Racking, Equipment and Surrender in an Industrial Lease

Personal property such as forklifts and loose pallet stock is the easy category. The harder question arises when equipment is attached to the building. Generally, a fixture is something attached so that it is treated as part of the real estate. A trade fixture is an item a tenant installs for its business, and it may be removable depending on the lease and state law. Those labels sound simple, but disputes are common.

Dykema's discussion of a Michigan appeals decision shows how much the details can matter. In that salon case, a reception desk and color bar were part of the landlord's work described in the lease, and the tenant did not pay for or install them. The court held they were fixtures that belonged with the real estate, and that the tenant who took them was liable for conversion. Dykema notes conversion liability in Michigan can include triple damages and attorney's fees. That case involved a salon, not a warehouse, and the law varies by state, but the lesson travels well: who paid for and installed an item, and what the lease says about it, can drive the outcome.

The practical answer is in Dykema's proactive approach: identify the categories of items during negotiation and consider attaching an exhibit that lists fixtures, trade fixtures and equipment, so there is no debate when the lease ends.

Sort what you plan to bring or install into three groups: yours to remove, must stay, and to be decided by a stated rule. Use your real equipment plan.

• Pallet racking, shelving, mezzanine storage modules and rack protection.
• Conveyors, sortation lines and production machinery.
• Compressors, air and process piping, dust collection and exhaust.
• Added electrical service, bus duct, panels and machine wiring.
• Battery charging stations and any related ventilation or eyewash equipment.
• Supplemental dock equipment, cameras, access control and network cabling.
• Fencing, lighting, gates and security equipment in the yard.

Any equipment left over from the prior tenant needs its own line. A landlord may offer existing racking, or leave it in place as a benefit. Find out whether it is the landlord's to offer, whether it is in safe condition, and whether taking it makes you responsible for removing it later.

If the last tenant left racking behind, ask in writing who owns it and who must remove it. A free rack today can become a removal bill at your surrender.

A right to remove equipment and a duty to repair usually go together. Dykema's guidance suggests allocating responsibility for removal costs and for repairing any damage caused when items come out. Bean, Kinney & Korman similarly notes that landlords often require specialized improvements to be removed and the premises restored to original condition.

Racking anchors are the classic industrial version of this issue. Removing rack leaves holes or cut-off bolts in the slab, and those can become a dispute if your lease says premises must return to their original condition. Settle the standard up front. Ask a contractor what the repair method would be on this slab, and get the agreed method into the lease in plain terms. A structural engineer should be involved if the rack layout or slab condition raises load questions.

Do the same for everything else that penetrates or alters the building: the holes in walls and roofs, added power and piping, floor striping, and machine pits or trenches. A mechanical system's removal can also raise roof and structural concerns for a landlord, and Bean, Kinney notes a landlord may strenuously object to removing a newly installed HVAC unit for that reason.

The time to ask is before you sign, when the landlord wants your tenancy and the costs are still theoretical. Have your attorney turn these answers into lease language.

• ✓Does the lease say that racking, machinery and listed equipment remain our property, and may be removed at any time during the term?
• ✓Does the landlord waive any lien on our equipment, and will it sign a waiver our lender may need?
• ✓When we request approval for an alteration, will the landlord state at that time whether it must be removed at the end?
• ✓Is the repair standard for floor anchors and other attachments clearly stated?
• ✓Is ordinary wear and tear excluded, including the normal floor marks and dock wear of an industrial operation?
• ✓Must we restore to original condition, or only to the condition required for the permitted use?
• ✓Are items present at delivery, including prior tenant improvements and racking, excluded from our removal duty?
• ✓How long do we have after the end of the term to retrieve property, if at all, and what happens to anything left behind?
• ✓Do we have the option to pay an agreed sum to the landlord instead of doing the restoration ourselves?
• ✓Does an unfinished restoration count as holding over?

Lender-related items deserve a mention. If your equipment secures a loan or lease, the equipment financier may ask for a landlord waiver or access agreement. It is easier to ask for that form during lease negotiation than to ask later, when the landlord has no reason to act quickly.

Racking removal and restoration can take real time, and that work usually has to finish inside your term. Late surrender can bring holdover charges, so reading the restoration and holdover clauses together matters. Dykema also recommends documenting the physical condition of the premises at commencement and surrender, using photographs, video and signed reports with dates. That record is your evidence.

1. At move-in, photograph the floor, walls, doors and systems, and date the images.
2. Keep as-built drawings of your racking, anchors, wiring and alterations during the term.
3. Well before expiration, read the surrender, restoration, alterations and holdover clauses together.
4. Get contractor quotes for removal, slab repair and any restoration, then schedule the work back from the lease end date.
5. Walk the space with the landlord before the final deadline, get a written list of anything outstanding, and record its completion.
6. Return keys and access devices as the lease requires, and get a written acknowledgment of surrender if you can.

If you plan to reuse the racking elsewhere, check that it fits the new building's layout, fire protection and slab before you commit to moving it. Those are questions for your engineer, racking supplier and fire official.

TAG represents tenants and buyers. We work surrender language into the lease negotiation at the front end, and when a client is relocating we plan the old building's exit and the new building's delivery as one schedule.