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Understanding the Tenant Improvement Workletter

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When leasing commercial office space to house your business, you may be lucky enough to locate a space that is just perfect for your needs without a single change. That, however, is not usually the case and changes may be required to fit the office space to your specific requirements. Before beginning any negotiations, it is important to understand two key terms:

Tenant Improvements (TI): This term refers to the construction or remodeling of leased commercial real estate that are made to accommodate the needs of the lessee. This could include adding or removing interior walls, signage, lighting, wiring, flooring, or other changes needed. The cost of these changes is negotiated between the landlord and lessee and agreement must be reached as to which party will pay for exactly what expenses.

TI Workletter: This is a written legal document negotiated between the landlord and lessee that outlines exactly what office building standards are used in any TI construction and the number of items supplied in the leased space such as light fixtures, power outlets, and other items required to make the space suitable for the lessee. The document also outlines how much the landlord will pay and what financial responsibilities on the part of the lessee may be.

TI Workletter Issues:

The Tenant Improvement Workletter may include:

  • Exact descriptions of the TIs to be built
  • The design process to be followed
  • Contractors or other parties that will perform the TIs
  • Who will pay for what improvement
  • A clause regarding changes the tenant may want to make after initial design
  • Definition of what happens if TI work delays result in impacts to the tenant move date

Scope of Work and Changes in Scope

The landlord’s architect, planner or designer prepares plans and specifications defining the TIs to be performed. Because the landlord likely owns the entire building, he or she will control this work because of potential impact of the TIs on the building or building infrastructure. The tenant should be consulted and involved in the process and a time schedule should be agreed upon. The landlord may agree to pay for certain basic improvements but if the tenant wants to make upgrades from the building standard, the costs will be levied on the tenant. Tenant requested changes are usually paid for by the lessee. If the lessee requests changes in mid-stream, the change in scope will be at their expense and may impact the move in date without any penalty on the part of the landlord or construction team.

Construction Phase

The landlord will normally be the party in charge of obtaining bids for agreed upon changes, selecting the contractor and obtaining permits, as well as managing the work and ensuring that as-built drawings are prepared. However, should the tenant be permitted to perform the TIs, he or she will be required to take care of all items above plus obtain payment and performance bonds and obtain lien waivers from all parties working on the commercial office space.

Payment for Tenant Improvements

The workletter must specify exactly who is responsible for paying for the TIs and how much will be paid. In some cases, the landlord will agree to a “turnkey” TI where all costs are absorbed by the landlord for the initially agreed upon improvements. Leases commonly provide a tenant improvement allowance stated in an amount per square foot rented and in this case the landlord pay the allowance and the tenant pays for all improvements. The workletter must outline exactly what the allowance can be used for such as planning, permits, and construction, as well as what can not be upgraded with the funds from the allowance, often items such as telecommunication wiring, trade-specific fixtures, and equipment.

Work Delays

This portion of the workletter should address exactly what happens if the facility is not ready for tenant occupation by a defined move in date. Usually the landlord does not have any financial liability because of late delivery and the lease normally remains in effect during any delays. If the delay is caused by the tenant, there is no reduction in rent due. However, the tenant should pay close attention to workletter clauses regarding delays and negotiate a better outcome if the delay in work is not their fault. There may be consequences negotiated into the workletter that result in contractor penalties or rent abatement if the delays are in no way caused by tenant delays or tenant requested changes of scope.

This is one of the areas that a good tenant representative will take the lead on assist you. Understanding the 'norm" in your are is important to make sure you get as much of an Office Space Tenant Improvement allowance as possible.

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