The benefits of landlord/tenant remodeling provisions
You are a tenant in a long-term commercial lease and you want to “refresh” your space. How should you approach your landlord about amending the lease?
You are a landlord negotiating a long-term lease and you want the option of remodeling the tenant’s space several years down the road during the term. What are the key things you should consider?
Why would a tenant or landlord consider asking for a remodeling provision in a lease? How are such projects structured and paid for?
Remodeling provisions in leases benefit both landlords and tenants. For tenants, the business environment and culture can change like clothing fashion. Hip elements to include in your space when you first enter your lease may be out of touch seven to 10 years down the road.
Similarly, businesses sometimes go through the process of rebranding, creating an additional brand or, with leadership or management changes, reforming the culture. Such changes to the face and culture of the business may require changes to the space in which the business operates. Accordingly, tenants may require a more open floor plan, more breakout spaces for informal conferences, new glass-walled conference rooms and so forth.
Landlords also can benefit from incorporating a remodeling provision in a lease. Remodeling property can add value, which potentially makes the property worth more at a later sale.
Relatedly, increased value can help the landlord get better terms when it refinances the property. The landlord also may want to reconfigure the spaces, use them differently or put an addition on the property in order to accomplish both objectives.
Who and how?
Remodeling provisions generally spell out who is responsible for the cost of the improvements, for hiring design professionals and contractors and for general oversight of the project.
There are several ways remodeling costs can be negotiated, including through a tenant improvement allowance, a rent abatement or a build-out.
First, the landlord might pay a tenant improvement allowance to the tenant. The allowance is a pre-negotiated amount that the landlord is willing to invest up front on the project. In such a model, tenants might negotiate control over the selection of designers, architects, engineers and contractors, subject to landlord approval.
This model allows a tenant to customize the project by working directly with the designers and contractors and for the landlord to pay the costs as they are incurred up to the amount of the allowance. Typically, if the project costs exceed the designated amount because the tenant wants some extras or wants to change the design or materials, the tenant picks up the tab for those extra costs.
Rent abatement is another method of paying for remodeling cost. In rent abatement, the landlord allows the tenant to pay discounted or no rent for a designated period. The tenant must then use those funds to pay for the improvements. The tenant again could negotiate the selection of professionals and any costs incurred over the designated amount would be borne by the tenant.
The landlord might also offer to do a build-out. In a typical build-out, the landlord selects the designers and contractors and offers the tenant several different build-out options. The landlord pays the costs for the build-out as long as those costs are within one of the selected packages. Any customization or add-ons to those packages by a tenant likely would be at the tenant’s cost. This method potentially gives the landlord more control over costs and the professionals conducting the work.
Other issues to consider
Two other issues that should be considered when negotiating a remodeling provision include who controls the remodeling process and whether a tenant should be temporarily relocated during the remodel.
Smaller tenants may not want to have control over design professionals and contractors because it just adds to what tenant is already doing to run its business. In contrast, larger tenants, or tenants operating a franchise, may strongly desire to hire their own professionals in order to control the design and construction process and timing.
In order to maintain design consistency and materials, a landlord may try to retain such control in order to use a design professional or contractor that has worked on other parts of the same building. Typically, if a landlord allows the tenant to have some control over the plans and professionals selection and approval process, the landlord will require the tenant to submit the plans and selections for landlord approval.
Finally, if a remodeling project is going to interfere with a tenant’s business, the parties may negotiate a temporary relocation provision. Such a provision allows the landlord to provide the tenant with temporary space, either in the same building or center, or in another building owned by the landlord. It typically includes who will pay for the relocation and how much rent and other costs the tenant should pay while occupying the temporary space.
Whether you are a commercial landlord or a tenant, remodeling provisions can be very beneficial to negotiate as part of entering into a lease or as an amendment to a current lease.
Ford Turrell is an attorney at Warner Norcross + Judd LLP who concentrates his practice in real estate and corporate matters. He can be reached at firstname.lastname@example.org.