Areas of Concern When Leasing Previously Improved Space

Based upon these concerns, a tenant should always conduct a hazardous materials inspection prior to having the space effectively delivered by the landlord. In connection with that hazardous materials inspection, the tenant should also have a hazardous materials report, which should identify any actual or suspected hazardous materials that are present at the premises.

The tenant should also have negotiated in its lease the following clauses, providing that:

1. the landlord represents that there are no hazardous materials in the premises at the time of delivery of the premises to tenant (and if such hazardous materials exist, the landlord will remove same at the landlord's cost);
2. the tenant has the right to conduct a hazardous materials inspection and have a hazardous materials report prepared (and that the landlord will remove any hazardous materials that are shown to be present at the premises based upon the hazardous materials report); and
3. the removal of the hazardous materials is a condition precedent to the effective delivery of the premises to the tenant (typically, the rent commencement date of a lease will not occur until at least delivery of the premises has been tendered from the landlord to the tenant).

While hazardous materials certainly can be present in space that has not contained a previous tenant, it is unusual. It means that the landlord installed hazardous materials in its own property (thereby contaminating that property) or that the hazardous materials laws have changed significantly following the landlord's construction of the “vanilla box” space. As a result, while a tenant may have concerns regarding hazardous materials that are present in unimproved space, typically, this is not a significant concern.

Changes in Floor Elevations

In situations where a tenant is taking space that used to consist of two or more spaces, one of the major concerns is whether the height of the floor in each premises is level with the adjacent premises. If the floors are not level, the tenant will need to determine how this leveling process will occur. Often, this can be a costly (and unexpected) process. As a result, the tenant should incorporate into its lease an obligation upon the landlord that all flooring throughout the entire premises be at the same height and level prior to delivering the premises to the tenant.

Further, in the event following construction work where floor level is not readily ascertainable from a reasonable inspection of the premises, and the floor levels are not at the same height and level throughout, then the time frame for the tenant's construction of the premises should be tolled until the landlord can cause all floor levels to be the same height and the same level.

Heating, Ventilating and Air Conditioning (HVAC) Units

In previously occupied space, the previous tenant often will have left in place the HVAC units that are serving the premises exclusively. A careful inspection of these units should be made by the tenant prior to taking delivery of the premises. In particular, if the HVAC units are no longer usable, the tenant should require that the landlord remove and dispose of them prior to delivering the premises to the tenant.

Also, if the existing HVAC units are in usable condition, the tenant should be clear in its lease that it has the right to reuse the existing HVAC units, and that such reusing of the units will be approved on the tenant's plans when they are reviewed by the landlord's tenant coordinator. Since the lease documents are generally reviewed by individuals not associated with the construction department for the landlord, the tenant needs to have a written agreement with the landlord that the reuse of the existing units will be approved by the landlord. Absent this agreement, the tenant may be required to remove the units and dispose of same, even though the tenant had intended to save construction dollars by reusing the existing units.

Finally, the tenant should make a careful evaluation of the expected value of the HVAC units versus the repair costs, including potential cracks in the heat exchanger, air compressor or other critical parts of the units. This will help the tenant determine whether it would be of more value to have the landlord remove the units, or whether it would be of more use to the tenant to be able to reuse the existing units once they are repaired by the tenant. A careful evaluation of the units can either save or cost the tenant thousands of dollars in its construction budget based upon the condition of the existing units and the relative cost of repair.

Utilities

It is typical in most leases to have the landlord state what utility services will be serving the specific premises. However, the tenant should perform a careful analysis of the existing electrical panel and its capacity; the size of the water and sewer lines serving the premises; and the gas line, if any. Depending on the use of the premises by the previous tenant, the existing utility lines, facilities and distribution systems may or may not satisfy the new tenant's requirements. For instance, if the previous tenant was a candle shop and a new tenant is a food use, typically, all of the utility systems will not be of sufficient size and capacity to satisfy the needs of the new tenant. This shortage of utility services can be extremely costly in cases such as this.

