Most prospective commercial tenants, prior to the move-in date, need to modify the space to suit their business’s needs. Whether it is a raw space (a “vanilla box”) or built to the specifications of the prior tenant, extensive renovations are almost always required. Unless the new tenant is a chain with other locations, they may not yet have a definitive layout and design in mind for the space. The construction plans must be thought through prior to finalizing the lease. The tenant’s architect should not only have preliminary plans prepared but also should review the build-out clauses in the lease. Aside from clauses addressing whether the space can meet the physical needs for the business such as occupancy, electrical and venting, the lease must address the cost and timing of the initial renovation.
There are three methods of allocating the responsibility and cost of the initial build outs between the landlord and tenant.
- Turn-key: The space is suitable for the tenant’s needs or the landlord agrees to renovate at its own expense. This is more common in office than retail leases.
- Tenant’s work: The tenant performs and pays for its own renovations. The landlord frequently forgoes rent during this build-out period (giving the tenant a rent abatement or credit). This is the most common scenario.
- Landlord’s Work: The landlord does the construction up to a capped amount and subject to tenant’s specifications. If the cost exceeds the cap, tenant pays the difference. This is often problematic as it assumes a good working relationship. In this type of arrangement, there is frequently a clause that the fixtures and improvements remain the property of the landlord after the termination of the lease.
Which of these methods is best depends upon the parties’ respective needs for control and quality of construction and improvements, the readiness of the space (a previous tenant not timely moving out could wreak havoc on construction) and the availability of the chosen architects or contractors. Regardless of what terms are ultimately negotiated, having specific construction plans prior to lease execution can head off many disputes that can poison the new landlord-tenant relationship.