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Work Letter 'What Ifs'
Editor's Note: Landlords and tenants enter into agreements, known as “Work Letters,” delineating their respective rights and obligations with regard to tenant and landlord improvements. As with any other portion of the lease, complications can develop, so addressing potential Work Letter issues within the contract can pay dividends down the road. To illustrate some of the circumstances that may arise, and how one might deal with them at negotiation, the author has proposed six “what-if” scenarios, the first two of which were discussed in Part One of this article. She continues herein with Scenario number three.
3. What if Tenant Improvement Pricing Exceeds the Tenant's Expectations?
If the tenant is responsible for paying all or any portion of the tenant improvement costs, it will want as much control over those costs as possible. The tenant will want to ensure that:
- the work is bid to multiple contractors and/or subcontractors for pricing;
- the construction plans and documents that are used by the contractors and subcontractors to determine pricing are as detailed as possible to ensure that the bids will be as accurate as possible;
- if the landlord is responsible for the tenant improvements, the tenant has the right to approve the contractor and also the construction contract (or, at a minimum, the type of contract, such as cost-plus-fixed-percentage or cost-plus-guaranteed-maximum-price); and
- it has approved the construction budget (and attached a copy to the lease, if available prior to lease execution).
Once the architectural and engineering drawings and other construction documents are prepared, the tenant will want the right to approve the construction documents before they are submitted to the applicable governmental authority for approval. In addition, if the applicable governmental authority requires changes to the construction documents in order to issue approvals and permits for the work, and the changes would increase the cost of the tenant improvements, the tenant will want the ability to request revised pricing and/or “value-engineer” the design of the tenant improvements to reduce costs or otherwise keep costs in line with the approved budget.
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