Importance of Negotiating Surrender Provisions in Health Care Leases

In our ongoing series of blog posts, we examined key negotiating points for tenants in triple net health care leases.

We also offered suggestions for certain lease provisions that will protect tenants from overreaching and unfair expenses, overly burdensome obligations, and ambiguous terms with respect to the rights and responsibilities of the parties. These suggestions, when implemented, are intended to result in efficient lease negotiations and favorable lease terms from a tenant’s perspective. In our previous blog posts, we considered the importance of negotiating initial terms and renewal terms, operating expense provisions, assignment and subletting terms, maintenance and repair obligations, and holdover provisions. This latest blog post focuses on negotiating surrender terms. Tenants should understand and negotiate their obligations for removal of alterations, equipment and other personal property, and the condition in which leased premises must be surrendered at the expiration or earlier termination of the lease term. Failure to do so could result in delays in a tenant’s ability to vacate the leases premises as well as unforeseen significant costs.

Most commercial leases provide that alterations and improvements made by or on behalf of a tenant become the property of landlord and must be surrendered with the leased premises upon expiration or earlier termination of the lease unless landlord requires removal. We suggest tenants request language in the lease requiring landlord to advise at the time it consents to such alterations and improvements whether or not the same must be removed, rather than landlord having the right pursuant to the terms of the lease to demand removal at the time of expiration or earlier termination. Having such a term in place eliminates the element of surprise and provides tenant with certainty as to which alterations and improvements tenant is required to remove. Tenants may also want to limit the removal requirement so that any alterations or improvements that cannot be removed without significant damage are to remain in the leased premises upon expiration of the lease term.

Health care tenants often have unique needs and require specialty alterations and equipment such as raised flooring systems, emergency generators, supplemental HVAC systems, oxygen and medical gas systems, and related cabling, wiring and piping. A health care tenant may try to negotiate that specialty alterations and equipment do not have to be removed at all, as this can be especially burdensome, time consuming and costly. However, landlord will likely push back and insist upon the right to require removal. As a back-up position, as with any other non-specialty alterations, tenant may want to negotiate that landlord is required to advise whether or not removal is required at the time landlord consents to installation of any such specialty alterations and that the same need not be removed if removal would result in significant damage. Tenants should also insist upon a clear definition of what constitutes “specialty alterations and equipment” and push for certain exclusions such as vaults (including vaults which encompass radiation treatment areas and equipment), reinforced floors, structural reinforcements, drainage holes in floors, and other medical equipment and installations routinely used in medical offices.

Negotiation of surrender provisions is important in order to limit a tenant’s exposure to costs associated with removal of certain alterations and equipment, and to allow tenant to plan and budget accordingly at lease outset and as the need for such alterations and equipment may arise during the lease term.  As with other key lease terms, we recommend detailing the basic understanding of the parties with respect to surrender obligations in a term sheet in order to clarify expectations of the parties, save time and money by streamlining negotiations, and achieve an overall efficient lease negotiation process.

In our next post, we will cover the importance of negotiating lease terms governing tenant improvement allowances. We will offer suggestions for making expectations clear, protecting tenants from landlord construction delays, and limiting exposure of tenants for costs and rental obligations during construction.

Allison Zangrilli and Zlata Fayer are Senior Counsel in Epstein Becker Green, P.C.’s Health Care and Life Sciences Group. Allison and Zlata have extensive experience drafting and negotiating commercial leases for clients in a wide variety of industries, including health care, hospitality, real estate, and professional services. They focus on medical office, retail, and warehouse space leases. They are also experienced in all aspects of real estate matters, including real estate acquisitions and dispositions, title matters, diligence, and financing.