My last blog on this subject (April 2, 2014) covered the situation where the Landlord performs the work up to “certain cost”. Another scenario, somewhat less prevalent in office leasing, is where the tenant performs its own work.
In this situation, Landlord provides a work allowance (e.g., $50 per foot) and tenant will be responsible for construction to prepare its space for occupancy.
The benefits to landlords include:
i. Delay in the rent commencement date is less likely. The parties will agree on a rent commencement date based on estimated completion date. Tenant is responsible for obtaining permits, hiring architects, space planners, contractors and other professionals; performing the work and, obtaining certificates of occupancy or completion. Whether or not the work is substantially completed on the estimated rent commencement date, fixed rent will be payable.
ii. Tenant cannot claim that work is inferior or incomplete. Tenant takes all of the risk of faulty or deficient construction, and interference with the tenants or the building’s operations.
iii. Landlord caps its financial exposure (the work allowance) and avoids the possibility of increased cost of the work as a result of field conditions, tenant change orders or otherwise.
Tenants may favor this alternative because:
i. Tenant is not relying on the timing or quality of performance of the work by landlord.
ii. Tenant could do the work cheaper than the landlord and, if negotiated in the lease, tenant could receive a cash payment or rent credit for the difference between the work allowance and the actual cost of the work.
When tenant performs its own build-out work, certain issues must be considered.
i. Does landlord need to complete any base building work before tenant can commence its build-out? Any landlord delay in completing base building work should not eat into any construction or subsequent rent concession period.
ii. The timing for tenant’s submission of plans, specs and drawings, and landlord’s response time and criteria for approval, needs to be specified as unambiguously as possible.
iii. Landlord will want to approve tenant’s contractors, and any subcontractors performing roof penetrations, structural work, or building system alterations. Landlord may require that only its contractors do that work; tenant needs to insure that those contractors are charging commercially reasonable prices since the work is being paid from the fixed work allowance.
iv. Landlord’s interest is to limit the work allowance to non-specialized, hard improvements, so that the value of the space is increased to benefit landlord in future leasing. Conversely, tenant will want the work allowance to include soft costs (architects, engineers, consultants, permitting, etc.). Oftentimes the parties will agree on a fixed limitation as to soft costs, for example 15% of the work allowance.
v. The allowance should be limited to work necessary to prepare the space initially for tenant’s occupancy, rather than for subsequent alterations.
Tenant’s performance of the work provides a good deal of certainty for the landlord while ceding control of the build-out process to tenant. This could be a win-win, win-loss, loss-win or loss-loss situation, which is partially dependent at least on the drafting skills of the attorney.
By: Eric Rubenstein, Esq Ruskin Moscou Faltischek P.C. firstname.lastname@example.org 516-663-6513
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