Landlord might contribute to Tenant’s construction costs in the commercial real estate lease!

It’s important to understand the conditions to recover the tenant allowance as stated in the commercial real estate lease.


What is a Tenant Allowance?

Tenant Allowance, or Tenant Improvement Allowance, means Landlord will contribute money to the cost of Tenant’s leasehold improvements, often referred to as “work.” Tenant is usually responsible for the work itself, and Landlord will reimburse a portion of Tenant’s costs, if certain conditions are met. The scope of the work and the conditions for reimbursement should be part of the commercial real estate lease.

There are usually conditions Tenant has to meet before receiving the Tenant Allowance reimbursement. Common conditions are:

  • Tenant has to pay its contractors first and get a lien release and receipts
  • Tenant has to submit all of its proof of payments
  • Tenant can’t be in default under the lease
  • Landlord approves the scope of work, the contractors, and the insurance

Negotiation tip: watch out for unreasonable conditions, like a time limit on when the Tenant Allowance can be recovered, or unreasonable criteria for Landlord approvals.

What a Tenant Allowance is Not

It’s important to read the commercial real estate lease to understand the restrictions on the Tenant Allowance. Sometimes, it is a stated amount, or it can be an amount per square foot of the lease space. Any amounts spent over and above the Tenant Allowance are Tenant’s responsibility- estimates from a general contractor are important!

A Tenant Allowance is not a cash advance or an interest-free loan, and if the actual costs of construction are lower than the Tenant Allowance, then the Tenant will probably only receive reimbursement for the lesser amount. The Landlord have factored in the cost of the Tenant Allowance during the term of the commercial real estate lease, so consider that when negotiating the rent amount. The Tenant Allowance could be an actual reimbursement or a rent credit.

Tenant Allowance Limits

Landlord will often limit what work can be reimbursed with the Tenant Allowance within the commercial real estate lease. Negotiation tip: If Landlord is also the contractor, watch out for a management fee or supervisory fee in addition to the construction fees. Sometimes only “hard costs” are included in the Tenant Allowance, so the following expenses could be excluded from reimbursement:

  • permits
  • cabling and wiring
  • mechanical or drawings
  • space plan
  • interior design
  • landlord supervision
  • construction management
  • waste disposal fees

Is the Tenant Allowance a Good Deal?

It depends! Tenant should ALWAYS get at least one bid, and preferably 3, on any sort of construction. Negotiation tip: do not rely on Landlord’s estimate or a verbal estimate. Actual costs tend to be higher than the original bid.

If Landlord is also the contractor, make sure that the commercial real estate lease is very specific about what work is being done, and the quality, as well. Tenant should get final approval of any work that Landlord has done, and other than minor punchlist items, Tenant shouldn’t have to accept possession until all of Landlord’s work is completed correctly.

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

The Default

Sometimes Landlord or Tenant, either inadvertently or deliberately, don’t abide by the terms of the commercial real estate lease, resulting in a breach. A breach, if not cured (fixed), can create an event of default. If there is a default, then the damaged party can seek remedy. Landlord remedies could be everything from hefty financial penalties to lockout to termination of the lease and suing for the monetary balance. If Tenant has any default rights, they are often limited to actual damages or specific performance.

The Notice

It’s not fair to have consequences without knowing what the action is, right? That’s why notice is important. The defaulting party should be informed of default by the damaged party, so the offending party can take action to fix it- this is notice.

The commercial real estate lease should clearly state Landlord and Tenant’s address for notice. Negotiation tip: don’t make the premises Tenant’s sole notice address. If Tenant is locked out or doesn’t otherwise receive mail at the space, then notice may be legally delivered, but not actually received!

Notice can be delivered in different ways:

– By hand

– By email

– By mail (US Mail, certified, or registered)

– By courier service

Notice should always be required to be in writing; it’s hard to prove a phone call occurred in court. Certified mail or courier service are often the most reliable ways to document that delivery occurred, and it’s important to understand the entire notice provision to confirm when the clock starts ticking on any cure period in the event a notice of default is received.

The Cure

Once the damaged party has provided notice, there should be some time for the offending party to fix the damage, known as the cure period. That’s not always the case! In an improperly negotiated commercial real estate lease, Landlord can theoretically tell Tenant that Tenant is doing something wrong (even if it’s easy to fix), then default Tenant and immediately pursue its remedy. That’s default without a cure period!

Each party to the commercial real estate lease has an incentive to make sure that defaults are remedied as quickly as possible- Tenant wants a safe place for its employees and customers to enter into business transactions, and Landlord wants to make sure that Tenant is paying its rent. Both parties enter the lease expecting the other to abide by the agreement, but if there is a breach, it does take a little time to fix the problem.

