Lease Work Letters

Topic Progress:

A.          Condition of Delivery.

(i)            Landlord’s objective.

(1)          Premises delivered “as is, where is”, subject to Landlord’s Work, if any.

(2)          No Landlord obligations regarding the condition of the project outside of the Premises.

(ii)          Tenant’s objective.

(1)          Premises must be suitable for Tenant’s intended use.

(2)          Project sufficiently complete for conduct of Tenant’s business.

B.             Construction Issues.

(i)            Landlord’s objectives.

One of Landlord’s principal motivations is to collect rent as soon as possible. Where Landlord is responsible for constructing the tenant improvements, Landlord can: (i) control the process, (ii) complete construction as soon as possible, and (iii) often earn a fee (which Landlord will argue is compensation for bearing the construction risk). Landlord’s goal in negotiating a build out provision is to:

(1)          Fix the rent commencement date on the date the improvements are substantially complete, notwithstanding the requirement to correct punch list items.

(2)          Include a definition of “Tenant Delay” and “Force Majeure Events” to protect Landlord from delays in completing construction due to the failure of Tenant to timely perform. SEE SAMPLE LANGUAGE BELOW

The Outside Delivery Date shall be delayed by one day for each day that Landlord is delayed in substantially completing the Tenant Improvements and the reason for such delay is due to a Tenant Delay or a Force Majeure Event. In addition, the Commencement Date shall be advanced by one day for each day of delay that Landlord is delayed in substantially completing the Tenant Improvements and the reason for such delay is due to a Tenant Delay. As used herein, a “Tenant Delay” shall mean a delay related to: (i) changes made or requested by Tenant to the Tenant Improvements; (ii) the failure of Tenant to timely furnish all or any information requested by Landlord for the performance of the Tenant Improvements; (iii) the performance of work in or about the Premises by any person, firm or corporation employed by or on behalf of Tenant, including, without limitation, any failure to complete or any delay in the completion of such work; or (iv) any and all delays caused by or arising from acts or omissions of Tenant in any manner whatsoever. As used herein, a “Force Majeure Delay” shall mean delays due to (a) acts or events beyond its control including, but not limited to, acts of God, earthquakes, strikes, lockouts, boycotts, casualties, discontinuance of any utility or other service required for performance of the Tenant Improvements, moratoriums, governmental agencies and weather, (b) the lack of availability or shortage of specialized materials used in the construction of the Tenant Improvements, (c) any matters beyond the control of Landlord, its general contractor or any subcontractors, or (d) any delays in the issuance of governmental permits or changes required by the fire department, building and/or planning department, building inspectors or any other agency having jurisdiction over the Project.

(3)          Treat Tenant’s acceptance of the Premises as Tenant’s acknowledgment that the Premises are in good condition subject only to latent defects and punch list items, with a specific limitation on the period within which Tenant can ask that such latent defects and/or punch list items be corrected.

(ii)          Tenant’s objectives.

Tenant wants high quality improvement at low costs. Tenant does not want to pay rent before the tenant improvements are completed. Tenant’s goal in negotiating a build out provision is to:

(1)          Establish specific standards for the quality of Landlord’s work.

(2)          Eliminate or limit Landlord’s fee for construction administration.

(3)          Require competitive bids from subcontractors in each trade.

(4)          Require that Landlord present Tenant with a detailed estimated cost breakdown. To the extent Landlord is providing a tenant improvement allowance with respect to only a portion of the tenant improvements (with Tenant paying all amounts in excess of the allowance), the cost breakdown should be reviewed to determine if any already completed improvements are included.

(5)          Define “Tenant Delay” narrowly. Tenant must be sure the construction schedule is realistic, and that Tenant is given advance notice of a potential Tenant Delay and a period to cure such potential delay. Further, Tenant should only allow Landlord to exercise its remedies to the extent a Tenant Delay actually causes a delay in construction.

(6)          Obtain the right to enforce warranties and guaranties directly.

(7)          Consider need for early access rights for Tenant to install FF&E. SEE BELOW FOR SAMPLE LANDLORD ORIENTED CLAUSE.

Tenant shall have the right to occupy the Premises approximately ____________ (___) days prior to the Rent Commencement Date. Such early access to the Premises by Tenant shall be solely for the purpose of installing Tenant’s _______________ in the Premises and shall be subject to the following conditions: (i) prior to Tenant’s entry into the Premises, Tenant provides Landlord with proof that Tenant has the insurance that Tenant is required to maintain under this Lease, (ii) prior to Tenant’s entry into the Premises, Tenant provides Landlord with such evidence as reasonably required that Tenant has received all required governmental approvals to enter the Premises, (iii) prior to Tenant’s entry into the Premises, Tenant provides Landlord with contractor’s licenses, insurance and bonds for all contractors entering the Premises in connection with any work to be performed on by Tenant in the Premises, and (iv) Landlord shall have the right to terminate or suspend Tenant’s early access at any time that Landlord determines that such early access interferes with the performance of the Landlord’s Work.

(iii)         Description of Improvements.

Ideally, final plans and specifications will be attached to the lease. Since this is rarely feasible, the parties should attach some description of the improvements to be constructed (often space plans) and establish a procedure for approval.

(1)          “Building Standard” – “Standard Shell”.

(2)          Who prepares the plans?

(3)          Time frames for plan approval.

(4)          Standards for plan approval.

(a)       consistency with project.
(b)       compliance with CC&Rs/laws.
(c)        discretionary approval for matters which affect structure or are not generally reusable.

