Working with Lease Work Letters that Work (for YOU)

You better work!
--RuPaul

While I doubt RuPaul was referring to commercial lease work letters that regulate the construction of the leased premises, the point remains that some lease work letters could use some “work”.  The name itself, a work “letter”, denotes brevity and informality.   A 60-page office lease contemplating $3 million in premises improvements, attaching a two-page work letter breaks the collective hearts of construction lawyers everywhere.  The standard AIA construction contract form, with only the general conditions exhibit, weighs in at over 50 pages (the abbreviated form A104 is 26 pages…ten point Roman type single-spaced…).    

While no one wants a 50-page construction contract attached to a 60-page lease, there remains the potential for refinement in describing the parties’ responsibilities in the premises construction process.  Some concepts commonly found in construction contracts may be useful to the landlord or tenant, depending on who is funding and/or controlling the premises buildout.  Below are some issues to consider including in your next lease work letter.

Design and Permitting

• Is it clear who is responsible for obtaining all of the plans and construction documents?
  • If both tenant and landlord are performing work, are there scope gaps on the design responsibilities if multiple design professionals?
• Is there a mechanism for approval for submitted plans or designs?
  • Are there time limits by which the plans are deemed approved?
  • Are there standards for landlord to reasonably disapprove plans (e.g. improvements affecting base building or common areas; office tenant asking for 20,000 gallon aquarium)?
  • Approval mechanism needed for both landlord and tenant submissions:
    • Landlord inaction cannot delay tenant work schedule or plans to open/occupy
    • Tenant delay in making decisions cannot cost landlord time or expense
  • Has the design process begun?
    • Can you attach a mutually agreeable program or space plan to the lease?
    • Does the timing of the work and each parties’ obligations to complete the work take into account design delays?
  • How are changes to the plans, at each phase of the construction, addressed?
    • How does a change in landlord’s portion of the buildout affect tenant?
    • How does a change in tenant’s work affect landlord?
  • Who is obtaining the permits?
  • Are delays in obtaining the permits included as an excusable delay for landlord premises delivery deadlines or do they postpone rent commencement for the tenant?

Construction Contracting and Supervision

• Do the parties who are controlling and paying for the buildout have adequate say over the contract terms?
• How are the following terms addressed in the construction contract vs. the lease and work letter:
  • Insurance and Indemnities
  • Change Orders
  • Excusable Delays/Force Majeure and Unexcused Delays
  • Completion Standards and Warranties
• Who is supervising the work?
  • Landlord wants a say for its building; tenant want a say over its space
  • Are supervision fees equitable and based upon percentage of only the hard costs?

Scheduling and Delays

• Is a construction schedule with milestone dates appropriate?
• Who is responsible for schedule slippage?
  • Are delays properly addressed in the construction contracts?
• Who is taking the risk for excused delays?
• Is there specialty work or materials that require long lead times that affect the timing?
• If both landlord and tenant are performing work at the space:
  • Is tenant’s rent commencement ratably extended for delays in landlord work?
  • Are there mutual covenants not to interfere with each other’s work and ramifications for interference?
• Are delays for changes addressed?
  • Is rent commencement delayed for landlord changes?
  • Is landlord absolved from timely delivering the premises for tenant changes?

Changes

• Is there a change order mechanism for submittal, approval and a requirement to perform work while costs or timing are in dispute?
• Can either party generate change order requests?
• Are change order costs addressed?
• Does the landlord or tenant need major changes to be funded in advanced?
• Is there a mechanism for dispute resolution?

General Construction Issues

• Confirming scope of work without scope gaps (if both parties are performing work)
• Addressing who has control over budget changes—and ramifications for those changes
• Outlining payment procedures:
  • Documentation for pay application
  • Requirements for each payment: lien waivers; sworn statements; architect certification
  • Lender and title company requirements
• Defining excusable delays and force majeure
• Confirming ramifications for delays:
  • Requirements to work double shifts or nights/weekends
  • Per diem delay damages or costs for tenant incurring holdover rent
• Addressing unknown or unforeseen conditions, including:
  • Unknown/unforeseen base building issues
  • Inaccurate building plans
  • Environmental remediation
• Confirming who has responsibility for the safety and security of the premises, especially when both parties concurrently perform work
• Addressing landlord concerns for other tenant disruption and access to common areas/garbage removal/material staging/freight elevators, etc.
• Defining substantial completion and procedure for punch list work
  • Temporary vs. permanent certificate of occupancy
• Confirming parties responsible for construction defects

Some of the above issues may not be applicable to the particular landlord, tenant or asset type.  The detail of the work letter can be tailored, based upon the amount of work, who pays for the work, whether a single party is in control of the work and the sophistication of the parties.  A national retailer knows exactly what it is going to install, who will install it, and the timing and cost of the work, using its standard prepared plans, drawings and specifications.  Likewise, for the landlord, the space planning and particular aspects of construction to satisfy the 10,000 square foot local business office tenant can be a long and arduous journey.   Hopefully you have a good work letter to get you to the end of the construction journey relatively unscathed.

Larry N. Woodard is a real estate partner and Co-Leader of the Construction Planning Practice Group in the Chicago office of Honigman LLP.