Landlord, Stay Out Of My Fit-Up Plans!

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Landlords always want to “approve” a tenant’s construction plans, but why? It can’t be that they are more expert than the governmental department that checks “to code.” Construction has to meet the code’s requirements even if a landlord has approved the plans.

Is it a matter of taste? Does the landlord think the ladies room should be where the men’s room is located and vice versa? How about whether the tenant wants to use a smooth ceiling tile and all of the other stores have a popcorn tile (not counting the 42% that don’t)?

Certainly, it is legitimate to “vet” any items that threaten the “structural integrity” of the building or change common utilities or services. But, doesn’t the lease say that anyway? If is doesn’t, it should.

Our suspicion is two-fold: (1) landlords insist on it because they can (after all it is in the form lease); and (2) landlords are nosy. OK, we’ll confess – landlords ask for this right because they are afraid of the unknown. Since they can’t control many other unknowns, they will focus on what they think they can control. Honestly, that doesn’t make landlords unique; we are all like that: ignore the real threats because there isn’t anything we can do about them, and focus on minor item that we can control (or think we can control).

What concerns would or should a landlord have that the governmental construction official wouldn’t have? Ruminations thinks the key ones are: “(a) don’t make the place so unusable that the next tenant wouldn’t have any chance of salvaging some use out of the store; and (2) keep it in the range of “retail.” If we aren’t talking retail space, just adjust these concepts for yourself.

We have the same general notion about those “standard” provisions that ask a tenant to get the landlord’s approval for contractors and even subcontractors. Tenants with bargaining power cross those out. Those without are often saddled with delay and the prospect of higher build-out costs. Wouldn’t it be enough to bar smaller tenants from “self-construction”; require licensed contractors where a particular trade is licensed; and require contractors with a minimum level of build-out experience? Why add days or weeks of delay and uncertain standards? The lease already includes performance standards. Why add “process “ standards” on top of those. Tell the tenant that it has to sweep the floor; not what size broom to use and what the first name of the sweeper has to be.

Basically, Ruminations thinks a reasonably accurate floor plan and rendering should satisfy the usual needs of a landlord. Granted that “special” space calls for a “special” approach. We just think that too many leases start with the “special” approach.

Why does this matter? It matters because this is just another unnecessary encumbrance to both negotiating a lease and to letting the tenant get into the space as soon as possible. It leads to negotiations over how long do I get to review the plans; how detailed should the comments be; how quickly should the tenant respond with revised plans; who pays what for the reviews; what happens when the construction official wants changes made to the plans; what happens if field conditions require changes to the plans?; and more (just add to the list).

These thoughts are informed by two types of experiences over the years. First, landlords rarely have any objection anyway, and when they do, those objections almost always go to items that were known to be troublesome before the lease was signed. Second, tenants with bargaining power tell landlords to “jump in the lake,” and landlords respond by asking: “which lake.” Third, when there are construction comments, they usually come from the landlord’s own employees who “need to keep their job,” feel obligated to “say something,” and never add value to the project.

Before brickbats (kindest definition: “blunt criticisms”) are hurled in this direction, we know this posting is pretty unforgiving and quite polemic. That’s our intent; but our intent is innocent. We want to provoke the leasing community to think about these kinds of issues and to use those thoughts to make the lease negotiating process less time consuming, less expensive, and less confrontational.

Ruminations is looking to rid our form leases of provisions that only get in the way of getting the deal done. For those landlords (meaning almost all landlords) who just “can’t let go” of this kind of “control,” we urge that you revisit your “form” plan review language and include only provisions that address legitimate concerns specific to the overall property. Ruminations knows this is “tough.” We’ve got millions of square feet of landlord-side experience that tells us it is “tough.” We’ve also spent thousands of hours negotiating provisions like this and have never been drawn into a single situation where it mattered. Large tenants will get their way and have the ability to build-out what they want. Small tenants generally can’t do damage (if they meet construction code requirements) because they can’t afford to do extensive build-outs.

Share your thoughts with the rest of your real estate colleagues. We’ve made that easy in this posting because, to make our own one-sided point, we’ve just “flown over” a whole bunch of legitimate concerns, figuring that our readers will cover those for us and for everyone else. Just look right under the title for this posting and click where the word “comment” or “comments” appears.

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Comments

  1. Perhaps with the experience of millions of SF experience on the landlord side you might be able to present the other side. This is a one sided post and a bit short on legitimate landlord concerns as you said. It neglects other contractural responsibilities the landlord may have to satisfy or protect it will be interesting to see responses. Might open up the landlord vs tenant objectives.. Landlords want the control and their reps are proving their value (..etc) vs that all tenants want is not to pay to get the job done right (said by the LL with a smile and a pat on the back after climbing out of the lake). Heck, there’s two sides to this in any deal.

  2. Assuming that all legal ( public) concerns are met, the crucial matter here is the link between the tenant’s fit-out plans and the structure and engineering systems of the building where the retail outlet is located. Independent of the tenant’s goodwill or expertise, fit-out people may always cause such “cracks and faults” during the implementation phase that the landlaord may end up without insurance coverage when things ad up to serious losses and legal conflicts. Therefore, the landlord must have some say. In malls, that is indispensable.

  3. Randall Gunn says:

    Ruminations is correct with the general idea. Many times I feel that I am looking at situations where a fight in the negotiations is thrown in to justify the fees. Some times it is worse.

