Zero Office Reinstatement Cost?
SEP 2021 | LAST UPDATED
Reinstatement, make good, restoration or dilapidations, refers to the process at expiration of an office lease where the tenant is required to hand back the premises they are vacating in a particular condition. It is the exercising of a landlord’s rights in regards to the reinstatement.
COST OF REINSTATEMENT OBLIGATIONS
The cost is generally based on the condition of the premises at the expiration compared with the condition in which it must be handed back to the landlord as stipulated in the lease. In many instances, but not always, it is based on changes made to the premises, or works or repairs required under the lease that have not been carried out.
REDUCING REINSTATEMENT LIABILITIES
Schedule of Condition
- A schedule documenting the state of repair of a premises prepared at, or immediately prior to, the lease commencement and prior to any of the tenant's works being carried out. Knowing from the start will help stop you from signing a lease that states it’s in good condition, when it actually isn’t. It is also a useful way of limiting your liability under a lease.
- Good maintenance and facilities management during your occupation of the property will also help minimise your end of lease liabilities.
- If you intend to alter or fit out the property, be sure to follow the lease procedures as you might require written permission from the landlord to do so. And at the end of the lease, you might not have to remove alterations if the landlord does not request their removal.
- During the course of a lease term the lessee will be able to repair, decorate and maintain the demise in accordance with their lease obligations. However, once the lease has ended and the lessee no longer has access to the premises, the only form of remedy to address make-good obligations is damages.
- It is therefore important that both parties enter into dialogue in good time before lease end.
- In many cases, 6-12 months may be required, depending on the size of the premises and likely complexity that the condition of the fit out and building will bring. This will not only allow both parties to consider their position and allow reasoned consideration and establishment of the tenant's make-good liabilities and intentions, it may also assist in avoiding friction between the parties.
- Sufficient time can also allow the tenant time to choose to meet their obligations by carrying out the make-good works or to make a monetary settlement.
- Where there is insufficient time to carry out make-good works, the lessee is usually obliged to make a monetary settlement.
GLOBAL AVERAGE REINSTATEMENT COST
MITIGATE REINSTATEMENT COST WITH SAVVI
Average lease terms are about 5 years and this means that about 20 per cent of offices are churned, demolished and refitted every year. In Hong Kong, leases are even shorter with 2-3 years being the norm.
Unless the landlord is carrying out a major refurbishment or a new replacement tenant has been found to take on the works, the tenant is generally required to restore the property to its original handover condition.
By careful and thoughtful planning with a view to reducing waste, there are great opportunities to save materials and avoid some of the waste. SAVVI leads the tenant, landlord and incoming tenant to a mutually beneficial arrangement where all parties benefit.
- The potential savings and environmental waste reduced in successfully placing a replacement tenant to take over your office in its existing condition can be huge, saving both cost and time for both sitting tenant and incoming tenant. Indeed, often this is subject to the marketability and adaptability of the existing fit-out.
- With prospectives tenants on the table, a landlord may or may not enforce the terms of the lease and instead decide to keep the space in 'as is' condition or accept a financial desposit or settlement on a case by case basis.
- While reinstatement liabilities will be passed onto the incoming tenant, thorough due dilligence will be conducted for the incoming tenant to assess the overall cost savings of taking over the premises in 'as is' condition.
- Often, there are huge savings for the incoming tenant in terms of time and money saved from a new office fit out. To learn more, refer to the SAVVI office design and fit-out guide here.
- Landlord reduces void rental period and recieves offers to take over the fitted space near or close to the naturual lease expiry. Should the new incoming tenant request to take the space in bareshell condition, an open discussion between all parties will be led by SAVVI to find a mutually beneficial arrangement.
REINSTATEMENT COST | HONG KONG
Reinstatement costs for Class A or Prime buildings typically range from HK$100 - 300 per sf Net. Through early planning, businesses could also mitigate these costs by securing a replacement tenant to utilise and re-use the office fittings.
REINSTATEMENT CHECKLIST | HONG KONG
1. Knowledge of Condition
Establish your knowledge of the condition of the premises at lease commencement. Is there a schedule of condition that was prepared at lease commencement?
2. Read the Lease
Read the lease and highlight important sections and words.
3. Inspect the Premises
Inspect the premises once you know the lease covenants.
4. EXPLORE OPTIONS FOR MITIGATING COSTS
Assess marketability of the office space and negotiation with the landlord accordingly (your dedicated SAVVI account manager will manage this process on your behalf).
5. request Quotation
Request for quotation from Landlord’s nominated contractors and go to market to compare with best in class providers.
6. Begin Early
Be mindful of timing. Engage with an advisor early, the more time on your hands, the more options you have. At least 6–12 months in advance of lease expiry is recommended.
7. The Environment
Last but not least, and arguably the most important, minimise waste by the process of exploring environmentally friendly solutions. Triple waste occurs with every reinstatement:
The outgoing tenant reinstates / ‘makes good’ their fit out in accordance with their lease obligations and materials are disposed.
The landlord refurbishes the space to bring it to modern lettable standard obligations and more materials are disposed.
The incoming tenant fits out, making changes and removing some of the new fixtures and finishes and even more materials are disposed.
When is the right time to think about reintatement?
Before you take a lease. A survey will establish the condition of the premises, giving an indication of work that may be needed, both immediately and later.
If the premises are already in bad repair, special considerations apply (see below). During the term of the lease, regular or planned maintenance can avoid greater expense later. It is usually a good idea to record the condition and layout of the premises before you occupy.
What if the premises was in a poor state from the outset?
Most commercial leases require the tenant to put and keep the property in repair. Unless you and the landlord specifically agree otherwise, the fact that the premises were in a poor condition when you took them on is largely irrelevant. You still have to put them right.
Negotiate to agree with the landlord that the premises be returned at the end of the lease in a condition similar to the state in which you took them. In this case, after you have had the premises surveyed, make sure that their condition is established, recorded and attached to the lease as a ‘schedule of condition’. Ensure that your solicitor varies the lease clauses to reflect the reduced obligations.
What is the position on renovations that we have made?
This depends on the terms of the lease that the landlord granted you to make alterations. On granting consent for alterations the landlord probably required that at the end of the lease you restore the property to its original state if requested to do so.
Therefore, unless the landlord thinks your alterations have added value, you will probably be required to reinstate the property at the end of the lease or pay the cost. The exception is if neither the lease nor the licence for alterations gives the landlord the option of requesting reinstatement.
Is the landlord’s reinstatement quotation negotiatble?
No, do not accept it without taking professional advisor who may be able to reduce the figures and / or demonstrate that certain items should not have been claimed. The landlord may not in fact intend to reinstate the property; to remarket the premises.
Often, a holding deposit can be negotiated with the landlord and returned subject to the premises being let out in 'as is' condition, within an agreed set timeframe.
PARTNER WITH SAVVI
No time? There are hundreds of contractors. We provide access to full service & best in class specialists, categorised by industry & track record to ensure your project is delivered on time & within budget. Simple.
Quick response quotations to quickly inspect and assess your premises.
Due diligence to ensure your interests are fully protected.
Open book procurement in conjunction with our best in class provider, driving best value through competition.
Access to specialists for all buildings owned by major Hong Kong landlords, resulting in total understanding of their requirements and procedures, saving both time and cost.
Ability to negotiate and purchase discounts across suppliers.