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Most commercial leases provide that the landlord will make initial improvements to the leased premises. The allocation of construction costs is an important business term and is often negotiated. Landlords and tenants should consider the following when negotiating TI and TI allowance provisions:
1. Turnkey Premises: In a turnkey arrangement, the landlord completely builds out the premises and bears the entire cost of construction. The parties should agree upon the scope of the improvements prior to executing the lease.
2. Competitive Bidding: If the landlord is providing a TI allowance, the tenant should require that the landlord competitively bid the work (e.g., obtain bids from 3-5 licensed general contractors; multiple bids from subcontractors for large portions of the project). In addition, the tenant should require access to the bids.
3. Right to Modify Plans: If the landlord is providing a TI allowance, the tenant should negotiate for the ability to modify the plans after the bids are in. If the bids are higher than the tenant expected, the tenant should have the right to modify the plans to lower costs.
4. Reimbursable Items: The landlord should want only items that will add value to the premises to be included in the TI allowance. Items such as removable equipment should not be included. On the other hand, the tenant will want all engineering, design and permit costs included as reimbursable items.
5. Management or Supervision Fee: The tenant should be aware of any management and supervision fees charged by the landlord and whether those fees are included as reimbursable items under the TI allowance.
6. Right to Take Control of the Improvements: If the tenant is dissatisfied with the bidding process, the tenant may require the right to take over the TI project.
7. Payment of the Construction Costs / TI Allowance: Discussed in a prior blog entry here: http://rrlawaz.com/2010/02/timing-of-payment-of-ti-allowance-to-tenant/
8. Unused Allowance: The tenant should negotiate that it receives all or a portion of the unused TI allowance as a rent credit, or future credit for remodeling or refurbishment.
9. Right to Audit: The tenant should require the right to verify the cost of construction.
Prior to using any language or concepts from this blog entry, consult with an attorney.
Ryan Rosensteel is a real estate and construction attorney licensed in Arizona. You can contact him at email@example.com.
Filed under: Lease Provisions