With a notice and cure period, Tenant has to be told something is wrong AND has an opportunity to remedy the default. Negotiation tip: Non-monetary defaults usually need more time to cure than a monetary one. State the exact amount of days for cure that each default has in the commercial real estate lease.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

A prudent Tenant that wants to stay in business won’t object to customers coming in the door. There shouldn’t be a problem with employees or contractors entering the space, either. Unexpected entrants arriving, however, can disrupt the ordinary course of business. A good commercial real estate lease, negotiated properly, will provide security and certainty about who can enter the space and who is liable if something goes wrong. No surprise guests, no surprise legal liability or business inconvenience for Tenant!

 

Landlord Employee Entrance

A Landlord employee that is performing an inspection or a minor repair should be able to come in during normal business hours to complete their task. Negotiation tip: Request advance notification before a Landlord party or representative enters the space, so Tenant knows who should be in the space and can plan accordingly.

Most Landlords will want an exception for an emergency situation, which makes sense. If there is a burst pipe in the space after hours, then it’s more important for someone to go in there and shut it off then to track down Tenant for notice before entering the space.

 

Entrance Request: Notification vs. Notice

This isn’t a legal notice requirement (see the post on legal notice, it’s a good one!); it’s actually a notification requirement. The important part is that anyone entering the space that isn’t invited by or controlled by Tenant should not be there unless Tenant knows about it. Tenant can decide how they want to get the notification from Landlord- put it in the commercial real estate lease, and put it in writing.

 

The consequences of notification

Tenant’s business probably contains sensitive information, which shouldn’t be shared with non-employees. It could be social security numbers or bank account information for clients, home addresses and phone numbers, payment records or other personal information. Some items are protected by federal law, some should just be kept private. If Tenant is required to have advance notification under the commercial real estate lease that someone is entering the space, then it can make sure this sensitive information is stored away from prying eyes.

A Tenant representative isn’t always in the space, and Landlord representatives may enter after hours, like janitorial staff or maintenance workers performing a repair so Tenant isn’t disturbed in its business operations. It’s important for Tenant to know who is in the space when, and to have good practices to protect sensitive information.

 

Potential New Tenants

Landlord has the right to sell or mortgage the building, and it makes sense that a prudent potential investor would want to tour the space before committing. If Tenant is vacating the space at the end of the term, then it’s okay for potential new tenants to enter the space to look around. Negotiation tip: if the lease isn’t expiring, there is an option available, or there are good-faith negotiations to extend the commercial real estate lease, Landlord shouldn’t be showing the space to potential new tenants!


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

If you’re producing, storing, fulfilling orders for or distributing goods, then you need an industrial commercial real estate lease for your operation. Ideally, you will operate in the space for a very long time, probably longer than any of the products you are manufacturing or distributing. It’s so important to have your commercial real estate leasing team in place, to identify and negotiate the best deal for you. You don’t want to walk away from money or your legal rights that you could have, if you’re smart about your industrial commercial lease negotiations!

Here’s a list of hot items to consider in your industrial commercial real estate lease. Just because you don’t get everything, you might be able to negotiate a tenant allowance (TI) to do things like deferred maintenance, abate hazardous materials, or bring the building up to code and outfit it specifically for your needs. Have these answers and your commercial real estate attorney will be prepared to secure the legal and financial protections you need!

Shipping and Receiving (Truck docks or rail)

  1. How much square footage is needed for the warehouse and how much for the office?
  2. How many truck level doors?
  3. Is a drive-in door needed each for shipping and/or receiving? What size?
  4. What are the bay sizes (column spacing)?
  5. What is the clear height?
  6. What is the turning radius?

Utilities- comfort for people and products

  1. What is the supplied HVAC capacity?
  2. What are the minimum and maximum temperature requirements?
  3. What type of heating/cooling is required, if any, in the warehouse?
  4. Does the building have any green technologies?
  5. How much power is supplied to the building in volts and amps?
  6. What is the lighting requirement in terms of foot candles required?
  7. What is the budget for lighting installation, on-going maintenance and electricity costs?
  8. What kind of sprinklers, building security, and life systems are required?

Floors- inside and outside, don’t forget the docks.

  1. Is there any special coating or sealant needed on the floor?
  2. What is the floor loading capacity?
  3. Is reinforced concrete required in the loading area?
  4. Is heavy-duty asphalt required at the truck docks?
  5. What is the optimal floor plate size?
  6. Does any equipment need to be recessed into the floor?

Special Equipment- is any necessary?

  1. Will specialized equipment or machinery be used?
  2. Is an overhead crane required?

The Building- what do you know about it?

  1. What is the deferred maintenance?
  2. What are the accessibility issues with the building?
  3. Who were previous tenants? Is there a possibility of hazardous materials?
  4. Are there any business hours or zoning requirements?

Partner smart and have your commercial real estate leasing team in place so nothing is left out of your deal!


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.