What protections does a landlord need during construction? 6:00 am
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Question: What protections should a landlord consider when negotiating a commercial lease provision related to the finalization of the plans and specifications for the initial construction of a premises?
Answer: In many instances, the plans and specifications for the initial construction of a premises are not finalized when a commercial lease is ready to be executed. If the landlord is obligated to perform certain construction obligations prior to delivering the premises to the tenant, the finalization of such plans and specifications could delay the date that rent commences and increase the landlord’s investment in the lease. As a result, there are certain protections that landlords should consider when negotiating lease provisions related to the finalization of such plans and specifications.
Since the rent commencement date is often calculated based on a number of days after the delivery of the premises to the tenant, a delay in finalizing the plans and specifications could delay the date the tenant is obligated to commence paying rent. As a result, a landlord should include a provision in the lease that provides that the rent commencement date is moved one day earlier for each day of any delay caused by the tenant. As another option, a landlord could include a provision that provides that, in the event the plans and specifications are not completed by a certain date, the landlord can complete the plans and specifications or the tenant is deemed to have approved such plans and specifications.
As an additional concern, many commercial tenants require the ability to receive free rent and to terminate the lease in the event the delivery of the premises has not occurred by a certain date. If such rights are required, then it is important for the landlord to provide that the required dates are extended by the number of days of the delay caused by the tenant.
The cost of the construction obligations of the landlord should be considered as well. If the landlord is obligated to perform the work set forth in the plans and specifications, then there is a potential that the cost to perform the construction set forth in the plans and specifications as finalized could be more than anticipated. It is important, therefore, for the landlord to try to negotiate a maximum cost that the landlord is obligated to spend in order to complete the work set forth in those plans and specifications, with the tenant obligated to pay any excess costs.
Although it is ideal for the final construction plans and specifications to be agreed upon prior to the execution of a lease, in most instances, this is not feasible. With the foregoing provisions added to the lease, the landlord should be able to protect itself so that it receives rent in a timely manner and does not incur unanticipated construction costs for the initial construction of the premises
