In order to meet construction schedules, opening date projections and cash flow targets, often a tenant must consider whether it is willing to commence construction without having an executed lease or agreement in place. While this decision may expose the tenant to considerable risk, as further described below, under certain circumstances both the landlord and the tenant may be willing to proceed forward with construction, even absent the existence of an executed lease or agreement. In an effort to provide a means for a tenant to construct its space prior to executing a lease or an agreement for a leased space, a landlord and a tenant would be wise to enter into an Early Access Agreement providing for certain understandings between the parties, prior to the time that the lease or agreement is executed. The Early Access Letter need not be a long or complicated document, but should provide for certain crucial understandings, so as to establish the rights and protect against the liabilities of each party, as well as to create an understanding of the relationship between the parties. At a minimum, the Early Access Letter should cover the following topics: (i) plans; (ii) insurance; (iii) indemnification; (iv) the event if a lease or an agreement is not executed by the parties; and (v) construction rules and regulations.
Before a tenant is allowed access to the premises to begin construction, there should be a detailed understanding between the landlord and the tenant as to the work that will be performed by the landlord and the tenant in the construction of the premises. As a result, before any work is commenced, the Early Access Letter should provide that the tenant must submit detailed plans and specifications identifying all of the work to be performed by the landlord and the tenant. The Early Access Letter should provide that the landlord shall initial tenant’s plans acknowledging the landlord=s acceptance of the terms of the plans, or the landlord will note those items on the plans which are unacceptable to the landlord. The Early Access Letter should also provide that the tenant will re-submit plans to the landlord until the landlord accepts said plans and specifications. Finally, the Early Access Letter should provide that once the plans and specifications are accepted by the landlord, a set of the final plans will be kept at the premises during the course of the tenant=s construction work and that tenant’s construction work shall strictly adhere to the landlord approved plans and specifications.
In order to protect the landlord and the tenant from liability during the course of construction at the premises, the terms of the Early Access Letter should recite the insurance provisions that will eventually be contained in the lease or the agreement which is contemplated to be signed by the parties. Further, before the landlord should allow access to the premises by the tenant or its contractors, a certificate of insurance should be provided by the tenant to the landlord detailing the insurance coverages to be maintained by the tenant and its contractors. The certificate of insurance should identify the landlord and any other party that would otherwise be required by the terms of the lease to be identified as an additional insured (e.g., landlord’s lender). The terms of the Early Access Letter as they relate to insurance should be sufficiently detailed to identify the types of coverages, the amounts of the coverages and the additional insured parties that must be covered by the tenant=s insurance policies. Further, no access should be provided to the tenant or its contractors to the premises without first providing landlord with the certificate of insurance reflecting such insurance coverages.
In order to protect the parties (primarily the landlord) from liabilities that may occur during the course of the tenant’s construction work, an indemnification should be provided by the tenant, which indemnification would provide that the tenant indemnifies and holds the landlord harmless from any claims, causes of action, liabilities, costs, expenses and attorneys’ fees that may be incurred by the landlord, or to which the landlord may be subject, as a result of work performed by the tenant or its agents, employees, contractors or servants at the premises. Since there is no lease or agreement documenting the understanding between the parties, it is critical that the indemnification provision contained in the Early Access Letter be as detailed as that required by the landlord in the terms of the lease or agreement that is to be executed by the parties.
Please note, the tenant may also request that the landlord indemnify the tenant and its agents, employees, contractors and servants for any liabilities that occur outside of the premises to which the tenant is made a party during the course of tenant’s construction or for occurrences within the premises that are caused by the negligence, gross negligence or willful acts of the landlord or its agents, employees, contractors or servants. Whether or not the landlord will agree to provide an indemnification to the tenant will depend in part upon whether the landlord would be willing to provide an indemnification in the lease or the agreement to be executed by the parties, and also based upon the relative bargaining power between the landlord and the tenant. However, any indemnification language between the parties should be sufficiently detailed in the Early Access Letter, in order to be enforceable, if any liability were to occur during the course of tenant’s construction work prior to execution of a lease or an agreement.
What happens when the lease or agreement is not executed by the parties?
Since the basis of an Early Access Letter is for construction work to commence, even though a lease or agreement is not executed by the parties, the issue of what happens to the improvements that are constructed by the tenant, in the event the lease or agreement is not executed by the parties, should be addressed in the Early Access Letter. Typically, an Early Access Letter will provide that the tenant will have no claims to any improvements made to the premises through the course of its construction work prior to a lease or agreement being executed by the parties. Unless this issue is addressed, the tenant may have a claim for unjust enrichment of the landlord’s property through the work performed by the tenant. Further, the tenant could claim that it has the right to occupy the leased premises and that there was an implied contract between the parties through the landlord allowing the tenant access to the premises to perform its construction work. As a result, the Early Access Letter needs to be sufficiently clear, so that the tenant may not maintain a cause of action against the landlord for any interest or right to occupy the premises and further, so that the tenant is prevented from maintaining a cause of action for reimbursement for the improvements that were constructed at the premises. Normally, this is a heavily negotiated topic in the Early Access Letter, since the tenant would have no protection if the landlord chose to lease the premises to another party, once the premises was constructed by the tenant.
As a result, the Early Access Letter should provide that the parties will negotiate in good faith towards the execution of a lease or an agreement for the tenant’s occupancy of the premises, however, the Early Access Letter should be clear that if no agreement or lease can be reached by the parties, then the tenant agrees to vacate the premises and the tenant will have no claim or cause of action for the occupancy of the premises or the improvements constructed therein.
Please note, the tenant may want the right to remove certain improvements that are constructed at the premises in the event a lease or an agreement cannot be reached between the parties, but for such a specific request, the Early Access Letter should be clear as to what improvements may be removed by the tenant. Typically, the landlord does not want the tenant to have any right to remove any improvements from the premises, in the event the parties are unable to reach an agreement as to the terms of the lease or the agreement for the tenant’s occupancy of the premises. However, this issue is subject to negotiation.
While the parties do not need to detail specifically all the construction rules that will apply to tenant’s construction within the terms of the Early Access Letter, certain basic rules should be specified, such as: the hours tenant may perform its construction at the premises, the requirement that the tenant’s construction work not interfere with any other construction work at the building or any operations within the building, disposal of trash and debris during the tenant=s construction work (and the cost therefor that is payable by the tenant), and any other matter which the landlord determines is crucial for the tenant to abide to during its construction. Since there will be no other agreement between the parties concerning the construction work to be performed by the tenant, it is essential that any specific construction rules which must be adhered to by the tenant, be sufficiently detailed in the Early Access Letter.
In addition to the foregoing, the Early Access Letter should provide that the tenant is not permitted to operate for business at the premises unless a lease or an agreement is executed by the parties. Also, the Early Access Letter should provide that there is no obligation upon either the landlord or the tenant to enter into a lease or agreement, only that they will pursue the execution of such lease or agreement in good faith and with all due diligence.
Since the execution of a lease or agreement is never guaranteed, and since there may be considerable costs involved in tenant=s construction work (which the tenant may never utilize, in the event a lease or an agreement is not executed), the landlord and the tenant should approach the prospect of entering into an Early Access Letter and commencing construction, with a great degree of caution and discretion. However, if the circumstances dictate the necessity for commencing the construction work prior to executing a lease or an agreement, then an Early Access Letter provides a means to accomplish this goal.
American Lawyer Media, Commercial Leasing Law & Strategy Volume 15, Number 12, May, 2003