Possession is 99% of the LANDLORDS!

While tenants need some certainty, landlords need flexibility to deal with construction timetables, governmental approvals, permitting, weather delays and other variables. Both landlords and tenants have legitimate interests to protect in addressing delivery of possession.


A tenant incurs significant costs and expenses in preparing to accept delivery. Tenants order and schedule the delivery of materials for construction of leasehold improvements, goods and merchandise; commit key personnel for the build-out and store opening; hire employees in contemplation of construction and store operations, and place advertising many months before the grand opening. Failure of the landlord to meet its delivery obligations results in numerous costs and operational ramifications to the tenant. All of these issues compel a prudent tenant to protect itself by adequately addressing delivery of possession and remedies in the event of a landlord breach of its obligations with respect to delivery.


Most tenants would prefer either:


(i) immediate occupancy upon full execution of the
lease, or


(ii) a fixed delivery date that is agreed upon at lease
execution, with the landlord obligated to perform certain specified improvements to the leased premises consistent with plans and specifications approved by the parties.


The more likely scenario, though, is for there to be no fixed delivery date at lease execution. Additionally, while the parties may agree generally on the work to be performed by each party, frequently there are no detailed plans and specifications for either the landlord's work or the tenant's work at lease execution. However, all of these issues need to be adequately addressed in the lease.
Creating a delivery window

The parties should be able to agree on a delivery window, obligating the landlord to deliver the leased premises to the tenant with the landlord's work substantially completed. This window is frequently a period of several months, and if the leased premises are not yet constructed, may be one, two or more years from lease execution. A landlord should be obligated to give the tenant notice by a certain date, typically several months prior to the first day of the delivery window, advising the tenant of the status of the landlord's construction and the estimated date that the landlord will deliver the leased premises to the tenant with the landlord's work substantially complete. This estimated delivery date must fall within the delivery window specified by the parties in the lease.


If agreed to by the parties, the landlord could have the right to revise the estimated delivery date prior to a date certain, by which time the landlord shall give the tenant a firm delivery date upon which the landlord's work shall be substantially completed and the leased premises delivered to the tenant. Upon establishing this final delivery date, the landlord should have no further right to modify the delivery date.


Neither the estimated nor final delivery date should be earlier than


(i) 30 days after the date the tenant receives the
estimated delivery date or the final delivery date from the landlord, as applicable, or


(ii) the first day of the delivery window, as agreed to in
the lease.


Nor should the estimated or final delivery date be later than the last day of the delivery window, as established in the lease.


If the landlord fails to provide notice of the final delivery date on or before the earlier of the final delivery date and 30 days prior to the previously established estimated delivery date, or if the final delivery date established by the landlord does not otherwise comply with the requirements of the lease (e.g., the final delivery date falls outside of the agreed-upon delivery window), the estimated delivery date should be deemed to be the final delivery date. Additionally, if the landlord fails to provide an estimated delivery date on or before the date the estimated delivery date is to be established, or if such date does not comply with the requirements of the lease, then the estimated delivery date should automatically be deemed to be the first or the last day of the delivery window, as established by the parties in the lease.


Tenant remedies for late delivery


In the event the landlord's work is not substantially completed and the leased premises are not delivered to the tenant on or before the final delivery date, the tenant should be entitled to specific remedies on account thereof. Most landlords want to quantify their exposure for late delivery and failure to substantially complete the landlord's work. Typically, the tenant receives a credit against its rental obligations for each day after the final delivery date until delivery of the leased premises is made to the tenant consistent with the terms of the lease, including substantial completion of the landlord's work.


Many tenants ask for a credit against base rent equal to one (1) day of base rent for each day of delay; others can negotiate two (2) days'
credit for each day of delay. Some credits relate to all rent, and some only relate to base rent. A tenant is wise to provide that time is of the essence regarding all the delivery dates discussed above.


A landlord's provision that the landlord shall have no liability for failure to deliver or for late delivery is rarely appropriate.


