Who Pays When the Rooftop Unit Dies Under a Lease

Why this matters

The rooftop unit over a leased shop is the landlord's equipment and, under a lot of lease forms, the tenant's problem. When it fails in year three of a five-year lease, the answer to "who pays" was written into one paragraph before anyone knew the unit's age. If that paragraph says the tenant maintains, repairs and replaces, the tenant can buy the landlord a new unit and walk away from it two years later. The fix costs nothing at signing and is nearly impossible to get afterward: read the HVAC clause, find out how old the unit is, and negotiate the paragraph with that age in front of you.

The rest of the lease is covered in Commercial Lease Clauses a Trade Shop Should Read First. This card is the HVAC paragraph only.

Four verbs, four different bills

HVAC clauses are built from a short vocabulary, and each word moves money:

• Maintain means routine service: filters, belts, coil cleaning, inspections, adjustments. Almost every lease puts this on the tenant, and that is reasonable.
• Repair means fixing something that broke: a motor, a contactor, a control board, a refrigerant leak. Often on the tenant, sometimes capped.
• Replace means a new unit, or a major component. This is where the real money is.
• Capital (as in "capital repairs" or "capital expenditures") is the accounting word for spending that extends the life of the asset beyond a year. Leases use it to say who carries the big items, and then often define it loosely or not at all.

The most expensive gap in these clauses is the line between a repair and a replacement. Is a new compressor a repair, because the unit stays, or a replacement, because it is the most expensive component in it? Is a cracked heat exchanger on a gas-fired unit a repair? If the lease does not say, the argument happens on the day of the failure, with the landlord holding the paper. Ask for a definition: "replacement of the unit or of any major component, including the compressor, heat exchanger, or condenser or evaporator coil, is a capital item for the landlord's account."

How the clauses usually come

• Tenant does everything. "Tenant shall maintain, repair and replace the HVAC system serving the premises." Common in single-tenant and triple-net leases. Every failure is yours, including old age.
• Tenant maintains and repairs; landlord replaces. The tenant carries routine work and ordinary repairs; replacement of the unit is the landlord's. Better, if "replace" is defined.
• Tenant repairs up to a cap. The tenant pays for repairs up to a stated amount per occurrence or per year, and the landlord pays above it. Sometimes the cap applies only to replacement.
• Landlord replaces and passes the cost through. The landlord buys the new unit, then recovers it through CAM charges, usually amortized (spread) over the unit's useful life so the tenant pays only for the years it is in the lease. See related: CAM Charges and Your Pro-Rata Share.

The service contract requirement

Many clauses require the tenant to keep a maintenance contract with a licensed HVAC contractor, often quarterly, and to send the landlord copies of the reports. Treat that as more than paperwork. If the unit fails and you cannot show the required maintenance, the landlord can argue the failure came from neglect, which can shift a replacement the landlord would otherwise carry onto you.

If your shop is itself an HVAC contractor, ask the lease to allow the tenant's own licensed technicians to perform the maintenance, with written reports, instead of requiring a third party. Without that language, servicing your own unit can technically breach the clause.

Why an old unit at signing is a negotiating point

Rooftop units have a long but finite life; ASHRAE's published median service-life figures put packaged rooftop air conditioners at about 15 years, and real units run shorter or much longer depending on climate, maintenance and coastal exposure. A unit that is 13 years old when you sign a five-year lease will be 18 when you leave. On a "tenant replaces" clause, you are being asked to insure the landlord against old age.

That is a real fact about the building, so put it on the table:

1. Find the age. The manufacture date is encoded in the serial number on the nameplate; each manufacturer has its own code, which its literature or support line will decode. Photograph the nameplate and write down model, serial, tonnage, heating type and refrigerant.
2. Note the refrigerant. A unit on R-22 depends on a refrigerant no longer produced or imported in the United States since 2020 under EPA's phaseout, so a refrigerant-circuit repair may be expensive or impractical. That is a strong reason to push replacement onto the landlord.
3. Get a condition report. Have a licensed HVAC technician inspect it before signing: operation in both modes, amp draws against nameplate, refrigerant circuit, coil condition, cabinet and curb, and on a gas-fired unit the heat exchanger and venting. Attach the report to the lease as an exhibit so the baseline is agreed.
4. Use the result. An old unit is the reason to ask for landlord replacement, a tenant repair cap, a replacement before possession, or a rent concession.

