Avoid Pitfalls of Poorly Drafted Work Letter

If you’re negotiating a lease for space that will need construction work before you can occupy the space and do business there, you’ll face issues that are crucial for you to address. A major concern you should have is the “work letter,” which is typically an exhibit to the lease—and one of the most important parts of it. That’s because it covers one of the few situations in a lease that will definitely occur. That is, while many lease negotiations focus on clauses covering events—such as assignment and subletting—that may never occur, the work letter covers an actual event—construction of your space. And the work letter spells out some of the most important business and legal issues in the entire lease—issues that potentially could cost the tenant a lot of money and raise serious disputes between you and the owner.

Competitive bidding and transparency in the process are the two key issues for you to take into account. Usually, the construction allowance covers a percentage of the total cost of construction and the tenant pays for costs in excess of the allowance. The key for an attorney who is representing a tenant in this situation is to not give the landlord a “blank check,” for the work. So don’t agree to unlimited costs above the allowance.

Require that the landlord agree to what’s known as an “open bidding” process, where two to three contractors bid out the work based on your plans. Why? Landlords have contractors that are affiliated with the landlord or the landlord is getting a fee based upon the cost of the construction work; they’re getting the benefit so sometimes the higher the costs, the more benefit that inures to the landlord.

For more of what you need to know to avoid the potential hidden costs of a poorly drafted work letter, see “Get Control in Work Letter to Avoid Hidden Costs,” available to subscribers here.