Deferring delivery or lease termination


In many instances, a rent credit is an insufficient remedy for the tenant. Many tenants only open their stores during certain times of the year. To address the blackout periods, a tenant should have the right, if the delivery has not occurred by a date certain with the landlord's work substantially complete, to defer delivery until a specified date. Some tenants may insist on the right to terminate the lease if the landlord fails to meet its delivery obligations. Most frequently, the tenant will obtain the deferral right, but not the termination right, unless the landlord fails to deliver the leased premises to the tenant with the landlord's work substantially completed by the deferred delivery date. A landlord should provide that the rent credit would abate during this deferred delivery period in the event the tenant exercises such deferred delivery right. In addition, if the tenant exercises a termination right on account of the landlord's inability to deliver the leased premises by a certain date, the tenant should try to obtain a reimbursement obligation from the landlord for the tenant's out-of-pocket costs incurred in negotiating the lease and preparing to occupy the demised premises. If the landlord agrees to same, the landlord usually will cap its exposure to a tenant for these costs.


Force majeure


Most of the foregoing dates and remedies should be subject to force majeure. However, a prudent tenant will insist that there be some outside date by which the tenant has the right to terminate the lease, regardless of whether the landlord failed to meet such date on account of force majeure or otherwise. While the landlord's damages may be tolled by force majeure, at some point a tenant should have a termination right, regardless of force majeure. A landlord should be obligated to give notice to the tenant in the event of a force majeure event. A strong tenant will insist that the landlord's failure to notify the tenant of a force majeure event within a specific number of days after the force majeure event will nullify the landlord's right to claim a delay on account of force majeure.


Landlord and tenant work obligations


Delivery without the landlord's approval of plans and specifications for the tenant's work should be unacceptable to a tenant. If a tenant cannot commence its work, it does not want delivery of possession. While many leases describe generally the work to be performed by the parties, the lease should provide for the parties to agree upon plans and specifications for both parties' work obligations. Within a certain number of days after lease execution, each party should be obligated to deliver to the other plans and specifications for their proposed work. Each party should have an affirmative obligation to provide comments thereto within a specified number of days after receipt thereof, with specific comments and proposed modifications thereto. Typically each party should be obligated to revise its proposed plans to reflect the reasonable objections and proposed modifications of the other party within a specified time thereafter.


This process of reviewing and submitting should continue until the plans and specifications have been approved by both parties. Failure to respond within the specified time frame should be deemed approval by the party failing to respond to the plans as last submitted. The lease should further provide for the landlord to obtain all necessary building occupancy permits necessary to perform the landlord's work, and the lease should address who is obligated to obtain the necessary permits and approvals for the tenant to perform its work and open the leased premises for business to the public. The lease should also state the landlord's obligations with respect to completion of common area improvements, including parking areas, curb cuts, lighting and landscaping. Certain common areas should be identified on the site plan of the center, which areas must be completed in order for the tenant to open and operate for business in the leased premises.


Many tenants do not want the delivery date to be deemed to have occurred until the tenant has been able to obtain all necessary permits to perform tenant's work. This is a negotiable item, depending on the strength of the parties and the scope of the work to be performed by each party.
Joint walk throughs

The parties should provide in the lease that they shall conduct a joint walk-through of the leased premises approximately 2 to 3 weeks prior to the final delivery date to ascertain the status of the landlord's construction and to identify items that need to be performed prior to delivery.
Completion of construction


The lease should identify what items the landlord must complete and provide to the tenant prior to delivery of possession and/or prior to the tenant's opening for business, such as occupancy permits, governmental approvals, certificates of completion by the landlord's architect, copies of contractor, subcontractor and supplier warranties, operation and maintenance manuals, the landlord's record drawings for construction of the leased premises, utility contact information, utility meter information, a subcontractor list with contact information, etc. All of these items are negotiable and the landlord may or may not be willing to provide them, depending on the tenant's negotiating strength.
Many things need to happen in a timely manner for a tenant to obtain possession at the time contemplated by the parties upon lease execution.
Landlords and tenants should not leave these issues to chance. Properly addressing delivery windows, dates, updates and revisions to the timing and the work obligations of the parties well in advance of delivery can greatly facilitate a smooth and timely delivery of possession of the leased premises to the tenant with the landlord's work substantially complete. A prudent tenant will protect itself and guard against delays and the consequences thereof, while providing some reasonable flexibility to the landlord to address the realities of construction and permitting requirements, many of which are beyond the landlord's reasonable control. By addressing these issues in the lease, both parties can protect themselves and facilitate a good start to their lease relationship prior to delivery and well in advance of the rent commencement date." For more information see: www.houstonrealtyadvisors.com or www.houstonrealtyadvisors.net