Commercial space is rarely “walk-in ready” for the tenant. As a result, landlords and tenants must negotiate for leasehold improvements in order for the leasing transaction to move forward. This can impact new leases, amendments or renewals of existing leases.
Below are some tips when negotiating and drafting the work letter for leasehold improvement responsibilities, originally published in the January 2019 issue of SuiteLife Magazine:
- Best-Laid Plans. Your job is easier if the plans and specifications are approved by the parties and all permitting authorities upon lease execution. If they are not approved at that time (as is typical), you must define the process as to how the plans and specifications will be created and approved. One of the parties should be responsible for the initial plan set, and from there a back-and-forth review and approval process with realistic deadlines should be specified. Failure to timely object to plans or revised plans could be deemed an approval, so calendar accordingly.
- Don’t Forget to Budget. The plans and specifications for the work will impact the project budget, so an approval process similar to that above should also apply to the budget. It must also be clear as to who pays for work in excess of the agreed-upon budget.
- Spending Your Allowance. It is not uncommon for a landlord to offer the tenant an improvement allowance, which is a credit against the cost of the work. The work letter should clarify how the allowance gets paid. The mechanics of the payments can impact a party’s cash-flow. For example, does the allowance get paid to the tenant at the conclusion of the work such that the tenant has to fund the construction out-of-pocket and seek reimbursement from landlord? Or is the allowance incrementally paid directly to the contractor per the draw schedule?
- Hiring the Contractor. The work letter must identify which party is responsible for hiring the contractor and causing the permitting and completion of the work. This element will also impact how to best structure the tenant improvement allowance payments, and whether the landlord can insulate itself from construction liens for tenant improvements. It may also be prudent to name the contractor who will perform the work.
- Changing Your Mind. A well-drafted provision addressing change orders is advisable. Items discovered in the field or during permitting can necessitate change orders, and change orders can impact the budget and construction schedule. It should be clear who bears the risk for price adjustments and construction delays caused by change orders.
- Blowing Deadlines. A realistic construction schedule is imperative, which should include an estimated completion date and possibly an outside completion date. A deadline is meaningless unless the work letter identifies the remedies available to the other party if the deadline is not met. Deadlines can be subject to extension under circumstances outside of a party’s control, but not always.
This is just a sampling of some of the issues to consider. Involvement in commercial leasing does not necessarily mean understanding the various risks and pitfalls encountered with construction. Hopefully the above information will be helpful to those negotiating leasehold improvements. If you have any questions or concerns, please feel free to contact me at email@example.com or by phone at 239-344-1275.