(5)          Cost estimates (esp. if rent increases as costs increase or if Tenant bears responsibility for cost increases) and procedures for modifying plans to reduce costs/terminating the lease.

(6)          Notice of disapproval – specify particular disapproved item, the reasons for disapproval and suggested modifications.

(7)          Change orders.

(a)       Approval procedures.
(b)       Responsibility for cost of change order.
(c)        Adjustments to completion date.

(iv)         Performance of Work.

(1)          Landlord.

(a)          Greater construction expertise.
(b)          Multi-tenant building.
(c)           Hazardous materials.

(2)          Tenant.

(a)          Minor work – control costs.
(b)          Uniformity required for national chain.

(3)          Shell vs. tenant improvements.

(4)          Construction warranties.

(a)        Compliance with plans and specifications.
(b)        Compliance with laws.
(c)         Improvements free of design, material and workmanship defects.

(5)          Construction barriers/fencing.

(6)          Staging areas/license for storage of construction materials.

(7)          Harmonious labor relations.

(8)          Removal of trash.

(9)          Protection of roof.

(10)      Coordination of simultaneous landlord and tenant work.

(11)      Insurance requirements.

(a)          Liability.
(b)          Builder’s all risk.
(c)           Worker’s compensation.

(12)      Acceptance of work.

(a)          “substantial completion” – minor punch list items which do not hinder tenant’s full use and operation of the premises.
(b)          Punch list – preparation procedure.
(c)           Punch list – Landlord repair obligation and tenant remedy.
(d)          Effect of failure to specify a defect.

(13)      Delivery.

(a)          60-30 day “pre-delivery” notice.
(b)          Tenant remedy for late delivery – daily penalty fee or free rent/termination right if delay past drop dead date.
(c)           Landlord remedy for tenant delay – accelerate obligation to pay rent one day for each day of tenant delay.

(v)          Payment Responsibility.

(1)          Typical improvement construction scenarios.

(a)          Turnkey – Landlord constructs shell and all interior improvements required by tenant at Landlord’s sole cost.
(b)          Landlord builds shell, building standard improvements and tenant improvements, with tenant receiving a construction allowance and reimbursing landlord for the difference, if any (typical office lease).
(c)           Landlord builds shell and tenant, at its cost, constructs interior improvements (typical industrial use).
(d)          Tenant constructs building and interior improvements and landlord reimburses tenant for cost of work up to a specified maximum (typical anchor/big box tenant lease).
(e)          Tenant constructs building and interior improvements at tenant’s sole cost and expense (typical ground lease).

(2)          Allocation of responsibility for different construction costs.

(a)          Labor, materials, fixtures and equipment.
(b)          Government taxes and fees such as impact fees, permit fees, SDC/TIFF, hook up fees.
(c)           Consultants’ fees (engineers, architects, designers).
(d)          Survey costs.
(e)          Environmental report costs.
(f)           Title insurance costs.
(g)          Compliance with laws costs (ADA).

(3)          Other cost allocation considerations.

(a)          Cost expended prior to lease execution.
(b)          Off-site improvement costs.
(c)           Costs of change orders (may depend upon who requests – landlord, tenant or governmental entity).
(d)          Bond costs.
(e)          Premium time labor costs to meet schedule requirements.
(f)           Costs incurred due to construction delays.
(g)          Landlord supervision fees.

(4)          Reimbursement procedures.

(a)          Lump sum payment or “construction” draws.
(b)          Preconditions for disbursements.
(i)            Issuance of certificate of occupancy.
(ii)          Receipt of all lien waivers.
(iii)         Architect’s certificate that work completed in accordance with plans and specifications.
(iv)         Tenant opened and paying rent.

(5)          Reimbursement security of tenant.

(a)          Cash deposit in escrow.
(b)          Letter of credit.
(c)           Rental offset right.
(d)          Personal guaranty.
(e)          Trust deed on fee interest in premises.
(f)           Late charges and default interest.

(6)          Protections for landlord.

(a)          Performance bond.
(b)          Lender’s disbursement conditions.
(c)           Joint checks to general contractor and subcontractor.
(d)          Partial retention until final completion.
(e)          Competitive bidding.
(f)           Notice of non-responsibility.

(7)          Any rental adjustment based on construction costs?.

(8)          Landlord recapture of unamortized tenant improvement allowance upon default by tenant.

(vi)         Completion.

(1)          Defined.

(a)          Issuance of certificate of occupancy by governmental authority.
(b)          Issuance of certificate of completion by architect.
(c)           Completion of all work in [substantial] accordance with plans and specifications.
(d)          Delivery of possession to tenant.

(2)          Delay.

(a)          Failure to timely approve/revise plans and specifications.
(b)          Requests for special order materials or finishes.
(c)           Change order requests.
(d)          Interference with work (i.e., early entry by tenant).
(e)          Delay in completing work/permit application process.
(f)           Establish procedures for documenting delays.

(3)          Remedies for tenant delay – accelerate rent commencement for each day of tenant delay.

(4)          Remedies for landlord delay. SEE CLAUSE ABOVE FOR LANDLORD’S CARVE OUTS FOR TENANT DELAY AND FORCE MAJEURE EVENTS.

(a)          Free rent based on days of delay.
(b)          Daily penalty fee.
(c)           Lease termination rights.
(d)          Right of tenant to complete work and invoice landlord for cost plus interest and construction supervision fee.
(e)          Damages.