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Turnkey Build-Outs
A tenant's ability to finance its leasehold improvements is an important negotiated term of a retail lease. Some of the ways the landlord and the tenant address such financing are providing that: 1) the tenant takes the space “as-is” and pays for the build-out through private funds; 2) the tenant obtains an improvement allowance from the landlord and hires the tenant's own contractors to perform the build-out; or 3) the landlord agrees to complete the tenant's entire build-out and amortize the costs thereof into the tenant's rent. In this third arrangement, often referred to as a “turnkey” build-out, the landlord delivers the keys for a completed premises to the tenant when the construction of both the base building and the tenant-specific improvements are complete.
For tenants that lack sophistication and financial resources, a turnkey build-out can be advantageous because the tenant benefits from the landlord's economies of scale with regard to the costs of construction and supplies and the use of an experienced construction and design team to which the tenant may not otherwise have access. National or regional tenants can also benefit from turnkey build-outs, allowing them to focus on multiple projects simultaneously without risking budget busts. A turnkey build-out can also benefit the landlord, as the landlord can control the scheduling of contractors in order to: 1) avoid conflicts with other construction in the building; 2) avoid interference with the quiet enjoyment of other tenants in the building; and 3) mitigate potential delays in the rent start date due to the tenant's delay or inability to obtain permits.
However, a turnkey build-out is not without risk. While many attorneys delegate work-letter issues to be handled by the respective construction personnel, most work letters include legal provisions which affect the obligations of each party. Close attention should be paid to the drafting and negotiation of the work letter and the relevant lease provisions. The following discussion highlights some of the key issues to be considered from both the landlord and tenant perspectives in connection with turnkey build-outs.
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