Office Lease Delivery and Lease Commencement Strategies
This LARG looks at office lease clauses related to commencement of the term, substantial completion of improvements and delivery of the premises to the tenant. The first section reviews the basics of office lease delivery clauses, and lists negotiating objectives for both the landlord and the tenant. The second section discusses the delay clause--a work letter device that can materially affect commencement. The third section focuses upon who decides when substantial completion occurs. Finally, the Lease Clause Critique compares two office lease delivery clauses--one pro-tenant and one pro-landlord.
Thoughts on the Office Lease's Delivery of Premises Clause
Almost all office leases contain a clause stipulating when the landlord will deliver the premises to the tenant, so that the tenant can plan for an orderly move into its new space. Generally, unless the tenant is a start-up company or is new to the particular office market, the tenant must coordinate that move-in with the vacation of its old space. And in most cases, the office space will need to be improved by the landlord or the tenant (or both) before the tenant can take possession and commence business operations. It is usually the delivery clause that sets the dates the parties rely upon for move-in, often with help from other sections of (or exhibits to) the office lease.
Normal Delivery Clause Ingredients
In addition to fleshing out the business deal concerning when the new space will be delivered to the tenant, delivery clauses also frequently cover:
- What, if any, rights the tenant has to gain access to the premises prior to delivery of the space to the tenant.
- What improvements will be furnished by the landlord when the space is delivered, often by reference to the office lease's work letter or construction exhibit.
- Any tenant rights to perform pre-delivery construction or inspections in the space.
- Indemnities from the tenant in favor of the landlord for any pre-delivery activities of the tenant, his contractors, agents or employees, and
- The effect of any delay by the landlord in delivering the space to the tenant on whether the lease remains valid (i.e., the tenant may be obligated to wait for delivery of the space for a certain fixed period beyond the negotiated delivery date, with no rights of termination for late delivery by the landlord).
Clauses pertaining to the delivery of the premises are not particularly complex when viewed by themselves, but they may be complicated by a number of other overlapping clauses in the lease (or in the lease's work letter) regarding delivery matters or related issues. In the worst circumstances, such clauses can contradict each other. Related language affecting delivery matters is often found in:
- The section of the lease covering the term, which governs when the term of the lease commences and expires, the length of the term, etc.
- The definitions section of the lease which contains critical lease definitions affecting delivery, and in particular the definitions of substantial completion, commencement date, unavoidable delay, force majeur, construction delay, etc.
- The lease's work letter or construction exhibit which contains the details of who makes what improvements to the premises, when such improvements will be made (i.e., whether before or after the delivery of the space to the tenant), and how delays affect rent start, delivery and commencement. The lease's indemnity, liability, and insurance clauses which may pertain to pre-delivery construction performed by the tenant or other tenant activities in the space before the commencement of the term.
The Landlord's Delivery Wish List
As far as delivery issues are concerned, the office landlord's usual agenda is to:
- Keep the tenant on the hook for the lease (i.e., minimize or eliminate any tenant termination rights related to the landlord's late delivery of the space), even if the leasehold improvements are completed later than the parties anticipated when the deal was signed.
- Avoid monetary penalties for late completion of improvements or late delivery of space to the tenant.
- Get the rent running as soon as possible by tying the rent start date to the "substantial" completion of the improvements for the space.
- Include a provision stating that the determination of the landlord (or its architect or contractor) is "conclusive" with regard to when the improvements were substantially completed.
- Make the tenant responsible for any tenant caused delays during plan approval or construction relating to the premises (i.e., accelerate the rent start date by the extent of any tenant caused delays).
- Decide whether the tenant's contractors should be kept out of the space until the landlord's contractors are finished in order to avoid labor conflicts and to minimize "finger-pointing" for construction errors and delays resulting from having more than one contractor working in the space at the same time.
- Ensure that the indemnity, insurance and liability provisions protecting the landlord apply to the tenant's pre-delivery activities if the tenant (or his contractor) is allowed to enter the space prior to the commencement of the term (which normally doesn't start until the space is delivered to the tenant with the landlord's improvements complete).
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