As a prospective commercial tenant, location should not be the only major consideration taken into consideration when choosing a space for your business. How the layout of the space complements and benefits the tenant’s business and future success also needs to be considered. Sometimes a tenant gets lucky enough to find a space in the perfect location that is also laid out so that it will cater to the tenant’s exact business needs. More often than not, however, a tenant will need to do major renovations or other construction work to make the space the best it can be to suit the tenant’s desired use.
The initial work needed to make the space suitable for a particular business does not always fall on the tenant. In some circumstances (usually depending on leasing market conditions), a landlord will agree to do the work needed to make the space fit the tenant’s needs. However, tenant’s should not think this work is free. If a landlord does agree to do the buildout work for the tenant, the costs of the buildout are usually passed through to tenant through additional rent or some other charge identified in the lease.
Regardless of who does the actual buildout work, both the tenant and landlord want the work to be done quickly. The tenant wants the work done fast so that the tenant can start operating in the space. The landlord wants the work done quickly because many times, a tenant will not have a rent payment obligation until the work is complete and it is able to operate. Once a tenant is operating, the landlord is happy because the tenant will be able to make its monthly rent payments. In an effort to ensure that the initial work is being done in an efficient and expeditious manner, landlords and tenants will often draft a “work letter”.
A work letter sets forth the work that needs to be done to prepare a space for a particular tenant’s occupancy. Work letters can be drafted into a lease itself, or can be drafted as a standalone document.
What is the Purpose of a Work Letter?
As mentioned above, the main purpose of a work letter is to provide a guide on what and how the initial work in any given space should be done. Among other things, a well drafted work letter should include information regarding the specific responsibilities of the respective parties, the design of the work being performed, a timeline for the performance of all the work to be done, and certain exemptions from occurrences beyond the reasonable control of any specific party.
Who Performs the Work?
There is no absolute rule on which party to the lease has to actually perform the initial work to prepare the space for the Tenant’s occupancy. Some tenants will not sign a lease if they are not the party that is almost completely in charge of the buildout (the reason that I say “almost completely” is because landlords will usually retain approval rights over any tenant improvement plans and specifications, which limits the tenant’s complete control over the buildout). On the other hand, some landlords do not trust that a tenant will hire the proper contractors and will perhaps cut corners in their initial buildout and will therefore require that any work that needs to be done, needs to be performed by the landlord. This is an especially important consideration when structural elements of the overall building are involved or systems shared with other tenants in the building.
In the situation where the landlord is the one that is performing the tenant’s buildout, it is very important for the tenant to retain as many rights as possible as it relates to the work. A tenant needs to make sure that the work is being done in accordance with the work letter after all. The landlord on the other hand should make sure that there is language that addresses the possibly of tenant interference in the construction work, especially if the landlord allows the tenant to maintain rights, such as approval or inspection rights, as it pertains to the buildout.
This article touches on just some of the various factors that need to be considered when drafting or signing work letters. As can be clearly seen from the above, it is important for tenants to make sure they have proper legal representation when determining how to best account for their needs in a work letter. For more information, or for help on your next lease agreement, reach out to the knowledgeable real estate attorneys at KI Legal by calling (212) 404-8644 or emailing firstname.lastname@example.org.
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