[WSBARP] Tenant improvement payments after termination of lease

[Roger Moss]

Timothy, if you are looking at a standard commercial lease, the tenant improvements belong to landlord when tenant vacates. There is nothing for your client to lose.

With only 3 months left on the lease, do not expect landlord to give your client a discount. They are leaving early and the remaining rent owed landlord is just part of the expense.

Speaking as a former commercial real estate asset manager, I will offer that doctors frequently are out of touch with the realities of these transactions. There are brokers who specialize in medical office spaces (some specialize in medical specialities which have very different ways of structuring deals and demands for landlord improvements). Your client would benefit from leasing guidance from an expert.

BTW, the standard Starbucks lease contains options to cancel at various points in the initial term. Their standard provision provides for reimbursement to landlord of unamortized tenant improvement expenditures…

If your client has not signed a lease at the other location, perhaps he should renegotiate present deal on better terms.

Good luck.

Roger A. Moss, Esq.
Pacific Conflict Intervention
206.790.1971 Seattle
415.371.9724 San Francisco
www.pacific-ci.com

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> On Jul 9, 2020, at 10:07 AM, Timothy Lehr <timothy at stileslaw.com> wrote:
> 
> All,
>  
> PC is a commercial tenant (medical office) and needs guidance on the expiration of a commercial lease agreement. There’s an issue with tenant improvement payments that I have yet to encounter. 
>  
> Tenant has 5-year commercial lease for his family medical practice. The lease includes a provision that Landlord (LL) will expend $50k for a remodel of the building and Tenant will cover any costs in excess of that. It goes on that Tenant shall be responsible for $35k of “Tenant improvements” to be amortized over a 60-month period and included in the monthly rent. So, Tenant pays an extra $500 or so per month to cover the Tenant Improvement costs.
> The lease included an option to buy at the end of the 5-year term. Under the option to buy (if exercised), the $35k would be credited to the purchase price.
>  
> Currently, the lease is set to expire in the next 3 months and Tenant doesn’t wish to exercise the option. Tenant has paid the full $35k during the term of the lease. Tenant wants to negotiate with LL about an early termination (Tenant has since found another building he plans to buy and move his practice to). If early termination is possible, about $7k would be what LL would lose in rent for the remaining few months of the lease term. LL and Tenant have a good working relationship.
>  
> Question –Does he just lose the $35k at the end of the lease term if he doesn’t exercise the option? The lease is silent to this point, so I wonder if there’s any precedent, case law, or general business practice that covers this type of scenario. Can Tenant use the $35k paid during the term of the lease as a bargaining chip in a negotiation to terminate the lease a few months early?
>  
> Tenant wants to come to a win-win situation with the LL as they have a good relationship, but I want to determine all his options and potential bargaining chips that he might have. Any thoughts on this are appreciated!
>  
> Tim
>  
> Timothy C. Lehr
> Attorney at Law
> Stiles Law Inc., P.S.
>  
> p:   360.855.0131
> e:   timothy at stileslaw.com <mailto:timothy at stileslaw.com>
> w:  www.stileslaw.com <http://www.stileslaw.com/>
>  
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