In my last blog (April 1, 2014), I pointed out that tenant build-out provisions in office leases can be quite thorny. Admonitions to counsel to “Keep it simple” while “cover all the bases” are difficult to reconcile. Certain issues invariably arise, and minimizing them should be the goal for counsel preparing the lease.
Landlord performs the work.
Under this scenario, landlords will typically limit their financial exposure to a fixed amount per square foot, and tenant will pay the excess cost of the work.
Benefits to the landlord of this structure include:
i. Landlord controls the work to ensure quality and no negative impacts on the building or other tenants.
ii. Landlord presumably will be able to include a contractor’s fee to be credited against the tenant allowance, which will effectively lower landlord’s costs for the project.
iii. Landlord can, absent problems, complete the work faster than a tenant would and thereby trigger an earlier rent commencement date.
Tenant’s benefits include:
(i) the risk as to the quality of construction is wholly on the landlord.
(ii) the work needs to be substantially completed (which tenant may challenge) before rent commences.
Typical issues arising from this scenario may be:
i. Rent commencement will be determined by the landlord’s completion of the work. Any delay in the work costs landlord money. But how to define “tenant delay” and “unavoidable delay”?
ii. Tenant delay can include change orders, failure to order long lead-time items, dilatory response to approving plans, choosing finishes, etc. Categories that constitute tenant delay must be clearly delineated.
iii. Often there is a dispute over the definition of force majeure or unavoidable delay. Tenants should try to categorize the force majeure items, separating those which are reasonably within landlord’s control (labor issues e.g.) vs. true unavoidable delays (e.g., acts of God).
iv. Late penalties should be specified, which may escalate from, for example, half a day’s rent to one (1) or two (2) days’ rent for each day of late delivery. The late penalty provisions are critical if there are significant holdover penalties for the tenant in the space it is moving from.
v. In certain instances, the tenant may be concerned about the landlord’s creditworthiness and ability to perform work that may cost millions of dollars. In their SNDAs, virtually all institutional lenders will exculpate themselves from the obligation to either perform work or pay the tenant allowance. A tenant may need to require landlords to post security (e.g., performance bond or guaranty or other collateral) to ensure that the work will be timely completed, and/or the allowance paid.
vi. A lease calling for “building standard” materials is a potential quagmire. Tenants need to make sure that those items are thoroughly vetted by tenant’s architect, engineer or other professional.
vii. There needs to be a practical, expeditious method for resolution of disputes during the build-out process. Perhaps a named, independent professional can be appointed as arbitrator of disputes. Neither side wants the work to be stopped while the parties bicker.
viii. The more input early on from construction professionals on both sides, the less chance for friction later on. Moreover, construction representatives must be in constant communication during the work process so as to avoid miscommunication and confusion which will cause delays.
ix. The parties should enter into a commencement agreement confirming the commencement date and rent commencement date to make future administration of the lease and applicable dates incontrovertible.
Other scenarios for tenant build-out will be discussed in future blogs.
By: Eric Rubenstein, Esq Ruskin Moscou Faltischek P.C. firstname.lastname@example.org 516-663-6513
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