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Effects of Disability Act on cost of alterations.

Effective as of July 26, employers with 25 or more employees have been required to comply with the Americans with Disabilities Act. Subsequent to July 25, 1994, the Act will apply to employers with 15 or more employees. The Act, in essence, prohibits employers from discriminating against individuals with a disability. It requires, among other things, that employers make reasonable accommodation to enable employees with disabilities to enjoy the same access to facilities as employees who are not disabled.

Most standard office lease forms provide that the tenant is responsible, at its cost, for complying with laws enacted subsequent to lease execution which affect the demised premises. This includes the making of required alterations and improvements of a non-structural nature in the premises. Although this language is customary, the tenant typically demands that the landlord negotiate such provision. It is the tenant's goal through such negotiations to both "spread" and "shift" the cost of this obligation; by doing so, the tenant attempts to share such cost to the greatest extent possible with the landlord and the other tenants in the building. With regard to "spreading," the tenant normally requests that the cost of such required alterations be amortized over the life of the alteration, and that the tenant only be responsible for incurring that position of the cost which is amortized during the lease term. With respect to "shifting," the tenant usually requests that the landlord pass the costs of such alterations on to all of the tenants in the building as an operating expense; the tenants then share such expense based on the percentage of the building occupied by each such tenant.

The landlord is usually willing to compromise with the tenant on these issues, and very often such compromise results in the inclusion of a "uniqueness test" in the lease. The uniqueness test provides that if alterations are required by law to be made as a result of the unique nature of the tenant's use of the premises, the cost of such alterations is to be borne entirely by the tenant. All other types of alterations required to be made by the authorities are subject, as requested by the tenant, to the "spread and shift" compromise, and the cost of such alterations is shared. The uniqueness test is found in most office leases, and it is the interplay between such test and the Americans with Disabilities Act that is the focus of this article.

The applicability of the uniqueness test is best understood by way of illustration. An example of a situation where such test would apply to yield a result that would work against a tenant would be if a tenant were to operate a medical imaging center in an office building. Under such scenario, if a law was passed requiring a new type of shielding to be placed in the demising walls of all imaging centers, the cost of such shielding would properly be borne by the tenant and not shared with the other tenants in the building. The reason for this is that the law would not be applied to the tenant if it were not for its unique use of the premises; therefore, the uniqueness test would require that the tenant foot the bill. An example of the opposite situation is illustrated by what took place in downtown Los Angeles approximately five years ago. At that time, the First Interstate Bank building, a high-rise office building in downtown Los Angeles, was badly damaged by a fire. At the time of the fire, such building was not required to contain a sprinkler system since it was built prior to the enactment of the law requiring such systems. After the fire, a new law was passed requiring buildings constructed before the sprinkler law to install sprinklers in all premises. Based upon the uniqueness test, the cost of such installation should have appropriately been shared by all tenants since the sprinklering requirement was generally applicable to all tenancies.

The passage of the Americans with Disabilities Act complicates the application of the uniqueness test. The problem arises because it is difficult to determine precisely how to apply the uniqueness test to the alterations mandated by the Act. Since the Act applies to virtually all employers regardless of the use of their premises, it could be argued that the cost of installing alterations necessary to comply with the Act should e shared by all tenants in an office building. On the other hand, since the extent of the alterations that may be necessary may vary depending upon the type of business involved, it can also be argued that each tenant should bear the cost of the alterations it is required to make. Accordingly, disputes are likely to occur over how to apply the test to the alterations required by the Act.

A possible solution to such potential controversy is suggested by a closer look at the uniqueness test. In essence, the uniqueness test is a shorthand in manner of stating that if a tenant's use deviates from the building norm, any additional costs resulting from such deviation should be borne solely by the tenant. The rationale behind such test is that it would not be fair for the other tenants in the building to subsidize the increase in operating costs of a building caused by a tenant whose use of its premises differs from the standard tenancy. In an office building, most tenants are restricted by their leases to using their premises for office purposes only. There is typically no manufacturing, selling or warehousing allowed. Accordingly, the argument can be made that so long as a tenant in an office building is an office tenant, the cost of altering the premises in order to comply with the Americans with Disabilities Act should be an expense shared by all the building's tenants. On the other hand, if a tenant in an office building is running a retail operation, such as a bank or restaurant, then the costs of any improvements should probably be borne by the tenant itself. The reason for this is that the costs would probably exceed the costs that otherwise would have been incurred had the tenant been an office user. It would therefore not be fair for the other tenants in the building to have to share such costs.

The bottom line is that the uniqueness test should probably be applied differently to alterations required by the Americans with Disabilities Act than it is to other types of mandated alterations. With regard to alterations requires by other laws, the specific operations necessitating the alterations should be scrutinized in order to determine if such operations differs from the operations carried out by other tenants. If it does (as in the imaging center example cited above), then he particular tenant affected by the law should bear the entire cost of the alteration. However, since the Americans with Disabilities Act is not "operation-specific" and applies to virtually all tenants regardless of the type of business they run, this type of application of the uniqueness test would not work.
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Americans with Disabilities Act and its effects on building modification costs
Author:Epstein, Robert
Publication:Real Estate Weekly
Date:Sep 9, 1992
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