Repairs vs. Replacement

Hello tenants and landlords I’m going to discuss “repairs versus replacement” in a commercial real estate leasing context. My name is Jenna Zebrowski and I’m the Attorney behind LawByJZ.com. A repair is fixing something that’s already there so that it works. A replacement means getting rid of the old thing and getting a whole new thing.

Generally, repairs cost less than replacements, but the tax advantages or operating efficiency of a replacement might look really good to the landlord.  If the landlord can pass the cost of the replacement on to tenant, it’s important that tenant can control its contribution to those costs, and to be able to take advantage of this brand new thing, so it’s not just cost, but timing that matters.

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Commercial Real Estate Case Study

Repair vs. Replacement: A Budgetary Consideration

Melissa had a 10-year lease on a location that was perfect for her mortgage loan business. Her lease required her to pay for the filters for the HVAC the heating ventilation and air conditioning system and quarterly inspections. She had a contract in place with a private company to do that and did it faithfully for nine years without any problems.

In the last year of the lease, Melissa decided to retire and not renew the lease. She told the landlord, who was disappointed to lose a tenant that paid rent on time every month. The landlord started marketing the space and looking for a replacement tenant for when Melissa moved out of the location at the end of the calendar year.

With only a few months left on her lease, Melissa was very busy wrapping up her business, closing files, and preparing to transition it to the new owner. During the hottest part of the summer, the air conditioning in her office conked out. Melissa complained to her landlord, but the landlord insisted that Melissa was responsible for the cost of replacing the system. She needed to leave the lease the same way she entered it, with a working air conditioning system.

Melissa felt it wasn’t fair for her to pay for a new air conditioner for a new tenant. She called up the attorney who helped her negotiate the lease, and learned more about repairs versus replacement in a lease situation. 

Under her lease, Melissa was only responsible for repairs and maintenance to the system, but not replacements of the air conditioning system. Repairs mean fixes to the system that is already in place to keep it in good working order. A replacement is an entirely new system, because the old one can’t be fixed. Of course, the new system is a lot more expensive than fixing the old one.

Melissa had maintained and repaired the air conditioning as necessary during the term of her lease, and she had the records to prove it. The air conditioning was old and needed to be replaced for a new tenant, no matter what, but she wasn’t responsible for paying it. She and the landlord decided to end the lease a little early, so she saved on a few months of rent as well as not having to pay for a new air conditioning system, and the landlord could get the space ready for a new tenant, with a new air conditioning, sooner.