Safety for the inspection itself: the technician works at a roof edge and inside a cabinet with line voltage and moving parts. Fall protection at unprotected edges on a low-slope roof is governed for general industry by 29 CFR 1910.28, with roof-edge rules that depend on distance from the edge; and the unit's disconnect is opened, locked and tested dead (29 CFR 1910.333(b)(2) for the electrical work) before hands go into the cabinet; live readings such as amp draw are taken only by a qualified person with the required protective equipment (29 CFR 1910.333(c)). When the inspection is done, every panel goes back on before the lock comes off, and the unit is restored at the disconnect and run in both modes to prove it starts, holds and does not trip. Nobody without that training goes up just to read a nameplate; use the photos.

A worked example: one failure, three clauses

A shop signs a five-year lease on a single-tenant building with one rooftop unit. The nameplate decodes to a unit 13 years old at signing. In the 30th month (2.5 years in, so 2.5 years of term remain), the compressor fails. The service contractor offers two options: replace the compressor at about 45 percent of the cost of a new installed unit, or replace the whole unit. Call the cost of a new installed unit R, so the compressor job is 0.45 R.

Clause 1: tenant maintains, repairs and replaces. The tenant pays either 0.45 R for the compressor, on a unit now 15.5 years old (13 + 2.5) that may fail again elsewhere, or R for a new unit. If it chooses the new unit, it uses it for 2.5 years and leaves the landlord a unit with 12.5 of its 15 expected years left. Whatever the landlord's tax position, the tenant has bought 2.5 / 15 = one sixth of the unit's life and paid for all of it.

Clause 2: tenant repairs up to a cap of 0.10 R per occurrence; replacement is the landlord's. If the lease defines the compressor as a major component, it is the landlord's, and the tenant pays nothing beyond its maintenance. If it does not, the compressor is a "repair": the tenant pays the cap of 0.10 R and the landlord pays the remaining 0.35 R (0.45 R minus 0.10 R). The landlord may decide that 0.35 R on a 15.5-year-old unit is poor value and replace the whole unit at R instead; under this clause that is its choice and its cost.

Clause 3: landlord replaces and amortizes through CAM over 15 years. The landlord installs a new unit at R and passes it through at R / 15 per year. As the only tenant, the shop's share is 100 percent, so it pays R / 15 for each of the 2.5 remaining years: 2.5 x R / 15 = 0.167 R, about one sixth. If the lease renews, the charge continues, which is fair, since the shop keeps using the unit. Check whether the amortization adds interest; many leases add it, which raises the figure.

Lined up for the tenant: Clause 1 costs 0.45 R to R; Clause 2 costs 0 to 0.10 R; Clause 3 costs about 0.167 R before any interest. Same failure, same building: full replacement under Clause 1 costs the tenant six times what Clause 3 does (R against 0.167 R), and Clause 2 can cost nothing, all set by one paragraph signed 30 months earlier.

What changes the answer: in a multi-tenant building where one unit serves your space alone, the pass-through usually still lands at 100 percent on you; where a unit serves common areas, your pro-rata share applies instead. And a cap written "per year" instead of "per occurrence" turns two failures in one year into one capped bill.

When the failure happens before you move in

If the condition report finds a cracked heat exchanger, a compressor drawing well over its rated load amps, or a refrigerant circuit that will not hold, the unit has not failed under your lease yet. That is the cheapest moment the shop will ever have. Ask for replacement before possession as a condition of the deal, or a written statement that the landlord replaces that unit regardless of what the general HVAC clause says. On a gas-fired unit with a cracked heat exchanger, the technician shuts off the gas to the unit and tags it out of service on the spot, because flue gas can reach the supply air; that finding is a safety condition, not a bargaining chip, and the unit stays off until it is repaired or replaced.

What to record before signing

• Nameplate photos and the decoded manufacture date for each unit serving the space.
• The condition report, dated and signed by the technician, attached as an exhibit.
• The agreed definition of a capital or major-component item.
• Whether the service contract may be self-performed.
• Who holds the warranty on any new unit installed during the term, and in whose name it is registered.

If the landlord refuses to change a "tenant replaces" clause on an old unit, the condition report still gives you a dated record of what you received, which matters if the argument is about neglect later. What that record proves in a dispute is a question for your attorney; what it tells you on the day is that the age was known when the lease was signed. This is not legal advice.

References

• ASHRAE Handbook, HVAC Applications, owning and operating costs chapter (equipment service-life data)
• U.S. EPA, HCFC phaseout under Title VI of the Clean Air Act (R-22 production and import ended in 2020)
• 29 CFR 1910.28 (fall protection, general industry) and 29 CFR 1910.333 (electrical safety-related work practices)
• See related: Commercial Lease Clauses a Trade Shop Should Read First
• See related: CAM Charges and Your Pro-Rata Share