Limit Damages for Construction Delays

Trying to fill vacant space while your office building or shopping center is undergoing renovations can be tricky. A new tenant might anticipate not having access to some of the amenities, equipment, or services that it expects to be able to use. If your lease doesn’t protect you from the tenant’s argument that it’s entitled to terminate its lease—or, worse, bar it from suing you—because certain portions of its space or the common areas are not usable during construction, you’ll have to deal with the time and expense of a lawsuit, losing the tenant, losing the brokerage fee you paid to secure the tenant—or all three. Here are five tips for preventing those problems.

Tip #1: Agree on Liquidated Damages for Delay

An owner should put terms in the lease that protect it from having to provide amenities or services that are under construction or not ready yet but that it is obligated to provide to tenants. If a prospective tenant insists on a remedy, it may be preferable to agree on lease terms allowing the tenant to get some form of liquidated damages to avoid a dispute if you anticipate construction work. That way, you know exactly what your exposure will be if that happens.

For example, if you know about renovations that currently are going on, but won’t be completed by the time a new tenant moves in, you may want to provide that for each day past a certain number of days that the work continues, the tenant will receive some sort of damages.

For instance, you could credit the tenant’s account by some monetary amount for each day past the benchmark you’ve specified. For an example of monetary credit lease language you can adapt, see our Model Lease Clause: Limit Damages If Delays Restrict Tenant’s Use [par. 1].

But while you should consider some mechanism in the lease to address the temporary outage when you anticipate an interruption in services or the unavailability of them, avoid abating the tenant’s base rent.

Rent abatement can be a slippery slope because if the tenant knows that you’re willing to abate its rent for construction that makes it hard to use its space, it may seek a rent abatement during lease negotiations for other issues where such a remedy isn’t typically warranted. Rent abatements may also affect your ability to place financing on the property. So specify in the lease’s liquidated damages section that the monetary credit is the only form of damages the tenant will be entitled to and that the tenant must continue to pay its full base rent [Clause, par. 2].

Tip #2: Don’t Give Termination Right

Avoid giving the tenant termination rights unless it’s absolutely necessary. If your tenant decides to terminate the lease, you’ll be stuck trying to find a replacement tenant for space to which you might have already made improvements—or allowed the tenant to make improvements—that will be expensive or inconvenient to remove.

Giving termination rights to a tenant is also problematic if the owner has an agreement for a brokerage commission. If the work isn’t done by the time the tenant is set to move in—or it can’t move in due to the work—and it decides to terminate the lease, you won’t be able to recoup a payment to the broker because, although the tenant ultimately didn’t move in, the broker still did its job. Now you’ll have paid the broker and still won’t have a tenant.

Tip #3: Tell Attorney About Construction

When entering into a lease with a new tenant, you may not realize that parts or certain aspects of your building could open you up for litigation later and that you should include protections in the lease. To avoid risking this exposure, tell your attorney about what’s going on in your building, like construction. Schedule a building visit. Be forthright with your attorney about what’s going on in the building, because what might be obvious to you may not be on your attorney’s radar screen.

Tip #4: Allow for Additional Construction

What if down the road, there needs to be additional construction related to the original work that was contemplated in the lease? Include a general paragraph providing that the owner can go in if repairs are needed. Give yourself a sufficient amount of time in this provision. A tenant may want to limit how many days you can go in to do repairs without it affecting the lease, and ask you to include language specifying that beyond a certain number of days, there will be an abatement of rent.

Tip #5: Tailor Damages to Tenant

Be sure to tailor—and limit to the extent possible—the provisions allowing mechanisms in the lease for tenants that will be without services for a period of time due to renovation circumstances. Some tenants need specific amenities in a building because of the unique characteristics of their business, and the provisions for those tenants will be different from those for tenants that generally want a certain amenity that’s not a fundamentally necessary aspect of their business.

Tenants that can run their businesses without the missing amenities don’t need provisions with as much leeway in getting abatement or getting out of their lease entirely, because their profit or ability to conduct business isn’t affected. To these tenants, the amenities are simply more convenient.

For example, a tenant that wants the convenience of using the main elevator that’s for public use, but has to use the freight elevator if the main elevator is undergoing renovations, may not be happy about the situation, but it shouldn’t be entitled to liquidated damages. The key in the amount of liquidated damages you provide should hinge on whether—or the extent to which—the tenant has the use of its space.