March 13, 2013 – Prior to signing a lease for a new office, the tenant must consider how the space will be renovated or constructed to meet the needs specific to the tenant’s intended use. This article will examine some of the issues involved when the landlord has agreed to fit out the tenant’s new office.

When the landlord will perform the work, the lease document should clearly describe the tenant’s desired alterations and improvements by attaching detailed plans and specifications for the work as exhibits to the lease. The specifications should include the tenant’s selections for finishes such as carpeting, painting, window shades or blinds, and upgrades above the landlord’s standard building materials. The “building standard” materials and finishes should also be included as an exhibit to the lease so that the landlord cannot substitute lower quality materials than had been promised during the lease negotiations. Other exhibits to the lease should include a floor plan depicting the layout of the proposed new space, and a “demised premises” plan that shows the location of the tenant’s office within the overall building or property. Without such plans the tenant’s windows could look out upon the side of drab office building when the tenant expected that its new offices would impress clients with dramatic views of a river or City Hall. If the landlord has agreed to perform major construction, such as erecting a new wing onto an existing building, the lease should also include an exhibit of “critical path dates” that set forth the landlord’s deadlines to complete major stages of the construction.

Similarly, the lease should include deadlines for the landlord to complete the work to an extent that the tenant can operate its business within the new offices. Otherwise, the tenant has no certainty that the landlord will deliver the space on time, which could leave the tenant in a precarious position with its soon-to-be-former landlord. The tenant will also want the lease to provide that the landlord’s work will be completed prior to the commencement of the new lease term, so that the tenant does not have to begin paying rent before it can occupy the offices or, if the lease contains a “free rent period”, during the time that the tenant had anticipated occupying the space rent-free. There should also be a deadline for the landlord to complete minor “punch list” work, and a dollar limit to what constitutes such minor work. Furthermore, the tenant must insist that the lease provide a “drop-dead” date for the completion of the landlord’s work and that the tenant may terminate the lease if the work is not completed prior to such date. The right to terminate the lease is certainly a remedy of last resort, since the tenant will be left scrambling to find a new space at a time when it had expected to be moving into nice, new offices. Accordingly, the tenant should also seek remedies that are triggered earlier than the “drop-dead” date, so that it is not forced into a last minute search for new space. One such remedy is for the landlord to pay a per diem sum to the tenant, or receive one day of free rent, for each day the completion of the landlord’s work is delayed beyond the initially projected commencement date of the lease. Such rights and deadlines are necessary in order to give the landlord incentive to complete the work on schedule, which will help the tenant avoid having to holdover at its current premises and be compelled to pay the often exorbitant “holdover rent” that most leases demand of tenants that fail to timely vacate upon the expiration of the lease term.

The details of improving a leased space for the tenant’s occupancy are often overlooked, which can lead to unforeseen expenses and can have a significant impact on the tenant’s business. If you have questions about what can become a complicated process, ask a real estate attorney for help.

For questions, comments or additional information, please contact Steve McConnell, Chair of our Real Estate Group, at smcconnell@regerlaw.com or via phone at 215.495.6531.