In addition, the new tenant may determine that the electrical panel is of insufficient capacity to satisfy its needs. Moreover, the tenant may determine that the main utility closet located closest to the premises does not have sufficient capacity to upgrade and satisfy its needs. As a result, a tenant may learn that it needs to travel great distances to find another utility closet. This further distance in achieving the tenant's electrical needs will also cause a “drop off” in electrical service and may require even more capacity than the tenant would otherwise have required. Therefore, the tenant should determine not only the utility capacities of the utility facilities within the premises, but also where the tenant will be receiving its utility services from outside of the premises and whether there is sufficient capacity within that facility in order to satisfy the tenant's needs.

Compliance with Current Building Codes

It is not uncommon for building codes applicable to a particular premises to change over time. Often, the existing premises is “grandfathered” and does not need to satisfy the updated building code, so long as the existing tenant is not performing construction work. However, if the new tenant is performing construction work in order to cause the premises to meet its particular needs, all updated building codes will now be applicable. Therefore, the new tenant should evaluate the current building codes as they relate to the particular premises.

Specifically, the tenant must determine whether all fire, health, safety or other building codes require the scope of the work to be expanded in order for the local municipality to approve the tenant's plans for the proposed construction work. It is also a good idea for the prospective tenant to talk with the local building officials, to make sure that any work on the premises will affect building code requirements.

Conclusion

By carefully evaluating the above stated areas of concern when a prospective tenant is leasing space that has been previously occupied by another tenant, the tenant can avoid many costly pitfalls in the construction and operation of the specific premises. While certain of these evaluations for hazardous materials, HVAC units and building codes may cause the particular tenant to expend certain amounts up front in the leasing process, these amounts are well spent in order to avoid significantly more costly expenses once the tenant has leased the specific premises.

Glenn A. Browne, a member of this newsletter's Board of Editors, is a partner in Braun, Browne & Associates, P.C., Riverwoods, IL.

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Quite often, prospective tenants are considering leasing space that has been improved by former tenants. In these situations, there may be concerns that would not necessarily obtain, or be less worrisome, for 'an unimproved space. This article addresses certain of those concerns, and ways in which prospective tenants can seek to reduce their risk.

Hazardous Materials

When considering a previously improved and occupied space, hazardous materials concerns may come in at least two forms. First, there are the hazardous materials that the previous tenant may have incorporated into the construction of the premises (either without the landlord's or municipality's knowledge, or due to the fact that the materials were not hazardous when they were installed by the former tenant, but have since been determined to be hazardous under current environmental laws). Second, hazardous materials may be present at the premises due to the operations of the previous tenant (e.g., improper disposals of solvents, oils or petroleum products).

Based upon these concerns, a tenant should always conduct a hazardous materials inspection prior to having the space effectively delivered by the landlord. In connection with that hazardous materials inspection, the tenant should also have a hazardous materials report, which should identify any actual or suspected hazardous materials that are present at the premises.

The tenant should also have negotiated in its lease the following clauses, providing that:

1. the landlord represents that there are no hazardous materials in the premises at the time of delivery of the premises to tenant (and if such hazardous materials exist, the landlord will remove same at the landlord's cost);
2. the tenant has the right to conduct a hazardous materials inspection and have a hazardous materials report prepared (and that the landlord will remove any hazardous materials that are shown to be present at the premises based upon the hazardous materials report); and
3. the removal of the hazardous materials is a condition precedent to the effective delivery of the premises to the tenant (typically, the rent commencement date of a lease will not occur until at least delivery of the premises has been tendered from the landlord to the tenant).

While hazardous materials certainly can be present in space that has not contained a previous tenant, it is unusual. It means that the landlord installed hazardous materials in its own property (thereby contaminating that property) or that the hazardous materials laws have changed significantly following the landlord's construction of the “vanilla box” space. As a result, while a tenant may have concerns regarding hazardous materials that are present in unimproved space, typically, this is not a significant concern.

Changes in Floor Elevations

In situations where a tenant is taking space that used to consist of two or more spaces, one of the major concerns is whether the height of the floor in each premises is level with the adjacent premises. If the floors are not level, the tenant will need to determine how this leveling process will occur. Often, this can be a costly (and unexpected) process. As a result, the tenant should incorporate into its lease an obligation upon the landlord that all flooring throughout the entire premises be at the same height and level prior to delivering the premises to the tenant.

