Get Right to Complete Owner’s Unfinished Work
Most tenants, whether in an office building or retail space, need at least some improvements in order to make the space usable. So it’s common for owners to agree to make and pay for even extensive improvements, through a tenant improvement allowance (TIA), to entice tenants to sign a lease. But tenants often run the risk that the work the owner has agreed to do won’t get done. And that can create costly problems for you and affect your operations. For example, the owner may run short of cash to pay its contractor, leaving you stuck with space that you might not be able to use. So how can you make sure that the work will get done—at the owner’s expense?
So-called “self-help” rights can be used for a variety of different complications that pop up in a tenancy. Both owners and tenants can try to secure self-help rights as a remedy. It’s a smart idea to negotiate a self-help right lease clause that addresses the owner’s work done as part of your TIA. This protects you when the owner agrees to make improvements, but fails to do so.
When drafting an airtight clause, it’s important to determine the time to exercise the right. Your clause should give you the right to step in and finish the owner’s work, and give you a way to get reimbursed for money you lay out. One of the major sticking points, however, will be the issue of when you can exercise your self-help right. That is when you can act if the owner:
- Fails to “substantially complete” the work by a certain date; or
- Defaults under its construction contract (for example, by not making a required payment).
The phrase “substantially complete” should be defined elsewhere in the lease. If it isn’t, a widely accepted definition is that the space is ready for you to occupy. An owner will insist that “substantial completion,” rather than “absolute completion,” be the standard used. Requiring absolute completion by a certain date could give you the right to step in even if only a small detail were unfinished.
But expect a savvy owner to insist that the deadline for substantial completion be extended if you cause the delay or the delay is caused by events beyond its control, also referred to as “force majeure,” such as labor strikes and material shortages.
For more of what you need to know to reduce the risk of an owner failing to finish work, and model language you can use, see “Ensure Promised Pre-Lease Work Is Completed by Owner,” available to subscribers here.