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Allocating Construction Obligations in Leases

By Ira Fierstein

One of the biggest areas of conflict after a lease is signed is the allocation of construction responsibility between the landlord and the tenant, but many of these problems are easily avoided by careful drafting and use of terminology at both the letter of intent and lease negotiation phases. Often, especially in the letter of intent, parties use terms that each thinks is perfectly clear, but actually mean different things to each of them. Below are some suggestions for how to handle these issues effectively.

The construction obligations of a landlord to its tenant can vary significantly, depending on what a tenant needs, how much a landlord is willing to contribute, and which party is going to control the various construction elements. At one end of the spectrum, the parties enter into a ground lease, and the tenant is responsible for constructing its own building. In this scenario, the landlord's obligations are limited to delivering a pad site to the tenant and completing the common areas of the center. At the other end of the scale is the 'turn-key' project, where the landlord essentially completes all construction activities from soup to nuts, including the building and all, or almost all, of the tenant finish. The tenant simply takes the keys, installs its fixtures, stocks the store, and moves in.

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