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Negotiating Construction Requirements in Commercial Leases

Author: Michael A. Faerber Date: 01/13/2014

Categories: Commercial Leasing

When you negotiate a lease for new space – whether for a restaurant, retail store, office or medical use – work usually needs to be done to the space before it can be used. Often the lease will include construction requirements that need to be hashed out so that all parties understand the procedures for approval and their different responsibilities.

Depending upon the landlord, the project, and the type and amount of work, the construction requirements can run from simple to very complicated. As a tenant, you need to be comfortable that you understand the process and timing requirements.

Issues and questions to consider may include: By when do you have to submit plans and specifications for review by the landlord? Do you have to submit permits to the local government offices by a certain date? How much work will the landlord do before delivering the premises to you? Who will be responsible for the total build-out of the premises? Will there be penalties if you fail to meet any time requirements?

Often, the timing of when rent begins is a certain amount of days after the landlord delivers the premises so you can start construction work or when you open for business, whichever comes first. If construction and permitting deadlines are not met, you may find yourself paying rent before you are open for business and making money.

If the work is going to be performed by your contractor then it is important to include the contractor and architect in the negotiation of the construction requirements. Hiring a contractor and architect who understand the nuances of the local jurisdiction’s permitting and construction processes is crucial. They will be able to tell you if the landlord’s requests are feasible in terms of physical construction, permitting and timing. You do not want to find yourself agreeing to timeframes for approvals that you cannot meet. This will only cause you to be in default under the lease, and possibly paying rent earlier than expected.

If the work is to be performed by the landlord’s contractor, and you, as the tenant, are responsible for some or all of the costs, then you want to make certain that the landlord is properly budgeting for the construction costs and getting competitive bids. Under this scenario, you should determine if the landlord is taking a construction fee and if that construction fee is reasonable.

The landlord may also provide you with a monetary allowance to assist with construction costs. You need to fully understand how you can use the allowance money. Is it limited to actual construction costs or can you also use the funds to pay architect or similar fees, or maybe even some equipment?

You also need to plan around the timing of when the landlord will provide the money to you. Will you receive progress payments during construction as you prove certain milestones have been met? Or will payment be made only after work is complete, the premises are open for use, and you have already paid your contractor and subcontractors? If it is the latter, then you need to make sure you have the funds available to pay all of your bills prior to reimbursement by the landlord.

There are a lot of moving parts in the construction end of the lease. Do not wait until the lease is signed and you are stuck with requirements and a process with which you cannot comply. Careful, early planning, aided by knowledgeable consultants, goes a long way to protect you from unwanted results.

If you plan to look at a new location in the near future, I would be happy to discuss the lease process with you. Please contact Michael Faerber by e-mail at mfaerber@mcmillanmetro.com.