If a tenant is going to move from its existing space, it will spend most of its time looking for replacement space and negotiating its new lease. But it should also think about the issues related to surrendering its existing premises – does it have to remove its initial tenant improvements; how long will it take and how much will it cost to complete any required demolition and restoration work; what will it do with its furniture, fixtures and equipment; what happens if it doesn’t move out on time?
The answers to some of these questions can be found by reviewing the lease. In order to figure out some of the other answers, the tenant may need to talk to contractors, moving companies, the landlord and building engineers. This process needs to start many months before the actual lease expiration date. I

Initial Tenant Improvements

Your lease should cover whether your initial tenant improvements need to be removed at the end of the lease term. Sometimes the landlord has until the end of the lease term to decide whether it wants you to remove your initial tenant improvements and to make any restorations. In other cases, the landlord might be required to identify any removal and restoration work upfront when it approved the proposed initial tenant improvements, so you should already know what your obligations are. When you start to look at new space, make sure you review your lease and your files to determine your removal and restoration obligations.
If the landlord has not yet decided what to do with your tenant improvements, you should discuss this with the landlord as soon as you know that you’ll be leaving your current premises. It may take weeks (or longer) to perform any required demolition and restoration work, in which case you might need to vacate your existing space well before the end of the lease term so that you can start construction. This means that you‘ll need to be in your replacement space that much sooner.
If your tenant improvements have residual value and can be re-used by a new tenant, then you should ask the landlord if you can “walk away” from the premises and leave your initial tenant improvements in place. Even if you don’t have to remove your initial tenant improvements, your lease may require you to remove all data and telecommunications cabling from the building risers. There is limited space in these risers and the existence of lots of old cabling also poses a fire risk; for these reasons, landlords routinely include in their leases that all such cabling has to be removed before you vacate the premises.
Lastly, you’ll need to coordinate the timing and sequencing of any work with contractors, movers, and furniture vendors. You should engage with these parties well in advance of the lease expiration date in order to schedule this work. You may also need to coordinate your work with the landlord and its building engineers, so you need to build in additional time to allow for this process.

Furniture,, Fixtures and Equipment

What should you do with your existing furniture, fixtures and equipment (FF&E)? The options include moving it to your replacement space, selling it to the landlord or to the tenant who will be taking over your space, selling it to a furniture vendor, donating it, or just disposing of it. If you sell your FF&E, make sure that the sale is on an “as is” basis and with no warranties about the condition or functionality of the FF&E.

Holding Over

If your new space isn’t completed on time, then you might have to holdover in your existing space. This can
mean paying holdover rent, which can run between 125% to 150% or even more of your current base rent,
depending on the holdover clause in your lease. Holding over also might expose you to other damages –
perhaps the landlord has already signed a lease with a replacement tenant who is prepared to move in as
soon as your lease term expires. Or perhaps the landlord or the replacement tenant is ready to start
construction immediately after the expiration of your lease.
If you don’t vacate on time, the replacement tenant might incur its own holdover rent because it can’t move
into its new space (your old space) on time. If your holdover delays construction, then that can result in rescheduling
costs and increased construction costs for the landlord or its new tenant. You could be liable for
all of these consequential damages that arise from your failure to vacate on time.
If you might need to holdover, then you should first determine whether the landlord has already signed a
lease with a replacement tenant, what the consequences are to all parties (the landlord, the replacement
tenant, and any contractors that are supposed to commence work in your space if you don’t vacate on
time), and your potential total exposure arising from the holdover.
You can then explore your options – is it possible to holdover in your existing space and what will be the
costs and potential exposure if you do so; does your landlord have other space in your existing building
that you can occupy on a short-term basis; can you temporarily move to co-working space; can your team
work remote until your new space becomes available?

Conclusion

If you are going to move to new space, start planning in advance for surrendering your existing space.
Figure out if you have to remove any improvements and restore the space, how long it will take, and how
much it will cost. If you might need to holdover in your existing space, assess the costs and exposure of the
holdover and consider alternative solutions if a holdover is not feasible or will be too expensive.
Leon Tuan is a San Francisco commercial real estate attorney who helps startups, growth companies, and
major corporations negotiate leases, buy properties and build out their space. He can be reached at
ltuan@lubinolson.com.

For more information, please contact Leon Tuan.