“You don’t get what you want, you get what you negotiate” We have all heard the phrase, but do we always heed its advice? Many leasing transactions are done with the thought that the initial tenant improvements will be adequate for the lease term, and they usually are. But what happens when your business requirements change and the space you occupy needs to be modified to better accommodate your needs? Or, what happens if you renew the lease many times over and your space just needs to be “refreshened?” At some point the premises will need to be reshaped. This concept is dealt with in the “Alterations” section of the lease.
With technology moving so fast, and the way we are using space morphing so quickly to a more open and “creative” environment, it is more important than ever to have liberal “Alteration” rights in your lease. Why? My friend Gregg Pasternak and his associate Roger Canaff describe some of the finer points that must be addressed in today’s leases:
Current Topic: Negotiating Alterations Provisions
The right to perform alterations during the lease term is sometimes an afterthought in negotiations, since generally the initial construction of improvements is governed by the terms of a tenant work letter which is attached to the lease as an exhibit. However, obtaining liberal rights to perform subsequent alterations, especially in leases with terms of more than 5 years, can provide your client valuable flexibility. And, a well negotiated provision can save a tenant significant money at the end of the lease term. Here are a few of the most important issues to address.
Typically, Tenant cannot perform alterations in the Premises without Landlord’s consent, which will not be unreasonably withheld unless such alterations will affect the Building structure, systems, or exterior. This is a perfectly acceptable starting point, but tenants should have the right to perform purely “cosmetic” alterations (most notably paint and carpet) without going through a potentially lengthy and expensive review and consent process. Most landlords will provide this right, but the specifics can vary substantially from deal to deal. First, it’s important to try to make the definition of “cosmetic” alterations as broad as possible. Landlords may try to limit these to merely paint and carpet, but including any non-structural alterations is sometimes achievable, especially in larger transactions. Perhaps more importantly, landlords usually try to put a cap on the amount of money which can be spent on cosmetic changes made without consent. Try to remove the cap entirely, by arguing that the nature of the improvements in question are relevant, not the cost. For example, if the parties agree that Tenant can install new carpet without Landlord’s consent, why should it matter if Tenant chooses the most expensive carpet in the world? However, if you lose that argument (and more often than not you will), be sure to make the cap large enough for the right to have some utility. A $10,000 cap on cosmetic alterations (which is fairly typical) essentially provides no right whatsoever to a tenant leasing 25,000 rentable square feet. A good rule of thumb is $5.00 per rentable square foot of the Premises.
Landlords always want the right to make tenants remove improvements at the end of the lease term, and early lease drafts generally give landlords not only the right to pick and choose what stays in the space and what goes, but the right to defer the final decision until the end of the lease term (and sometimes even 30 days after lease expiration). On large office deals, sometimes it’s possible to remove the restoration obligation entirely, especially if your client is a law firm or other user likely to construct largely re-usable improvements. However, most of the time your client will face the possibility of being required to remove some permanent improvements at the end of the term. First, you should always try to limit the removal requirement to non-general office improvements. If the space is likely to be usable by the next occupier, then that provides a value to Landlord, and they shouldn’t require your client to spend money to take it out. In deals 10,000 rentable square feet and larger, this concession should be obtained more often than not. Of course, arguments will ensue regarding what are typical office improvements (internal stairwells and cabling are often hot-buttons), but arguing about such things is fun and that’s why you became a broker in the first place, right? Secondly, Landlord should ALWAYS be required to notify Tenant of the restoration requirement at the time consent to the applicable alterations is given. It’s possible that your client may want to modify its plans for construction if a potentially expensive removal obligation is triggered, and you won’t be able to advise your client effectively without all the information at the time the decision is made.
Landlords are always looking for places to add a little profit to their bottom line, and management/supervision fees are a popular tool. Most leases will provide that Tenant has to pay a supervision fee in connection with any alterations. The size of the fee of course varies by region and by premises size. Of course deleting the fee entirely is optimal, and limiting Landlord’s recovery to reimbursement of actual out-of-pocket expenses is the next best thing. However, unless it’s a large deal, you often will be forced to live with some mark-up on alterations. These fees are usually 3%-5% of the total cost of construction, and often a sliding scale can be negotiated where the fee decreases as the cost of the project increases. No fee should be charged on purely cosmetic alterations.