LEASE AGREEMENT REFERENCE GUIDE 840: STRATEGIES FOR PRO-TENANT WORK LETTERS $49.95
STRATEGIES FOR PRO-TENANT WORK LETTERS
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:
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).