HVAC AND VAV – A FEW LETTERS THAT MAY COST A LOT OF NUMBERS

Who is responsible for the maintenance, repair and replacement of the HVAC systems in commercial buildings?

In a retail/flex/NNN setting, the answer seems pretty straightforward: the tenant. Most tenant premises in these types of settings are served by a separate heating, ventilation and air conditioning (HVAC) unit or units. The lease will often require the tenant to obtain a maintenance contract on the existing HVAC unit and, if it fails during the term, replace it as well. So what happens if (1) the tenant fails to do its due diligence and carefully examine the HVAC units before it signs the Lease; and (2) even with appropriate due diligence, the unit fails in the first, or equally as bad, the last year of the term? Without careful attention to, and negotiation of, these provisions, the answer is almost always the same: the tenant - and the cost could well be many thousands of dollars to replace the unit.

Depending on the quality of the HVAC units serving the premises, the life of these units is often 10 to 20 years, and certainly well in excess of most tenant’s lease terms. Thus, in fairness, there should be some cost sharing in the event the unit needs to be replaced. Some negotiated options are that: the Landlord warrants the units for some initial period of time; the parties agree to share the cost of maintenance or replacement (50/50 or some other percentage); or at the time of the replacement the tenant is responsible for paying for the portion of the new unit’s useful life that falls within the remaining term of the tenant’s lease.

In an office building context, the answer as to who is responsible for the HVAC also seems obvious: the landlord. The landlord will maintain, repair and replace the common building systems, including HVAC, and the cost will most often be passed through to all tenants in the building as an operating expense. However, many leases contain language stating that the tenant is responsible for systems “exclusively serving the premises” or those systems “within the premises.” So, who is responsible for components of the building operating systems which are wholly within the premises, which exclusively serve that premises, but which are also a part of the overall building operating system, such as variable air volume (“VAV”) boxes? If the allocation of this responsibility to the landlord is not clearly set forth in the lease, the tenant may be unexpectedly required to replace end-of-life VAV boxes, which are clearly part of the common building HVAC system, at a cost of several thousand dollars per box.

In any deal where the remaining useful life of components, such as VAV boxes, may be an issue, it is important to clearly state in the lease which party is responsible to replace the aging components. This can be landlord’s cost, tenant’s cost or a shared cost, but the parties should understand the costs and who is to pay for them prior to executing the lease in order to avoid unexpected costs and disputes over payment obligations during the lease term.

These are just some of the ways you can help your client when negotiating your client's commercial Lease. If you're looking for experienced commercial real estate attorneys, give the lawyers at Oliveri & Tammadge, LLC a call.