Protect Yourself When Giving Tenant Early Access to Premises

A creditworthy tenant dealing with an overly cautious lender may be confident that its financing will go through, but won’t want to wait until the deal is complete before it signs the lease. Don’t be surprised if the tenant asks you to give it early access to its space, so that its opening isn’t delayed. This may seem harmless, especially if it’s a good tenant and you’re afraid it’ll go elsewhere if it can’t set up shop pre-lease. But giving a tenant access to the space before the lease is signed is not an ideal situation for you—what if the “done deal” falls through? On the other hand, you don’t want to risk killing the deal.

            If you decide that the lesser risk is to permit the tenant to access the space early, you should protect yourself by getting the tenant to sign an “early occupancy agreement,” which spells out the tenant’s obligations and minimizes your risk of getting burned by the tenant’s pre-lease work. And remember that it’s important to be selective when letting tenants into a space before a lease is signed. The early occupancy agreement shouldn’t be offered to just any tenant. You should limit the early occupancy offer to tenants with a solid reputation, and tenants with financing that’s virtually complete.

Drafting Early Occupancy Agreement

The early occupancy agreement is meant to allow you to control the work in the space and limit your responsibility to the tenant, explains New York attorney and Insider board member Mark Morfopoulos. The form and clarity of the agreement can make or break the deal: If you use the wrong format or don’t clearly outline tenant and owner obligations, you could find yourself stuck with property damage, a bad tenant, unwanted alterations, or all of the above, warns Morfopoulos. Your agreement, like our Model Agreement: Control Tenant’s Early Occupancy Work, should do the following:

            Establish that it’s a license agreement. First, avoid calling the document a lease and set it up as a “license agreement.” The license agreement, unlike a lease, gives you the right to terminate the agreement immediately if the deal doesn’t go through. If you describe the agreement as a lease, the tenant might be able to successfully argue that it has a “leasehold interest” in the space [Agreement, par. 1]. Don’t use the terms “landlord” and “tenant.” Instead, be sure to use “licensor and “licensee” in your agreement and reinforce the fact that you and the tenant don’t have a landlord-tenant relationship. Note, however, that if you don’t have fairly broad rights to terminate the agreement, it may be characterized as a lease even if you call it a license.

            Specify tenant’s work. Specify exactly what type of work the tenant may perform during the pre-lease time [Agreement, par. 4]. For example, if the tenant wants to add specialized lighting and fixtures, be sure to address this in detail. To ensure clarity, include the details in a separate document and attach it to the agreement as an exhibit.

            Require tenant to insure pre-lease work. Before the tenant starts the pre-lease work, require it to get insurance to cover the work [Agreement, par. 3]. Spell out, in great detail, what type and amount of coverage the tenant will need to provide and add this information to the document that gives the specifics of the pre-lease work that you’ll allow. Make sure you’re named as an additionally insured party on any liability policies.

            Get tenant to complete pre-construction checklist. Create a “contractor checklist” and have the tenant complete it before doing any pre-lease work [Agreement, par. 2]. Issues that you should address in the checklist include: (1) all permits necessary to begin work; (2) approval of construction drawings; (3) certificate of insurance for pre-lease work; and (4) proof of the tenant’s responsibility for utilities.

            Make tenant pay for all pre-lease work. As an incentive to get its financing completed in a timely fashion, require the tenant to pay for all of the pre-lease work [Agreement, par. 5]. If the tenant asks for a tenant improvement allowance, agree to reimburse the tenant only after the lease is signed.

            Bar disruption of building during pre-lease work. Bar the tenant from interfering unreasonably with your other tenants’ operations while conducting the pre-lease work, and limit its access to other parts of the building [Agreement, pars. 5, 6]. For example, make sure that the tenant uses the service entrance to take all deliveries, as opposed to having deliveries come through the shared common areas. Also, require the tenant to comply with all building rules and regulations.

            Ensure compliance with all laws. Make sure that all work-related activities (pre-lease and post-lease) comply with any and all local, state, and federal laws, rules, regulations, and codes [Agreement, par. 5].

            Disclaim responsibility for pre-lease maintenance and tenant safety. Specify in the agreement that you don’t take any responsibility for maintenance or tenant safety during the pre-lease work [Agreement, pars. 7, 8]. State in the agreement that: (1) the tenant is entering the space at its own risk; (2) you take no responsibility for the safety of the tenant, its employees, or its contractors; and (3) you are not responsible for any damage to or loss of personal property brought into the space by the tenant [Agreement, par. 9]. Make sure the tenant accepts the space in its “as is” condition.

            Make tenant indemnify you. Make the tenant indemnify you for any lawsuits, liens, or other costs that arise from violations committed during the pre-lease work period [Agreement, par. 10]. Also, have the tenant agree to be responsible for any damage done or injuries caused while it is in the space.

            Forbid tenant to open during pre-lease period. The agreement should allow the tenant only to do work in the space, not to open for business [Agreement, par. 11]. Some tenants will attempt to open during this period to “test the market” in your building and try to back out of the lease agreement if foot traffic is less than it anticipated.

            Control tenant signage. If the tenant is well known, posting a sign announcing a future opening could be advantageous to you [Agreement, par. 11]. However, a tenant could also put up a sign that lacks quality and hurts your building’s reputation. To cover yourself, create a blanket ban on signs put up by the tenant.

            Make tenant promise to actively seek financing. State in the agreement that the tenant agrees to actively and in good faith seek to obtain financing and sign the lease [Agreement, par. 12]. Also, you should agree that you’ll continue to actively negotiate the lease. Attach the lease as it is negotiated so far, identify the outstanding financing issue, and state that the tenant can’t change any of the terms already agreed upon in the lease.

            State that lease supersedes agreement. To avoid confusion as to which document controls, state in the agreement that once the lease is signed, the lease controls—not the early occupancy agreement [Agreement, par. 12]. Also, state that, with the exception of the insurance and indemnification provisions, the remainder of the early occupancy agreement will be null and void.

            Give you right to terminate if lease isn’t signed. Add language giving you the right to terminate the agreement and get the tenant out of the space if the tenant doesn’t sign the lease in an agreed-upon amount of time [Agreement, par. 13]. For example, if the tenant doesn’t sign the lease within 30 days after signing the agreement, you have the right to terminate the lease and remove the tenant.

            Preserve your right to keep or remove non-trade fixtures.The improvements that the tenant will make may or may not be valuable to you [Agreement, par. 14]. Preserve your options by adding the right to keep fixtures that you can use. Also give yourself the right to require the tenant to remove any installations at its own expense if the deal falls through and the lease isn’t signed.

Insider Source

Mark Morfopoulos, Esq.: The Law Office of Mark Morfopoulos, Hartsdale, N.Y.; www.morfopouloslaw.com.