In the Spotlight: Renovation of Existing Buildings

As commercial landlords in cities nationwide continue to look toward renovating or converting their commercial properties to other uses, and in particular into residential condominiums, many do not fully consider the dynamics between the existing tenants and the conversion process, which can result in decreased profits for the entire conversion or renovation project. Often, the interests of the existing tenants and renovating landlords are irreconcilably adverse to each other. Any landlord that fails to consider the 'cross-purpose dynamics' between the existing tenant's interests and its own interests in renovating or converting the property places itself in a common trap. Unsuspecting landlords that may think they are undertaking a simple and profitable conversion find that the renovation process can prove costly and fraught with contentiousness and hostility. Careful consideration of a few key issues can help landlords be sensitive to and avoid problems that arise from the cross-purpose dynamics inherent in many commercial renovations.

1) Be Prepared to Meet Obligations to the Existing Tenants.

Not every tenant can be per- suaded to vacate its premises be- fore its lease terminates, even when the landlord offers incentives. Consequently, in situations where commercial landlords will be renovating or converting a building that is already occupied by existing tenants, one important consideration for landlords is that they will be obligated to continue to provide services and maintain the building in reasonably good condition while, at the same time, they are tearing it down and rebuilding it. While the landlord's responsibilities vary from situation to situation and are necessarily dependent upon the specific property, landlords can expect that they will be required to continue to keep some things the same or consistent throughout the term of the renovation for the benefit of the existing tenants, notwithstanding the fact that this complicates or runs contrary to the renovation plan.

While it may seem obvious, the first thing a landlord must consider is whether it is even possible to renovate the property while still meeting the contractual obligations to the existing tenants. It is imperative that landlords understand all aspects of the renovation plan and the possible impact the renovations may have on the tenants to assure themselves that both the tenants and the construction can co-exist given all of the noise, fumes, dust, and inconvenience that routinely accompany both large and small-scale construction and renovation projects.

If the landlord determines that the renovation project is possible, given the existing tenants, a landlord must presume that it will be required to continue to provide uninterrupted services such as utilities, security, and property maintenance while construction is ongoing. It may not be possible, for example, to re-route plumbing, ductwork, or electrical services without prolonged interruptions. In these instances, landlords must be able to provide temporary but reliable and reasonably equivalent utility services while the permanent services are being renovated.

Similarly, landlords must consider that they will be required to maintain common areas in a reasonable condition, which may prove difficult with the dust and debris generated through construction. Beyond mere functionality, landlords must be prepared to maintain the same level of professional appearance in common areas such that the tenants' invitees are not dissuaded from entering the property or utilizing it in accordance with the tenants' uses. Finally, landlords should expect that services provided to the tenants, such as landscaping, security, and cleaning will also be strained by the conversion or renovation process. Landlords should assume that contractors entering the property and working at early hours may require additional security measures, and the construction will require additional staff and resources to maintain the property in an acceptable condition while construction is underway. In addition to maintaining the status quo, landlords must also be prepared for and guard against the possibility of unintentional damages to existing lease space, damage to the tenant's property, or personal harm to the tenant or its invitees.

Considering only these examples, it should become clear that the operation and maintenance of the property for the existing tenant is fundamentally inconsistent with the purposes of rehabilitation and renovation. In addition to these general obligations, landlords must also consider the specific tenants themselves, the tenant's use of the space, and the specific rights each tenant may have under its lease agreement.

2) Know Your Tenants, Their Contracts, and Their Specific Rights.

A second important consideration for every landlord is the type of tenants that will remain in the property during renovation and the rights that are embodied in each of those tenants' leases. This is important for several reasons. First, many leases have standard option or renewal clauses. Knowing when a lease is set to expire and whether any renewal option exists may be very important to negotiating with the existing tenant for relocation, buying out the remainder of the lease, or most efficiently phasing the construction so that the existing tenants are impacted least. The interplay between the phasing of construction and the existing tenant base can be key to planning the renovations and, in particular, the speed, manner, and order of construction.

Along those same lines, the landlord must remember that inherent in all leases is the covenant of quiet enjoyment. The covenant of quiet enjoyment protects the tenants' expectations that they will be able to use the property for the purposes of their lease, without undo interference by the landlord. While the standard for what constitutes a breach of the covenant of quiet enjoyment is somewhat fluid and situation-dependent, knowing the tenant's use of the property and ability to handle the inconvenience of construction is critical to a smooth renovation plan.

