Reinstatement in real estate essentially means to restore a property back to it’s original or former state.
Some people might feel that this defies logic, but unless there are specific reasons not to so so, reinstating a property does include tearing down useful fixtures, luxurious looking built-in cabinets, removing expensive lighting, etc.
The most common reason for property reinstatement is when a tenant decides not to renew a lease that has expired and has to therefore return the premises to the landlord in it’s original condition.
It is important to note that due to the costs, tenants might not order such works to be conducted unless they are contractually obligated to do so.
With residential rental property, restoring a house or apartment back to it’s vacant state is seldom demanded by the property owners as all furniture and fixtures would still be essential items that new tenants can use.
The exception is when a residential tenant has conducted extensive works on the house, especially when without the approval of the owner.
But this is not the case with commercial properties like offices, retail shops, factories and warehouses.
Commercial property reinstatement
This is because each business is unique in it’s operational needs.
After taking up a rental space, they usually undertake various types of renovation and construction to set up the requirements of how they intend to run their business.
For example, a modern tech company might construct the office premises based on an open concept floor plan. And when they vacate the property, maybe due to expansion or business failure, a new business tenant might prefer to build enclosed offices for it’s staff. If the new tenant has to spend time and money on the dismantling and disposal of the fixtures that the previous tenant had left behind, it would be tough for the landlord to rent out the unit.
This is why rental space for companies are usually bare and empty. It is because commercial tenants are expected to customize and build their own conducive work environments.
And because of this, commercial landlords usually include a reinstatement clause contained in the lease agreement that vacating tenants are required to return the premises in it’s original state when it was initially taken over.
Saying that, sometimes not reinstating a commercial space can make it more desirable to potential tenants.
A good example is in the rental of spaces for restaurants and cafes. It is a common sight to see cafes and coffee shops close down and be replaced by another cafe or restaurant. A big reason why new F&B operators took over the premises was that the existing premises with it’s fixtures can be used by the new operator and can in fact help them save thousands of dollar from ordering and installing the fixtures themselves.
These fixtures of value are called trade fixtures. And when a tenant leaves them behind, the property owner take possession of them.
Reinstatement process
The reinstatement of a property does not consist of just dismantling and removal of furniture and fixtures.
Depending on what the tenant has done to the premises, it can also include:
- Demolition
- Re-painting of walls
- Hacking of walls and partitions
- Touching up of defects created by tenants
- Repairing damaged property
- Removal of wiring
- Removal of carpets
- Restoring power points
- etc
One might even have to re-build a wall that has been torn down as the wall was present in the property’s original state.
This type of expertise of professional service providers is sometimes referred to as reverse renovation in the industry.
While reinstatement service providers are not cheap, they can still make a lot of sense of business customers due to the daily expenses and opportunity costs that a company would incur with each day that is delayed.
Moreover, reinstatement companies often offer other related services like packing, moving and relocation.
But if we are honest with ourselves, unless we run a construction company of sorts, no one is going to reinstate a property himself. It’s just not worth the time, effort, and safety risks.
On top of that, there is inevitably a price to pay when proper regulations are not followed.
Reinstatement costs and reinstatement value
Insurance companies are particularly interested in the costs of reinstating a property. But in a different context.
They need this estimate so as to underwrite property insurance policies that provide adequate coverage for homeowners and landlords, without under-insuring them or over-insuring them.
The term replacement costs and reinstatement costs are often used interchangeably in the insurance industry. This despite the notion that they are technically of different meanings.
Replacement is defined as replacing an item with another, while reinstatement describes the restoration of an item to a specified condition.
It can be said that surveyors who provide data and information to insurers to determine their offerings present a reinstatement cost, and the insurers would use that information to work out a replacement value of a property, and in turn creates policies with sufficient coverage for the replacement costs in property-related insurance policies.
This is just on the side of the insurer.
Landlords and property owners could very well come up with a very different reinstatement value for their property.
The insured would understandably want to have as high a value as possible, and the insurance company would want to work with as low a value as they can get away with.
A mistake that property owners can be vulnerable in making is to perceive market value as reinstatement value.
This can be a grave mistake as market value does not serve as a fair reflection of reinstatement costs or replacement costs at all.
In a booming market, a property made of cheap materials that costs $100,000 to build can very well fetch a sale price of $500,000 on the market. While in a depressed market a house that costs $500,000 to construct might only have sellers willing to pay $100,000.
The contrast between the two cannot be more clear.
In order to obtain a credible estimate of the construction costs of building a comparable building to replace another due to total loss and condemnation, it is recommended to hire a qualified surveyor to take on the task of replacement valuation.
With these financial numbers and figures on hand, you would be able to better understand your needs in terms of coverage protection.
When an insurer offers you less coverage than needed, request for quotes from other insurers or challenge with the reports and findings from the surveyor to negotiate a higher coverage.