Sign Stipulation to Avoid Cost Disputes Over Tenant Improvements

If you make or pay for tenant improvements, your lease should give you the right to make the tenant reimburse you for the unamortized part of the improvements—that is, for any part of the cost you haven't yet gotten back through rent—if the tenant violates the lease and the lease is terminated. But getting the reimbursement you expect may be easier said than done. Chances are, the tenant will fight with you over how much the improvements cost. You could waste a great deal of time and money trying to resolve the dispute.

There's a simple way to avoid disputes between you and the tenant over the improvements' cost, says New York attorney Stuart J. Frank. He suggests that you and a tenant sign a “Stipulation of Cost.” This is a short agreement between you and the tenant that fixes the exact cost of the tenant improvements.

We'll tell you what to put in a stipulation of cost. And we'll show you how to attach the stipulation of cost to your lease. Plus, there's a Model Agreement, at right, that you can adapt and use.

What Stipulation of Cost Should Say

A stipulation of cost is an effective tool, says Frank. In his experience, disputes over the cost of tenant improvements, if the tenant violates the lease early, are rare if there's a signed stipulation of cost. That's because you've agreed on the cost of the tenant improvements. It's easy then to calculate how much the tenant must reimburse you, by using a simple, straight-line amortization method, he says.

A stipulation of cost, like our Model Agreement, should:

• Give your name and the tenant's name;

• Identify the lease to which it applies;

• Indicate that it's being signed as required by the lease;

• Say—that is, stipulate—the cost of the tenant improvements, as agreed to by you and the tenant; and

• Include signature lines for you and the tenant.

Two Steps to Require Stipulation of Cost

To put a stipulation of cost in your lease, follow these two steps, says Frank:

Step #1: Add lease language. Include a lease requirement in which you and the tenant agree to sign a stipulation of cost that will then be made part of the lease, says Frank. In the meantime, you can attach a blank stipulation agreement as an exhibit now. Require the stipulation of cost to be signed and returned by you by a set date—for example, no later than 30 days after the tenant opens for business, he says. And if the tenant doesn't return the stipulation of cost by that time, the tenant will have violated the lease, he adds.

To do this, add the following language to your lease when it discusses tenant improvements:

Model Lease Language

Landlord and Tenant agree to execute a “Stipulation of Cost,” in the form attached hereto as Exhibit [insert #], no later than [insert #, e.g., 30] days after Tenant opens for business, for the purpose of stipulating as to the cost of the Tenant Improvements. Upon the execution of such Stipulation of Cost, the parties shall attach it to this Lease and it shall be made a part hereof. If Tenant fails to execute the Stipulation of Cost within the time period required herein, such failure shall constitute a default hereunder.

Practical Pointer: You'll need to address in the lease how long the amortization will be, Frank says.

Step #2: Sign and attach stipulation of cost. You and the tenant should sign and date the stipulation as soon as the work on the tenant improvements is completed and the cost is known. The signed stipulations should then be attached to your lease as an exhibit.

CLLI Source

Stuart J. Frank, Esq.: Special Counsel, Hinman, Howard & Kattell, LLP, 431 E. Fayette St., Syracuse, NY 13202; (315) 473-9414; SFrank@HHK.com.