Landlords must also consider the nature of each tenant and its use of the property. Existing tenants, their invitees, and the use of the property may be fundamentally inconsistent with the proposed use of the property, such that the existing tenant simply cannot remain given the proposed use. For example, a government office or doctor's office may be inappropriate for the renovated property in terms of re-leasing, selling, or utilizing the property as planned. Similarly, the possible impact on the new use, on the nature of the existing use, and on the nature and volume of invitees may be problematic. The existing and proposed tenants may have inconsistent expectations for the property, questions of access, and differing use of the building. Ideally, when realizing these circumstances exist, a landlord can develop a plan to resolve these conflicts prior to embarking on the renovations.

Obviously, many of these issues can be avoided if no tenants remain in the property during construction. The removal of tenants, however, is not always simple and self-help is never recommended. Indeed, any actions such as terminating tenants' services or locking them out will only result in additional problems for the landlord. Even tenants that have expired leases or are in default may become 'holdovers' that are problematic for the renovating landlord. Tenants do not always surrender their leased premises at the conclusion of their lease term or upon default. In that event, the landlord must turn to the legal system to collect what is owed and have the tenant removed. While the case is pending in litigation, and setting aside the costs inherent in litigation, the renovations or conversions are likely to be stalled, at least to some degree.

Even if the landlord is doing nothing more than enforcing its legal rights against holdover tenants, delay can prove to be an unanticipated problem. First, delays can result in economic losses because of fluctuations in the market such as cost of materials, real estate sales, and interest rates. The construction industry itself experiences increases and decreases in demand for services, and what the landlord may have bid as an off-season job may become a prime time job because of delays ' which again result in unanticipated or higher costs to the landlord. Similarly, the cost of materials may increase, and, over time, a landlord will likely continue to bear the costs of financing the project until completion.

Even with the tenant's agreement to relocate, unique tenants in a tight market may be difficult to relocate. Thus, even if the tenants are willing to relocate and an agreement can be reached to find alternative space, some tenants may prove to be difficult to place, given their economic constraints or their status as limited use tenants.

Finally, landlords must be sensitive to the possibility that any remaining tenant will 'hold hostage' the development and renovation process. Realizing the leverage the tenant will have over the landlord to demand concessions or benefits to terminate its agreement early, a tenant may intentionally cause difficulties for the renovating landlord. Landlords must weigh the demands of the existing tenants, and the benefit of their departure against the possibility that the landlord may be required to maintain the whole building just for one or a handful of tenants.

Monica Mathews Reynolds is an associate in the Commercial Litigation Department of Spector Gadon & Rosen, P.C.' s Philadelphia office. She concentrates her practice in the areas of complex commercial litigation and real estate related litigation.

As commercial landlords in cities nationwide continue to look toward renovating or converting their commercial properties to other uses, and in particular into residential condominiums, many do not fully consider the dynamics between the existing tenants and the conversion process, which can result in decreased profits for the entire conversion or renovation project. Often, the interests of the existing tenants and renovating landlords are irreconcilably adverse to each other. Any landlord that fails to consider the 'cross-purpose dynamics' between the existing tenant's interests and its own interests in renovating or converting the property places itself in a common trap. Unsuspecting landlords that may think they are undertaking a simple and profitable conversion find that the renovation process can prove costly and fraught with contentiousness and hostility. Careful consideration of a few key issues can help landlords be sensitive to and avoid problems that arise from the cross-purpose dynamics inherent in many commercial renovations.

1) Be Prepared to Meet Obligations to the Existing Tenants.

Not every tenant can be per- suaded to vacate its premises be- fore its lease terminates, even when the landlord offers incentives. Consequently, in situations where commercial landlords will be renovating or converting a building that is already occupied by existing tenants, one important consideration for landlords is that they will be obligated to continue to provide services and maintain the building in reasonably good condition while, at the same time, they are tearing it down and rebuilding it. While the landlord's responsibilities vary from situation to situation and are necessarily dependent upon the specific property, landlords can expect that they will be required to continue to keep some things the same or consistent throughout the term of the renovation for the benefit of the existing tenants, notwithstanding the fact that this complicates or runs contrary to the renovation plan.

While it may seem obvious, the first thing a landlord must consider is whether it is even possible to renovate the property while still meeting the contractual obligations to the existing tenants. It is imperative that landlords understand all aspects of the renovation plan and the possible impact the renovations may have on the tenants to assure themselves that both the tenants and the construction can co-exist given all of the noise, fumes, dust, and inconvenience that routinely accompany both large and small-scale construction and renovation projects.

If the landlord determines that the renovation project is possible, given the existing tenants, a landlord must presume that it will be required to continue to provide uninterrupted services such as utilities, security, and property maintenance while construction is ongoing. It may not be possible, for example, to re-route plumbing, ductwork, or electrical services without prolonged interruptions. In these instances, landlords must be able to provide temporary but reliable and reasonably equivalent utility services while the permanent services are being renovated.