    I was once with a grocery retailer (in house real estate site selection and legal) and I was negotiating a ground lease with a significant developer. Grocer had over 800 units and thus not their first time at the rodeo. Grocer was going to be doing the construction at a cost of over $3 million. The in house counsel for the landlord actually requested some change on every other line in a 40 page lease. Would argue over colon or semi-colon. After 4 months of this, went over the head in frustration to the business side of the transaction. Told the attorney that normally actions like he was doing was to justify the fee, his excuse was to justify his existence.

    Unfortunately, there are times when both sides want to have “gotacha” and “let’s beat up on the other side” moments so they can say they “negotiated aggressively. Reality, it shows that the attorney really does NOT know what they are doing in some instances.

  4. This is a pitiful attempt to communicate a virtually non-existent injustice. I have been constructing retail tenant spaces & landlord shells for almost 30 years and I have never experienced anything close to a layout standoff as you would think is commonplace from reading above.
    -The author’s inexperience is shown with his comment “It can’t be that they are more expert than the governmental department that checks “to code.” As if codes officials are “lily whtie” servants of pure public good! Most code officials have little interest in the accelaration of commerce, but rather protecting their own job by creating a paper trail of obstructionist revisions & upgrades. They are generally the perpetrators of the alleged misfunction that the author has described. Many have no higher education in building science but have their jobs due to political favors. Often they require no technical expertise beyond passing a small state test which they can go to a school for test-taking preparation.
    -Does the author know that if the landlord wastes time reviewing and revising plans, that he delays receive rent? Yes that’s right……Being medlesome costs the developer money.
    -Does the author know that warranties for the build shell equipment and panels can be voided with improper installations by bottom-feeding subcontractors and general contractors?
    -Does the author know that most tenants are not mom & pop mercantile novices but rather are franchised businesses that have sophisticated retail requirement documents of their own which delay negotiations?
    Most developers take high risks, financially float the start up costs, and have delayed financial gratification to develop property to the best value, for the most amount of participants. Don’t let this author blurr your vision on the steps to achieving the American dream.

  5. Landlord’s sometimes have insurance concerns. Depending on the materials and locations of such things such as shelving, it is possible that the height and location of shelving and closeness to sprinkler systems can impact the ability of the sprinkler system to function properly. The insurance company is interested in this issue. Sometimes the tenant will have it’s own sprinkler system issues that need to be reconciled with the landlord also.

  6. Landlord’s sometimes face many problems. And some real estate company done misbehave and break there agreement. That’s the cause of change there mentality.

    • I tend to share many of the views expressed by Ira in this blog (at least when I representing the tenant!). However, if I may take the side of the landlord for a moment, there is also the need to satify the requirements of its lender. Consider the following provision in a loan agreement for +$50 Million loan provided by a well known institutional lender (FYI, the “Alteration Threshold” was $2.5 Million):

      “Lender’s prior written approval shall be required in connection with any alterations to any Improvements, exclusive of alterations to tenant spaces required under any Lease, (a) that may have a material adverse effect on the Property, (b) that are structural in nature or have an adverse effect on any utility or HVAC system contained in the Improvements or the exterior of any building constituting a part of any Improvements or (c) that, together with any other alterations undertaken at the same time (including any related alterations, improvements or replacements), are reasonably anticipated to have a cost in excess of the Alteration Threshold. If the total unpaid amounts incurred and to be incurred with respect to such alterations to the Improvements shall at any time exceed the Alteration Threshold, Borrower shall promptly deliver to Lender as security for the payment of such amounts and as additional security for Borrower’s obligations under the Loan Documents any of the following: (i) cash, (ii) direct non-callable obligations of the United States of America or other obligations which are “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, to the extent acceptable to the applicable Rating Agencies, (iii) other securities acceptable to Lender and the Rating Agencies, or (iv) a completion bond, provided that such completion bond is acceptable to the Lender and the Rating Agencies. Such security shall be in an amount equal to the excess of the total unpaid amounts incurred and to be incurred with respect to such alterations to the Improvements over the Alteration Threshold.”

  7. I don’t read a lot of support for the author’s perception that Landlords are medlesome trolls, Codes Officials are efficient Einsteins, or that tenants have a gun to their head, or bruises on their body.

  8. I’ve represented many national retailers over the years and yet I can concede the landlord’s legitimate interest in reviewing a tenant’s build-out design. Review by a building department for code compliance is simply not enough. When dealing with a small retaiIer, I think the landlord has a right to ensure that its building is not being altered by an inexperienced tenant who does not have an in-house design team and uses a “bottom feeding” designer or contractor or one who creates labor problems. But from the viewpoint of any retailer, regardless of size, there are cases where a landlord may go too far. When I was negotiating a lease for The Gap, a landlord didn’t like The Gap’s standard logo of white letters on a blue background – he wanted something else. This wasn’t a case of some ugly modern art brand depiction or a raucous pink sign, it was a simply a subjective matter of taste. We all know how this turned out. And while the landlord, who wants to approve contractors, may worry about labor disputes when a national retailer’s contractor uses non-union labor or uses the Brotherhood of Electrical workers instead of the Teamsters, the landlord has to trust that if there is a jurisdictional dispute, the retail;er will take care of it. With respect to small retailers, I can sympathize with the landlord’s concern over labor disputes.

  9. Greg Lutje says:

    coming from the regional shopping mall side of things- I do not agree w/ much of what this article suggests. I know my former employer’s tenant coordinators are insturmental in getting new spaces properly designed, built and open on time. Their review and advice re: tenant’s plans are instrumental, and I never heard any tenants’ objecting to their participation in the process.

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