Beyond the Lease…the Work Letter Agreement

There are a number of issues that must be taken into consideration when drafting, reviewing and negotiating the terms of a commercial lease agreement such as the term of the lease, the base rental rate, the net rental rate, improvements, care of the leased premises, insurance, indemnity, subordination and so on.  One of the issues that is either not reduced to writing by the parties or not clearly defined by the parties is the scope and responsibility of work related to the leased premises prior to the tenant taking occupancy, often times referred to as “build out.”

It is in the best interest of each party involved to clearly set forth the parameters of the build out related issues during the lease negotiation process so that all of the parties understand what is expected prior to the tenant taken occupancy of the leased premises.  So that the underlying lease agreement does not have to be drastically altered for each new tenant, the build out related issues are often addressed in a work letter agreement.

Typically, the work letter agreement is an exhibit or schedule to the underlying lease agreement, but it is also often executed as a stand alone document either prior to or at such time the lease agreement is executed by the parties.  Since the work letter agreement is a stand alone document, it is critical to clearly define the terms that are going to be used in it.  Clearly defining terms that dictate the scope of the landlord’s work, the scope of the tenant’s work, which party bears the cost for such expenses, the condition of the leased premises prior to the commencement of work and so on can ensure that all parties understand their respective rights and obligations during the period of time that build out of the leased premises is taking place.

One of the most critical issues that should be addressed in the work letter agreement is space planning.  Typically, the leased space is in one of three conditions: occupied with a current tenant (whose lease is about to terminate), vacant with improvements or in shell condition.  The current condition of the leased premises will dictate what sort of space planning is necessary and the work letter agreement should reflect the extent of such as well as which party is responsible for the architectural plans and specifications related to the build out of the leased premises.

After the issues related to space planning have been dealt with in the work letter agreement, it is important that the parties clearly set forth which party is responsible for the construction of the improvements.  This section of the work letter agreement needs address issues of construction delays, change orders, completion deadlines and the various remedies for breach thereof.  The work letter agreement should also address which party is financially responsible for the improvements of the leased premises.

There is no way to discuss all of the issues that should be addressed in a work letter agreement in such a brief article.  However, the parties to any leasing transaction where work is required to the leased premises prior to the tenant taking occupancy, should carefully consider the issues discussed in this article and reduce such to writing.  It is far less costly for the parties to draft a work letter agreement during the lease agreement negotiation phase than to deal with disputes once they arise.