Similarly, landlords must consider that they will be required to maintain common areas in a reasonable condition, which may prove difficult with the dust and debris generated through construction. Beyond mere functionality, landlords must be prepared to maintain the same level of professional appearance in common areas such that the tenants' invitees are not dissuaded from entering the property or utilizing it in accordance with the tenants' uses. Finally, landlords should expect that services provided to the tenants, such as landscaping, security, and cleaning will also be strained by the conversion or renovation process. Landlords should assume that contractors entering the property and working at early hours may require additional security measures, and the construction will require additional staff and resources to maintain the property in an acceptable condition while construction is underway. In addition to maintaining the status quo, landlords must also be prepared for and guard against the possibility of unintentional damages to existing lease space, damage to the tenant's property, or personal harm to the tenant or its invitees.

Considering only these examples, it should become clear that the operation and maintenance of the property for the existing tenant is fundamentally inconsistent with the purposes of rehabilitation and renovation. In addition to these general obligations, landlords must also consider the specific tenants themselves, the tenant's use of the space, and the specific rights each tenant may have under its lease agreement.

2) Know Your Tenants, Their Contracts, and Their Specific Rights.

A second important consideration for every landlord is the type of tenants that will remain in the property during renovation and the rights that are embodied in each of those tenants' leases. This is important for several reasons. First, many leases have standard option or renewal clauses. Knowing when a lease is set to expire and whether any renewal option exists may be very important to negotiating with the existing tenant for relocation, buying out the remainder of the lease, or most efficiently phasing the construction so that the existing tenants are impacted least. The interplay between the phasing of construction and the existing tenant base can be key to planning the renovations and, in particular, the speed, manner, and order of construction.

Along those same lines, the landlord must remember that inherent in all leases is the covenant of quiet enjoyment. The covenant of quiet enjoyment protects the tenants' expectations that they will be able to use the property for the purposes of their lease, without undo interference by the landlord. While the standard for what constitutes a breach of the covenant of quiet enjoyment is somewhat fluid and situation-dependent, knowing the tenant's use of the property and ability to handle the inconvenience of construction is critical to a smooth renovation plan.

Landlords must also consider the nature of each tenant and its use of the property. Existing tenants, their invitees, and the use of the property may be fundamentally inconsistent with the proposed use of the property, such that the existing tenant simply cannot remain given the proposed use. For example, a government office or doctor's office may be inappropriate for the renovated property in terms of re-leasing, selling, or utilizing the property as planned. Similarly, the possible impact on the new use, on the nature of the existing use, and on the nature and volume of invitees may be problematic. The existing and proposed tenants may have inconsistent expectations for the property, questions of access, and differing use of the building. Ideally, when realizing these circumstances exist, a landlord can develop a plan to resolve these conflicts prior to embarking on the renovations.

Obviously, many of these issues can be avoided if no tenants remain in the property during construction. The removal of tenants, however, is not always simple and self-help is never recommended. Indeed, any actions such as terminating tenants' services or locking them out will only result in additional problems for the landlord. Even tenants that have expired leases or are in default may become 'holdovers' that are problematic for the renovating landlord. Tenants do not always surrender their leased premises at the conclusion of their lease term or upon default. In that event, the landlord must turn to the legal system to collect what is owed and have the tenant removed. While the case is pending in litigation, and setting aside the costs inherent in litigation, the renovations or conversions are likely to be stalled, at least to some degree.

Even if the landlord is doing nothing more than enforcing its legal rights against holdover tenants, delay can prove to be an unanticipated problem. First, delays can result in economic losses because of fluctuations in the market such as cost of materials, real estate sales, and interest rates. The construction industry itself experiences increases and decreases in demand for services, and what the landlord may have bid as an off-season job may become a prime time job because of delays ' which again result in unanticipated or higher costs to the landlord. Similarly, the cost of materials may increase, and, over time, a landlord will likely continue to bear the costs of financing the project until completion.

Even with the tenant's agreement to relocate, unique tenants in a tight market may be difficult to relocate. Thus, even if the tenants are willing to relocate and an agreement can be reached to find alternative space, some tenants may prove to be difficult to place, given their economic constraints or their status as limited use tenants.

Finally, landlords must be sensitive to the possibility that any remaining tenant will 'hold hostage' the development and renovation process. Realizing the leverage the tenant will have over the landlord to demand concessions or benefits to terminate its agreement early, a tenant may intentionally cause difficulties for the renovating landlord. Landlords must weigh the demands of the existing tenants, and the benefit of their departure against the possibility that the landlord may be required to maintain the whole building just for one or a handful of tenants.

Monica Mathews Reynolds is an associate in the Commercial Litigation Department of Spector Gadon & Rosen, P.C.' s Philadelphia office. She concentrates her practice in the areas of complex commercial litigation and real estate related litigation.