Tenant Improvement Letters

Back in the olden days (i.e., pre-2008), a landlord and tenant assumed that when they signed a lease, that lease would commence without a hitch and the parties would perform through at least the commencement of the term. Accordingly, the parties tended to focus on defaults that could occur later on, such as the tenant's failure to pay rent or the landlord's failure to provide essential services. Since 2008, however, the instances of defaults by landlord and tenants prior to commencement of a lease seem to be on the rise (or, at least, may be more acutely felt by the parties to leases). This increase (or perceived increase) has been spurred by market conditions that result in landlords not being able to refinance existing loans, tenants downsizing offices, and equity and debt partners going silent on prior funding commitments. Whatever the cause of the increase in these defaults, parties to leases are focusing more and more on protections prior to commencement of the leases. As a result, while it is still necessary to pay attention to post-commencement defaults, it has become increasingly necessary to focus on the remedies and protections with respect to defaults that occur prior to commencement of the lease. This article outlines some of the major considerations of tenants and landlords in addressing the primary source of pre-commencement default under leases: the tenant improvement letter.