What to expect from the unexpected

Well-advised tenants taking leases of new buildings should address the property and construction issues in detail and not just rely on the landlord’s assurance that it has completed all the works correctly and safely.  This will involve signing an agreement for lease with the landlord up front and, ideally, having some say in the building project as it progresses.

In such cases the landlord and the tenant have differing interests in the finished product.  Whilst the landlord will retain ownership of the building, it is the tenant who will occupy it.  The tenant needs to be confident the building will actually be built and they will end up with a lease of premises suitable for their purposes and which they can trade from.  Although a landlord may be keen to accept changes to the design and finish of the building to reduce costs or to keep the project on time, for example, it is the tenant who will have to live with the consequences. Depending on the nature and extent of those changes, they could drastically affect the tenant’s use and enjoyment of the property.  Similarly, a landlord may specify certain fixtures and fittings (such as fancy lighting systems) as part of its requirements, but these could be costly for the tenant to repair and replace under the terms of the lease.

Tenants should not only be concerned with what is being built, but also when their obligation to take the lease of the new building is triggered.  A landlord will want to complete the lease as soon as possible so it can start receiving rent, but the tenant will want to ensure the building is fully ready – either for immediate occupation and use, or for its own fitting out – before the lease commences, so their business is disrupted as little as possible by ongoing works. The issues of practical completion of the building, what constitutes a defect, and how and when defects are remedied, are therefore crucial issues for the parties to consider.

To address these issues prospective tenants of new builds should always insist on separate professional representation and:

• undertake a full review of all relevant documentation before signing the agreement for lease.  The documentation will include not only the agreement and the lease itself, but also the building contract, collateral warranties, employer’s requirements and any contractor’s proposals, so the tenant understands exactly what is being built and the obligations and liabilities of the landlord and members of the construction team. Common concerns include insurance issues and the extent of a contractor’s l(and other members of the construction team and professional advisers’) liability to the tenant under collateral warranties;
• negotiate the agreement for lease to include specific development obligations by the landlord, thus entitling the tenant to compel the landlord to comply with (or ensure the building contractor complies with) the terms of the building contract.

This can also give the tenant some control over matters such as:

•  variations, requiring the landlord to obtain the tenant’s consent before specific variations are carried out – i.e. those which are material to the tenant’s use and enjoyment of the property or which may affect the quality of the building;
• practical completion and making good defects, allowing the tenant to make representations as to when and if these should be certified, and to rectify defects and recover costs from the landlord where the contractor and/or the landlord has not made good as required under the terms of the building contract.

If you are considering a new build commercial propery and want to discuss your options, call our Real Estate team for assistance.