wait for inspection                         6
  remove separator, fill   concrete   no      2
  slab patch cure                             7
3 remove added circuits    electrician yes    2
  and subpanel to main
4 floor to original:       floor sub  no      3
  grind epoxy, fill holes
CALENDAR DAYS, FIRST START TO LAST FINISH     51

The days in the last column are the work as it actually ran. The mezzanine came out in 4 days of a three-person crew, which was 96 labor hours pulled off service calls in the shop's second busiest month. The wash bay was the long pole: the plumber could not cap the sanitary connection and pull the separator until the permit was issued, the inspector's next opening was 6 days out, and the concrete patch over the filled trench had to cure about a week before the floor sub could grind across it.

Run back to back with no gaps, the items add to 4 + 1 + 1 + 6 + 2 + 7 + 2 + 3 = 26 days. The other 25 of the 51 were waiting: for the plumbing permit to issue, and for each sub's first open date. That waiting is what turned a 30-day start into a 21-day overrun.

The floor

The floor was where the deposit went.

"Original condition" for a floor that had been epoxy-coated for seven years and had rack anchors drilled through it in two dozen places meant grinding off the coating, filling every anchor hole, and patching the trench line. The floor sub did that. The landlord's walkthrough then found the patched trench a different color and finish from the surrounding slab, and anchor fills that were visible, and deducted the cost of having its own contractor do a second finish pass.

The owner's position was that a patched slab after seven years of shop use is reasonable wear and tear. The landlord's position was that the patch existed because of an alteration the tenant had been told to remove, so it was restoration, not wear. With no record of what the floor looked like on the day the shop moved in seven years earlier, the owner could not show what "original" had been. There were no move-in photographs, and the only description of the premises at signing was "as-is" in the lease.

The landlord returned about 60 percent of the deposit, with an itemized list for the rest, inside the period the lease set.

What it cost

In time: 3 weeks of holdover past the end of the term, and about 160 hours of the shop's own labor across restoration and two partial moves. In money, without dollar figures: holdover rent under this lease was one and a half times the monthly rate, so 3 weeks of holdover (about 0.69 of a month) cost about 1.04 months of rent, against 0.69 of a month at the normal rate. Add the subs, the permits, and the 40 percent of the deposit retained. The new building's first month overlapped completely with the old unit's holdover.

The part that bothered the owner most was that every one of those costs had been knowable on the day the lease was signed, and most of them were knowable again 96 days before the end, when the notice arrived and was filed for later.

Why being careful was not enough

The owner had asked the question the lease forced on them, "may I build this", and answered it correctly every time. The question the lease did not force, "will I have to take it out", was the one that cost money. Three things kept it hidden:

• Consent letters are written by the landlord. A letter that says only "consents" is the landlord's best outcome: it keeps the removal election open. The tenant has to ask for the other sentence.
• The cost lands at the worst moment. Restoration falls due at the same time as a move, when crews, cash and attention are already spoken for.
• Seven years erases the baseline. Nobody on staff remembered the floor, the walls or the electrical service as they were at move-in, and the person who signed the old lease had left.

What the owner negotiates now

For the new building, the owner put four things into the lease and the alteration process before signing.

1. A move-in condition record, signed by both sides. A dated walkthrough report with photographs and a video of every wall, floor area, door, dock, the electrical service and the plumbing, attached to the lease as an exhibit. This is the one item that would have changed the deposit outcome by itself. See related: How to Walk a Building Before You Sign the Lease.
2. Restoration terms written at signing. The lease names alterations the shop already plans (racking, a compressor circuit, a wash area) and states for each whether it may remain at the end of the term. Anything not listed falls under item 3.
3. A removal decision at the time of consent. The alterations clause now requires the landlord, when consenting to any future alteration, to state in the consent whether it will require removal at the end of the term, and provides that an alteration consented to without that statement may remain. Landlords commonly accept this; it is a standard tenant ask.
4. Trade fixtures defined. The lease lists what the shop owns and takes with it: racking, the mezzanine if it is freestanding and bolted rather than built in, compressors, benches and the wash equipment. That closes the argument about whether a bolted item became part of the building.

The owner also changed one internal rule: any notice from a landlord goes to the owner the day it arrives, with its deadlines calendared, and to the shop's attorney if it asks the shop to do or pay for anything.

Where this would have gone differently

• A landlord who wanted the improvements. A different landlord re-letting to another trade shop might have elected to keep the wash bay and the electrical. Then the same clause would have cost nothing, and the shop would have left with improvements the landlord valued, without credit for them unless the lease provided some.
• A notice the landlord gave late. Had the notice come 60 days before the end against a 90-day requirement, the election might not have been effective. Whether a late notice fails, or merely shortens the time, is a question of the lease's wording and the governing state's law, and it is exactly the kind of question to put to an attorney rather than answer from the lease alone.
• A shorter lease. On a three-year term, the restoration cost of a mezzanine and a wash bay can be a large fraction of everything those improvements earned. That is a reason to price restoration before building, not after, and one of the inputs to the larger choice between staying and moving (see related: Renovate the Current Shop vs Move Decision Tree).

References

• See related: Commercial Lease Clauses a Trade Shop Should Read First; How to Walk a Building Before You Sign the Lease.
• See related: How to Move the Shop to a Bigger Building Without Losing a Week; Renovate the Current Shop vs Move Decision Tree.
• The lease's own alterations, surrender and security deposit sections, read with a real estate attorney licensed in the state whose law governs the lease.