Keep Rein on TIA by Getting Bidding Rights for Your Contractors

If you agree to pay for construction of the tenant's improvements without setting the dollar amount of the tenant improvement allowance (TIA), and the tenant has control over the construction process, you could end up getting taken to the cleaners. That could happen if your lease has a loophole that we've seen in some owners' leases—or if you're forced to use the tenant's lease form. Here's the loophole: The lease doesn't require the tenant to consider construction bids from your general contractors (that is, contractors you're comfortable with and who have done work in the building). Rather, it lets the tenant consider bids from only its own general contractors. So even if you have a qualified contractor who can do the work for less, you're forced to pay more for the tenant's contractor.

Add Four Protections to Lease

To plug this loophole, make the tenant agree to let your contractors bid on the work. To do this, include the following four protections in the lease, says New York City attorney Neil E. Botwinoff:

Get right to designate contractors. Get the right to designate a certain number of your own contractors who will bid on the construction work, says Botwinoff. These contractors will be in addition to any contractors that the tenant has chosen to send its bid request to. You may want to require that the tenant get bids from at least three reputable and price competitive contractors in addition to your contractors [Clause, pars. a & b].

Get notice and plans from tenant. Require the tenant to give you notice some time—say, 60 days—before it wants to start construction of the improvements, says Botwinoff. This will give you time to line up your contractors to bid on the construction work. The notice should include the plans and specifications of the intended construction work. You'll then send copies to your contractors so they can properly calculate their bids, he says [Clause, par. a].

Practical Pointer: Make sure that the tenant gives you plans and specs that are clear and complete so that all of the contractors are bidding on the same job, advises Botwinoff.

Get bid statement. To keep properly informed of all of the contractors' bids, and which bid the tenant has chosen, require the tenant to send this information to you in a written statement, says Botwinoff [Clause, par. c].

Pay only lowest bid. Agree to reimburse the tenant only for the cost of the lowest bid, even though the tenant has the right to choose any of the other contractors who bid on the work, says Botwinoff [Clause, par. d]. If the tenant chooses a contractor who didn't submit the lowest bid, the tenant is responsible for paying the difference in the cost.

Practical Pointer: The tenant may insist that you drop this last protection and reimburse it for the full cost of the bid it accepts—even if that wasn't the lowest bid submitted, notes Botwinoff. Resist this demand if you can. If you can't, suggest this compromise: You'll reimburse the tenant an amount that's equal to the average of: 1) the bid by the contractor it chooses, and 2) your contractor's lowest bid, he suggests.

Possible Modifications by Tenant

Expect a savvy tenant to demand some protections for itself, says Botwinoff. For example, the tenant may require that:

Your contractors submit legitimate bids. To ensure that its construction is performed well and that none of your contractors submit an unrealistically low bid that's designed to save you money, the tenant may demand that you either:

• Pick only “reputable, capable, and price competitive” contractors; or

• Name your contractors in the lease, says Botwinoff.

Almost invariably, the tenant will prefer that you name the contractors in the lease, Botwinoff notes. This gives the tenant time to check them out before signing the lease and assure itself that they're reputable, capable, and price competitive, he explains. Plus naming them may help speed up the start of the construction, he adds.

Your contractors meet bid deadline. The tenant may demand that your contractors respond to its bid request by a set deadline—such as no later than 20 days after getting the plans and specs from you, says Botwinoff. This prevents your contractors from unreasonably holding up the tenant's construction work, he explains.

CLLI Source

Neil E. Botwinoff, Esq.: Member, Tannenbaum Helpern Syracuse & Hirschtritt LLP, 900 3rd Ave., New York, NY 10022; (212) 508-6700; botwinoff@tanhelp.com.