Mind the Gap: What Your Leasing Attorney Needs to Know About Construction, and What Your Construction Attorney Needs to Know About Leasing

Leasing and construction issues overlap and need to be carefully coordinated.  An attorney with strong expertise in both areas can insure that your design, construction and leasing agreements address all relevant concerns consistently as part of an integrated project.  Here are some pointers to keep in mind:

1. Scope of Work.  There are often inconsistencies that need to be resolved between the body of the lease, which has been presumably drafted and negotiated by attorneys, and the work related lease exhibits, which may be prepared by non-attorneys. The attorneys should take ownership of the work exhibits to minimize conflicting provisions. Also, the attorneys should insure that the work to be provided by the contractors, designers and engineers is consistent with the relevant lease responsibilities.  For example, if the tenant is obligated to provide the landlord with as-built drawings, or lighting with certain capabilities, or a particular exhaust system, the tenant’s attorney should ensure that the construction and design team are obligated to provide these items.
2. Diligence. A tenant’s architect and/or applicable engineers can provide valuable diligence regarding the condition of potential new space, in terms of capacity, state of repair and the like. The level of investigation should be consistent with the extent and nature of the representations made by the landlord about the condition of the space.  In addition the tenant’s attorney can obligate the architect and contractor to verify actual site conditions prior to performing their work and not rely on plans provided by the landlord which may be outdated.
3. Approvals.  A landlord may have a variety of approval rights before tenant work can commence, such as approval of the architect, the contractor, subcontractors, the agreements with those parties and the relevant plans and specifications.  The landlord may also be entitled to notice before construction begins and under other circumstances.  The tenant’s attorney should ensure that the contractor and architect acknowledge these rights in their contracts and that all approvals necessary prior to execution of these contracts are secured. If the landlord has the right to require changes to plans, the attorney should make sure that the tenant’s architect must incorporate these changes.  And the construction schedule should incorporate the timing of landlord reviews, revisions and approvals.
4. Landlord Work. If a landlord will be performing significant initial work before a tenant commences its work, the tenant’s attorney may require the tenant’s architect and/or contractor to inspect the landlord’s work for any deficiencies before accepting turnover of the premises, and to verify substantial completion for purposes of lease commencement.  Further, the architect and contractor should be responsible for coordinating the tenant work with the landlord work so that the final completed work is properly integrated.
5. Critical Dates.   A lease will generally include cut off dates by which plans must be submitted, work must be completed, opening must occur, etc.  These dates need to be taken into account when drafting the architect and construction agreements, so that all agreements provide for consistent timing of deliverables.
6. Tenant Improvement Allowances.  Particularly in large leasing markets, there may be numerous conditions to be satisfied before a landlord will release payments of a tenant improvement allowance.  As many involve documentation from the architect and the contractor, the tenant’s attorney should require the architect and contractor to make these submissions in their contracts.  For example, the architect should be required to provide the landlord with certifications as to the stage of completion of the work, cost of the work in place, compliance with plans and the like.  And the contractor should provide the required lien waivers for every applicable tier of subcontractor, and provide payment applications in the appropriate format.
7. Insurance and Indemnities.  A lease is likely to require the tenant to indemnify the landlord for the acts of its contractor, and to name the landlord as an additional insured.  The tenant’s attorney should pass through these obligations by requiring the tenant’s contractor and architect to indemnify the tenant and the landlord and name the tenant and the landlord as additional insured. Similarly, the scope of the indemnities in the lease and the construction contracts should be consistent.  And the tenant’s attorney should ensure that the contractor carries all insurance, bonds or other security required by the lease.
8. Alterations Rules and Regulations.  Many space leases require that construction be performed in compliance with the building’s rules and regulations.  In order to ensure compliance, a tenant’s attorney should reference or attach these rules to the construction contract.  Also, the tenant’s attorney should require its contractor to post, or permit the landlord to post, all notices of non-responsibility and the like required by the lease.
9. Required Verbiage.  A lease may require that certain language is to be included verbatim in a tenant’s construction contract, particularly if the owner is a governmental entity.  Examples are equal opportunity obligations and rights to take over the work.  A tenant’s attorney should make sure that this verbiage is appropriately incorporated in the design and construction documents.
10. Stay Flexible.  A tenant’s attorney should keep in mind that a tenant may retain an architect to evaluate various spaces but decide not to relocate.  And even after a lease is signed, the tenant’s rights to the space can be subject to termination for cause or under other circumstances before the build-out work is completed.  Therefore it is critical that a tenant’s attorney maintain rights to terminate the architect and contractor at will.
11. LEED/Green Building Standards.  If the leased space is located in a building that is LEED certified, or will incorporate other sustainability and like standards, the attorney should include references to the relevant requirements in the design and construction contracts so that these professionals will be required to incorporate these standards into the design and the construction means and methods.
12. Coordination with Landlord.  A tenant’s construction and design team should be obligated to coordinate with the landlord and building personnel to facilitate communication and timely progress of the work.  However the tenant’s attorney should provide that tenant authorization is required before the contractor or architect can implement directives of the landlord.
13. Space Measurement.  If the lease provides that the space will be re-measured at some point after lease signing, in order to calculate items such as the final rent or tenant improvement allowance, the tenant’s attorney should require the architect to participate in this process, to the extent permitted by the lease, and verify that all measurements have been performed to the standards set forth in the lease.
14. Late Delivery.  If a tenant’s goal is to build out and move to new space before its existing lease expires, timely construction is critical to prevent the tenant from becoming subject to significant exposure to its existing landlord.  The tenant’s attorney should have its contractor and architect acknowledge the potential for damages arising from late completion, such as holdover rent and the landlord’s lost profits, and accept the appropriate level of liability for this exposure.