August 2015
Issue #43



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Hello,

Any construction project will require a number of changes in direction along the way and a turnkey buildout by your landlord is no exception.

In this issue we examine how to build in the flexibility under your work letter to make necessary changes when your landlord is performing the initial tenant alterations.

Sincerely,

Alan Katz
Mintz & Gold LLP 

 

Weather Proofing Your Turnkey Buildout

 

My wife Robin and I tend to take fairly active vacations and this year we headed off for a hiking trip on the Isle of Skye in the Highlands of Scotland.

The scenery was spectacular (see below) and all that hiking was an excuse for this urban New York lad to sample a whole host of the latest overpriced and, let's face it, down right cool outdoor hiking gear.

I had my rain pants, waterproof boots, rain jacket, poncho, leg gaiters and even waterproof backpack cover.

Do you notice a certain aquatic theme here?

It is not just that it was wet; everyone expects Scotland to be wet (ask Jordan Spieth at the British Open in St. Andrews this year).

But the most distinctive feature of the Scottish weather is that it is constantly changing. It can rain, be sunny, get blustery and then rain again, all while you are buttering your oatcakes.

As the Scots like to say, "If you don't like the weather in Scotland, just wait ten minutes."

Of course that left me constantly putting on or taking off my waterproof this and bog proof that. But at least I was more than a wee bit prepared (and oh so very stylish).

Turnkey buildouts also require that tenants be prepared for constant changes.

When a tenant needs to build out its new premises, it can construct the premises itself (often with a tenant improvement allowance from the landlord) or have the landlord perform the build out.

When the landlord builds all of the tenant improvements necessary for the tenant's occupancy, it is called a "turnkey" build out, the terms of which are generally set forth in an addendum to the lease called a "work letter."

It can be advantageous to a tenant to have its landlord perform a turnkey build out. Landlords are in the business of building out premises and for many tenants it is a burden that they would prefer to avoid (especially on smaller projects where the landlord's "vig" may be less offensive). Also, there are no issues regarding the landlord's approval of contractors and architects.

Not surprisingly, landlords are averse to providing tenants with a blank check, so they limit their cost by agreeing to build using "building standard materials", or subject to agreed upon plans, or with a cap on their contribution.

The landlord may also be under tenant imposed time pressure to finish and they will want to limit what is being required of them in the time allotted since there are often penalties for late delivery.

This concern with increased costs and late penalties induces landlords to limit the amount of changes in the project going forward, even though the one thing that can be said with certainty about a construction project is that it will require changes.

The leasing and buildout process happens quickly, with inevitable zigs and zags in design, and a tenant needs some flexibility, particularly as it tries to accommodate multiple viewpoints within its organization.

Be sure to address the following five concerns in your work letter to make sure you have the necessary flexibility to make changes with minimum concerns:
  • Failing means you're playing (make sure changes are allowed). Kind of basic, but important. Some work letters will not allow any changes without Landlord's approval. You should be free to revise your project as necessary as long as you are prepared to be responsible for the additional cost and delay.
  • Mony a mickle maks a muckle (allow for "value engineering"). Often bids will come back radically different from the estimates of the architect. Value engineering allows you to reduce your scope or revise materials to allow you to bring the project back within budget.
  • Yer aywis at the coo's tail (narrow the definition of "tenant delay"). Landlords will put the onus on you for your delay or that of your architects, contractors and subcontractors. While conceptually reasonable, these provisions are often written too restrictively.
    • Limit tenant delay to actual delays in your landlord's construction. You should not be penalized if your change does not actually delay the overall project schedule.
    • Require notice of any delay from Landlord. You do not want to have your landlord first start listing delays at the end of the project. Provide that a delay shall not be deemed a tenant delay until you receive written notice and provided you do not cease the offending activity (or drop the requested change) within a short period of time (one or two business days).
    • Do not accept responsibility for matters beyond your control, e.g. change orders to comply with applicable laws or correct discrepancies in the plans; if your landlord is running the process then it should be responsible for these items.
    • Provide that any simultaneous tenant delays shall be deemed to run concurrently, not consecutively, and not be "double" counted. You should not be penalized twice when your landlord is only delayed once.
    • Clarify that any tenant delay shall not affect your landlord's obligation to complete the performance of its work within the time periods specified in the lease (although extended by the period of actual tenant delay).
  • Keep the heid (insist on reasonable time deadlines). Turnkey projects generally provide for a progression of plans from preliminary plans to final construction drawings. At each stage along the way, you will be given (a short) time to approve and if you exceed the allotted time it will be deemed a tenant delay. You need to be sure that the time is sufficient to review with your construction and design advisors and to get all of your personnel who need to have input on board.
  • Heid doon arse up! (build in early access). Your lease should allow early access toward the end of your landlord's work to perform telephone and other wiring, installation of built-in furniture if applicable and construction of IDF and/or MDF rooms so that you are ready to move in upon substantial completion of landlord's work. Otherwise, your landlord could deny such access or claim it led to a tenant delay.
As they often say about turnkey construction in the Highlands of Scotland, it's gaein be awricht ance the pain has gane awa.', so it's a lang road that's no goat a turnin.' Avoid the pain by following the suggestions above and your construction skies will brighten. Lang may yer lum reek.

Scottish Phrase Translations: Dedicated to the special way the Scots turn a phrase
  • Failing means you're playing: Translation: It's better to be doing badly than not taking part.
  • Mony a mickle maks a muckle (mickle = small thing, muckle = big thing): Translation: Look after the pennies and the dollars look after themselves.
  • Yer aywis at the coo's tail (coo = cow): Translation: Hurry up, you're always dragging your heels.
  • Keep the heid: Translation: Don't lose your head. Stay calm
  • Heid doon arse up!: Translation: Get on with it!
  • It's gaein be awricht ance the pain has gane awa.': Translation: As soon as that pesky bad stuff is out of the way, everything will be fine.
  • It's a lang road that's no goat a turnin' (goat = got): Translation: Don't lose heart in dark times, things can't keep going in the same direction forever.
  • Lang may yer lum reek (lum = chimney, reek = smoke): Translation: I wish you well for the future.

About Us

 

Mintz & Gold prides itself on providing the highest quality legal representation often associated with large law firms with the attention and reasonable costs of a smaller law firm.  Mintz & Gold's Real Estate Department has a national practice specializing in a broad range of commercial real estate law, with a particular focus on commercial leasing. We have extensive experience with respect to office, retail and shopping center leasing, and have represented major Manhattan landlords, national and multinational institutional tenants and national retail chains. Most of our attorneys practiced for many years at large institutional law firms before joining Mintz & Gold.

For more information regarding Mintz & Gold's real estate practice, click here.

For a list of representative transactions of Mintz & Gold's real estate group, click here.

For Mintz & Gold's website, click here.

Contact:
Alan Katz
katz@mintzandgold.com
Telephone: (212) 696-4848
Fax: (212) 696-1231



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This newsletter has been prepared for general information purposes only, and is provided with the understanding and subject to the user's agreement that it does not constitute the rendering of legal advice or other professional advice by Mintz & Gold LLP, and does not create any attorney-client or other special relationship. The content of this newsletter may be considered advertising under the ethical rules of certain jurisdictions and prior results do not guarantee a similar outcome. You should not rely upon this newsletter without seeking legal advice from an attorney licensed in the relevant jurisdiction(s). THE CONTENT OF THIS NEWSLETTER IS PROVIDED AS-IS WITH NO REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. Additionally, the information contained in this newsletter does not constitute tax advice. Any discussion of tax matters contained in this newsletter is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any transaction or matter.

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