Landlord-Tenant Law: Tenant Improvement Allowance And Landlord/ Tenant Work

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September 14, 2018
Author: Erik Piazza
Organization: PHELPS DUNBAR LLP

TENANT IMPROVEMENT ALLOWANCE AND LANDLORD/ TENANT WORK
The Lease should detail the items that will be constructed by Landlord. The Landlord typically constructs and provides the building shell, roof, exterior walls, foundation, floor slabs, and other structural components, the mechanical, electrical and plumbing systems leading up to the Premises, exterior lighting and the driveways and exterior landscaping of the Building. The Tenant is typically responsible for the construction of the interior of the Premises. The Lease should specify who constructs the demising walls between tenant spaces.

The Tenant is typically provided an allowance based upon square footage to assist the Tenant in the cost of improvements to the Leased Premises. The Landlord will be entitled to the depreciation the leasehold improvements pays for. The cost of all improvements in excess of the landlord allowance are paid for by the tenant. The Tenant Improvements typically become property of the Landlord upon termination of the lease.

Landlord Issues:
1. Control over the building and building systems during tenant work
2. Insurance and Liability issues
3. Only wants to pay for hard improvements that create long term value to the property and future tenants
4. Does not want to pay until build out is complete in accordance with plans and lien free
Tenant Issues:
1. Obligation of Landlord to timely deliver premises and remedy if not timely delivered
2. Construction defects identified during build out
3. Delays caused by plan approval (landlord) or other workers (possibly landlord’s contractors)
4. Wants the ability to use the allowance for hard and soft costs
5. Wants multiple draws to pay the costs without having to fund out of pocket or obtain a loan
6. “As is” acceptance of the premises prior to delivery/ construction

Sample Landlord provision: Within thirty (30) days after each of the following items are fulfilled, Landlord shall pay to Tenant the Allowance: (a) all of the Tenant’s Work is completed in accordance with Landlord approved plans; (a) Tenant provides Landlord a copy of a certificate of occupancy with regard to the Leased Premises (or other certificates evidencing inspection and acceptance of all of Tenant's construction by appropriate governmental authorities); (b) Tenant provides Landlord a General Contractor's Affidavit and Lien Waiver with respect to the Leased Premises and Shopping Center, executed by the general contractor(s) performing Tenant’s Work stating that construction has been substantially completed and that all subcontractors, laborers and material suppliers engaged in or supplying materials for such work have been paid in full; (c) Tenant provides Landlord a Subcontractor's Lien Waiver with respect to the Leased Premises and Shopping Center, executed by all subcontractors and materialmen who shall have furnished labor and/or materials for Tenant’s Work; (d) Notice from Tenant to Landlord that Tenant has opened for business at the Leased Premises; and (e) Delivery to Landlord of certificates or duplicate originals of all insurance which Tenant is required to carry under the terms of this Lease.

Sample Tenant provision: Within ten (10) days after Fifty (50%) percent of the Tenant’s Work is constructed, Landlord shall pay to Tenant half of the Allowance. Landlord shall pay to Tenant the remaining half of the Allowance within ten (10) days after receipt of the following: (a) A copy of a certificate of occupancy with regard to the Leased Premises (or other certificates evidencing inspection and acceptance of all of Tenant's construction by appropriate governmental authorities); (b) General Contractor's Affidavit and Lien Waiver with respect to the Leased Premises and Shopping Center, executed by the general contractor(s) performing Tenant’s Work stating that construction has been substantially completed in accordance with the Exhibit “B” and that all subcontractors, laborers and material suppliers engaged in or supplying materials for such work have been paid in full; (c) Notice from Tenant to Landlord that Tenant has opened for business at the Leased Premises; and (d) Delivery to Landlord of certificates or duplicate originals of all insurance which Tenant is required to carry under the terms of this Lease.

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