What is the current condition of the premises? Does the tenant plan on adding improvements to the commercial space? Is the landlord willing to participate in the buildout? These are all relevant questions that should be addressed when negotiating with the landlord and preparing a letter of intent or “LOI”.
As with any contract, there is no “right” answer. Rather, what the landlord is or is not willing to do is a function of myriad variables – the size of the space, the quality of what tenant and what the tenant brings to the applicable location (e.g., is the tenant an anchor or potentially leasing 1,000 square feet of a 100,000 square foot complex), the number of vacancies in the existing location, etc. Much like the other terms of the lease agreement, or for that matter, any contract, each party’s leverage will dictate the governing terms and conditions.
If the landlord is willing to contribute to the buildout via performance of the actual work (not financially, which we will address in a subsequent post), then the tenant needs to be aware of, and potentially negotiate, when the rent begins. Typically, the tenant’s obligation to pay rent will begin on a defined date (often defined as the “Rent Commencement Date”).
In a perfect scenario (for the tenant), the landlord performs the work (e.g., repairs to lighting, replacement of ceiling tiles, paint interior walls, etc.) and the commercial space is delivered on or before the agreed-to delivery date. One of the primary reasons a landlord and tenant will sign a lease is to avoid uncertainty for when reality occurs.
Delays happen. Issues occur. Things break.
In the case of a delay to delivery, the tenant does not have access to the commercial space, and yet, is nonetheless responsible for paying rent. This may seem unfair, but unless this situation is accounted for in the commercial lease, the landlord and tenant are (i) working out, whether formally or informally, an adjustment to the rent that is due (best-case scenario) or (ii) disputing what rent is due and whether the tenant can terminate the lease. Understandably so, these matters can quickly escalate depending on a number of factors - number of days delayed, criticality of the tenant receiving the commercial space on the delivery date, amount of work the landlord is responsible for performing, cause of the delay, etc.
Wishful thinking is not a way to run a business. Indeed, a tenant would benefit from including language that (i) extends the date upon which the rent is due for each day the landlord is delayed in delivering the commercial space (often couched with “substantial completion”) and (ii) provides the tenant the right to terminate the lease if the landlord’s delay continues for a defined number of days (e.g., 90) after the agreed-to delivery date.
This seems fair, right?
The tenant should not have to pay for commercial space the landlord is responsible for delivering if the landlord has not yet delivered the applicable commercial space. Likewise, if the landlord’s delay continues beyond a reasonable period of time, then the tenant needs the ability to cut bait and find a new location.
This article is a part of a series on Commercial Leases.