Further, in the event following construction work where floor level is not readily ascertainable from a reasonable inspection of the premises, and the floor levels are not at the same height and level throughout, then the time frame for the tenant's construction of the premises should be tolled until the landlord can cause all floor levels to be the same height and the same level.

Heating, Ventilating and Air Conditioning (HVAC) Units

In previously occupied space, the previous tenant often will have left in place the HVAC units that are serving the premises exclusively. A careful inspection of these units should be made by the tenant prior to taking delivery of the premises. In particular, if the HVAC units are no longer usable, the tenant should require that the landlord remove and dispose of them prior to delivering the premises to the tenant.

Also, if the existing HVAC units are in usable condition, the tenant should be clear in its lease that it has the right to reuse the existing HVAC units, and that such reusing of the units will be approved on the tenant's plans when they are reviewed by the landlord's tenant coordinator. Since the lease documents are generally reviewed by individuals not associated with the construction department for the landlord, the tenant needs to have a written agreement with the landlord that the reuse of the existing units will be approved by the landlord. Absent this agreement, the tenant may be required to remove the units and dispose of same, even though the tenant had intended to save construction dollars by reusing the existing units.

Finally, the tenant should make a careful evaluation of the expected value of the HVAC units versus the repair costs, including potential cracks in the heat exchanger, air compressor or other critical parts of the units. This will help the tenant determine whether it would be of more value to have the landlord remove the units, or whether it would be of more use to the tenant to be able to reuse the existing units once they are repaired by the tenant. A careful evaluation of the units can either save or cost the tenant thousands of dollars in its construction budget based upon the condition of the existing units and the relative cost of repair.

Utilities

It is typical in most leases to have the landlord state what utility services will be serving the specific premises. However, the tenant should perform a careful analysis of the existing electrical panel and its capacity; the size of the water and sewer lines serving the premises; and the gas line, if any. Depending on the use of the premises by the previous tenant, the existing utility lines, facilities and distribution systems may or may not satisfy the new tenant's requirements. For instance, if the previous tenant was a candle shop and a new tenant is a food use, typically, all of the utility systems will not be of sufficient size and capacity to satisfy the needs of the new tenant. This shortage of utility services can be extremely costly in cases such as this.

In addition, the new tenant may determine that the electrical panel is of insufficient capacity to satisfy its needs. Moreover, the tenant may determine that the main utility closet located closest to the premises does not have sufficient capacity to upgrade and satisfy its needs. As a result, a tenant may learn that it needs to travel great distances to find another utility closet. This further distance in achieving the tenant's electrical needs will also cause a “drop off” in electrical service and may require even more capacity than the tenant would otherwise have required. Therefore, the tenant should determine not only the utility capacities of the utility facilities within the premises, but also where the tenant will be receiving its utility services from outside of the premises and whether there is sufficient capacity within that facility in order to satisfy the tenant's needs.

Compliance with Current Building Codes

It is not uncommon for building codes applicable to a particular premises to change over time. Often, the existing premises is “grandfathered” and does not need to satisfy the updated building code, so long as the existing tenant is not performing construction work. However, if the new tenant is performing construction work in order to cause the premises to meet its particular needs, all updated building codes will now be applicable. Therefore, the new tenant should evaluate the current building codes as they relate to the particular premises.

Specifically, the tenant must determine whether all fire, health, safety or other building codes require the scope of the work to be expanded in order for the local municipality to approve the tenant's plans for the proposed construction work. It is also a good idea for the prospective tenant to talk with the local building officials, to make sure that any work on the premises will affect building code requirements.

Conclusion

By carefully evaluating the above stated areas of concern when a prospective tenant is leasing space that has been previously occupied by another tenant, the tenant can avoid many costly pitfalls in the construction and operation of the specific premises. While certain of these evaluations for hazardous materials, HVAC units and building codes may cause the particular tenant to expend certain amounts up front in the leasing process, these amounts are well spent in order to avoid significantly more costly expenses once the tenant has leased the specific premises.

Glenn A. Browne, a member of this newsletter's Board of Editors, is a partner in Braun, Browne & Associates, P.C., Riverwoods, IL.

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