Draft Detailed Agreement for Tenant’s Early Occupancy Work
Don’t be surprised if a prospective tenant asks you to give it early access to its space before all aspects of your deal are finalized. Some tenants are confident that their financing will go through and that other issues will be resolved without incident. A common reason in retail leasing for tenants to ask for the right to get into the space early is to avoid delays in opening. While it makes sense, and you might want to accommodate a tenant that brings something positive to your bottom line, the shopping center, or both, it’s also not harmless. That’s because giving a tenant—even if it’s a good tenant and you’re afraid it’ll go elsewhere if it can’t set up shop pre-lease—access to the space before the lease is signed is not an ideal situation for you if what you and the tenant anticipate to be a “done deal” falls through. On the other hand, you don’t want to risk killing the deal altogether.
Find Middle Ground
But is there a middle ground where you can protect yourself and make the tenant happy? Yes, if you get 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 or whose other holdups are sure to disappear.
So, how do you specify the terms for early occupancy work? The early occupancy agreement is meant to allow you to control the work in the space and limit your responsibility to the tenant. 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. Your agreement should include several key points to avoid risks.
Consider Two Issues
One crucial point to include is to establish that it’s a license agreement. 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. For that reason, 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.
Also, specify the tenant’s work. Specify exactly what type of work the tenant may perform during the pre-lease time. 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.
For 13 additional points you should include and a Model Agreement you can adapt, see “Agree on 15 Points Before Giving Tenant Pre-Lease Access to Space,” available to subscribers here.