9.5 C. Capital Improvements

• Jurisdiction: New York

C. Capital Improvements

Capital expenditures require particular attention when you’re negotiating a lease. The operating expense clause should exclude them generally from the operating expenses for which your client will be billed.

Barclay’s Bank in New York got a repair bill after its landlord, Panel Realty Company, installed a new air conditioning system. Barclay’s refused to pay, and the case ended up in court. The bank’s lease required the landlord to make all structural repairs. The bank was responsible for its share of all other building maintenance and repairs, including repairs to the air conditioning system. The court reasoned that replacing the system goes beyond traditional notions of repair. This was a capital expenditure that Panel Realty couldn’t pass on to Barclay’s. While the bank won, it had taken needless risk because its lease didn’t make the landlord responsible for capital expenditures.¹⁵³

Remember, however, that if your client enters into a net lease—taking, for instance, an...