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Lease Strategies

Product Overview

This LARG contains the following items:

The Aggressive Major Tenant's Work Letter Wish List, and the Lease Clause Critique: A Sampler of Pro-Tenant Work Letter Clauses.

Number of Single Spaced Pages: 12





Drafting work letters is normally squarely within the landlord's province, but this LARG looks at the work letter from a major tenant's point of view. The first section reviews the basic types of deals for constructing leasehold improvements, and lists several specific provisions that an aggressive tenant might want. The Lease Clause Critique contains several clauses from a pro-tenant work letter with comment. As one might expect, these provisions represent a dramatic departure from those normally found in pro-landlord work letters.

The Aggressive Major Tenant's Work Letter Wish List

A major tenant in a commercial building (whether office, industrial or retail) can have considerable leverage over the content of the work letter which governs the construction of its leasehold improvements. This is especially true in soft leasing markets, where landlords are more willing to accommodate the wishes of a sizable tenant with regard to how such improvements will be built.

Such pro-tenant language in the work letter can save the tenant real money when its improvements are being built. Of course, the tenant must be sophisticated enough to bargain for the type of provisions that will be of real benefit. The tenant also must make a smart decision concerning the structure of the business deal relating to its improvements.

The Basic Deals

Most tenant improvements are constructed pursuant to one of the following (or some variation thereof):

In a "turn-key" deal, the landlord constructs all of the improvements for the tenant (i.e., all the tenant has to do is "turn the key" to the front door and start doing business).

In an office building "shell" deal, the landlord delivers the space to the tenant with "Building Standard Improvements" complete or to be completed by the landlord. The tenant is responsible for all other work (so-called "tenant finish work") required to complete the premises.

In a "shell and allowance" deal, the landlord delivers the premises (i.e., a "shell") with certain basic improvements (e.g., slab, utilities, etc.) completed, and the tenant builds its improvements which are partially paid for by a construction allowance paid to the tenant when its work is complete. This type of deal is common for retail space.

What Works for the Tenant?

Naturally, the precise pro-tenant provisions needed for any particular work letter are a function of the type of business deal struck for the improvements, and of the capabilities and specific condition of the tenant. For example, if the tenant is not in a position to come up with a lump sum of cash to finance even part of its improvements, it had better negotiate a turn-key deal and pay the higher rent which includes the cost of amortizing the improvements.

If the tenant is ill-equipped to manage the construction, it might be better off having the landlord bid the job, get all the permits, and supervise all the construction. On the other hand, if the tenant has had lots of experience with construction (like many retailers), or has access to capable design and construction professionals (i.e., space planners, architects, construction contractors), it might want to run the entire job.

Specifics on the Tenant's Wish List

After the landlord and the tenant reach a business agreement concerning the tenant improvements, the tenant should consider the following points in the context of that deal:

  • If the landlord wants its own contractor to do all the work (including tenant finish), how "cozy" are the landlord and that contractor? Is there reason to believe that the landlord received very favorable prices for the base building by promising to make the contractor the exclusive contractor for the construction of leasehold improvements which are to be paid for by the tenants? If so, the tenant should consider rights to have other contractors bid upon its work bid, and for the right to award such work to other contractors if it is not satisfied with the bids of the landlord's contractor.
  • If the tenant plans to use its own contractor, it must negotiate for provisions giving that contractor free access to the premises (perhaps including week-ends and evenings), and rights to use elevators for such access. The tenant must carefully review and negotiate provisions which require that the tenant's contractor be subject to the control and direction of the landlord's contractor, and any "construction rules and regulations" which may unreasonably hamper the work of the tenant's contractor. Limitations upon access and rules which impede the work of the tenant's contractor will likely translate into delays and increased job cost for the tenant.
  • The tenant and its design and construction professionals should carefully review precisely what is included in "building standard work," and whether there are items that the tenant will not use due to the tenant proposed improvements. If so, the tenant should negotiate for credit for unwanted items based upon the construction unit prices for such items, or upon some other objective method for costing the unwanted items.
  • If the tenant is paying for all or part of its improvements, does the work letter contain requirements for the landlord's construction accounting procedures so that the tenant has adequate detail as to what items are included in the tenant's portion of the cost of construction? If so, are the following items specifically excluded from the tenant's cost of construction:
  • the landlord's management and overhead not related to the tenant's construction;
  • the cost of overtime unless such overtime is expressly requested by the tenant;
  • any legal fees paid by the landlord with respect to the negotiation of the construction contract;
  • any financing costs or construction period interest;
  • any costs resulting from the default of the landlord's contractor;
  • the cost of any general conditions which do not relate specifically to the tenant's premises; and
  • fees of the landlord's architect to review the tenant's plan.

The tenant should consider limitations upon the landlord's approval rights over the tenant's proposed improvements, especially if they are at the tenant's sole expense. For example, the landlord's approval rights over proposed tenant improvements could be limited to items which have a material adverse effect upon the exterior of the building, or upon the building's base systems such as structural, electrical, HVAC, plumbing, etc. (See The Lease Clause Critique in this LARG for such a provision).


End of Excerpt