Air Conditioning Unit and Triple Net Lease

[Timothy Lin]

I am the landlord of a commercial building, occupied by a restaurant that has been there for 25 years.

The new business owners will be purchasing the business from the current owners and will be our new lessee's.  They got an inspection that shows the AC unit which is ~30 years old should be replaced.

This is a triple net lease and under utilities the lease states:
"The Lessor shall provide and the Lessee shall pay for all Lessee's utilities and water and sewer use charges."

Beyond this I don't see anything else regarding an AC unit.  Does anyone have thoughts either way?  Of course will discuss with our lawyer as well, but curious what experienced landlords in triple net situations on BP think.

Thanks.

[Erik W.]

Does the HVAC system still work? Saying it has to be replaced just because it's 30 years old seems silly. Maybe the new tenant doesn't WANT to pay for repairs on a 30+ year system, but so what? 

I've got a commercial until that was built in 1992. HVAC systems are still running strong. Tenant in one unit complained because she had to pay $135 last year to "top up" the R-22 coolant because there's a tiny leak somewhere. But, she has a $500 annual deductible on repairs and replacement of equipment, so basically she already agreed to that, and as I told her, for that one time up front payment of $500, you're basically betting that you'll be staying here at least 4 years to do slightly better than breaking even on your deductible.

Yes, I know R-22 is on the way out and getting harder to find, but it's not reasonable for me to spend $8000 on a new system just so the tenant doesn't have to pay $150 - $200 per year to top up the existing system. Plus, I already gave her a rent reduction earlier this year when we took over because she complained that the vacant unit next to hers was listed for rent at a price cheaper per square foot than her unit. Okay, I did that. Now she wants a new AC system too. You don't get to have everything. Negotiation is key in situations like this so everyone gets treated fairly... or at least acceptably.

When we do end up replacing that system, the rent is going up to reflect the cost of an improved, more efficient unit that costs the tenant less on yearly maintenance. My general rule of thumb is upgrades need to pay for themselves in 3 years. So if she wants a full swap out before the unit dies, that's $8,000 / 36 months = $222/month rent boost. Or we can keep things "as is" and she pays a once per year fee to top up the unit. The choice is hers.