January 31, 2016
In the commercial leasing world, the provisions regarding the maintenance, repair and replacement of the heating, ventilating, and air conditioning system (HVAC) are often a point of contention. The reason for this is that the repair and replacement of the HVAC can be expensive, and the scope of the repair and replacement can be directly affected by the actions (or inaction) of the tenant. This summary will review some of the considerations and suggest possible resolutions to consider to address the HVAC.
Typical Landlord Lease
The initial draft of a typical retail commercial landlord’s lease will pass all costs associated with the maintenance, repair and replacement of the HVAC through to the tenant. From a practical perspective, this type of clause may not properly allocate the costs of the HVAC to the tenant based on the tenant’s use of the system. For example, this type of clause may require the tenant to pay for costs for a system that is damaged prior to tenant’s lease, or could result in the tenant having to replace the system in the last month of the term. From a landlord’s perspective, this type of clause may result in the tenant attempting to prolong the life of the HVAC beyond its useful life to avoid having to pay for the replacement of the unit.
Condition on Commencement
The condition of the HVAC on the commencement of the lease can affect the required costs associated with the maintenance, repair and replacement. If the HVAC is new, then there should be a warranty on the system and the tenant should seek a lease clause ensuring the warranty is passed through to the tenant. If the HVAC is not new, the tenant should have the HVAC inspected to determine the condition of the system and predicted useful life. If there is a concern regarding the condition of the HVAC, the tenant should consider negotiating some type of warranty and/or limit on the costs for repair/replacement for the system by the landlord (e.g. annual cap, etc.).
Maintenance, Repair and Replacement
The lease should allocate the responsibility for the maintenance, repair and replacement of the HVAC between the landlord and the tenant. If the landlord is relying on the tenant for the maintenance, the landlord should consider requiring tenant maintain a contract with an HVAC service provider for biannual or quarterly service. If the landlord is relying on the tenant for the maintenance and/or repair of the HVAC, the landlord should consider requiring tenant maintain a log regarding the same as a condition of the lease. The landlord will want to review any maintenance agreement or repair log on a regular basis to ensure that they are being maintained.
The landlord will not want to cover the payment for costs of the repair and/or replacement of the HVAC if the system is damaged by the tenant. For example, if the tenant fails to regularly change the filters or props open the doors of the premises causing damage to the system, the landlord will not want to cover the cost of repairing or replacing the system. The landlord will want to limit any warranty and/or agreement to cover costs to exclude damage to the HVAC caused by the tenant.
Replacement of HVAC
Most tenants are not thrilled with the possibility that they will have to pay for the replacement of the HVAC towards the end of the term. This can lead to a tenant attempting to bandage the HVAC to avoid the replacement. A better solution may be for the landlord to agree to pay for the replacement, and have the tenant reimburse a proportionate share of such costs for the remainder of tenant’s term. This should create an incentive for the tenant to seek the replacement of the HVAC when the repair costs are high and/or functionality of the system is compromised.
Although not uncommon, a simple clause in a commercial lease requiring the tenant to maintain, repair and replace the HVAC may not properly allocate the costs between the parties or be in the best interest of the landlord. A clause addressing the HVAC that takes into consideration the interests of the tenant and the landlord can help avoid conflict between the parties regarding the HVAC. Further, it will reduce the incentive of the tenant to seek a new location at the end of the term if the tenant faces the prospect of having to replace the HVAC if they continue operations at the premises. So, both the landlord and tenant have an incentive to think through the HVAC clauses at the beginning of the leasing relationship.