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Taking a lease off-plan: some construction considerations

  • United Kingdom
  • Real estate

11-11-2019

Eversheds Sutherland property column: November 2019

Taking property off-plan involves a whole host of extra considerations, and prestigious tenants looking for new high profile headquarters or bespoke office space require comprehensive landlord and tenant and construction advice. A development agreement for lease is likely to be a lengthy, complex and heavily negotiated document requiring carefully co-ordinated drafting and input from a number of lawyers. This month, we consider just a few of the issues to be addressed by those advising the tenant.

For example, the look and feel of new office space is often the fundamental reason why a tenant client is looking to move into new build space. Whether it is a new build in a specific and precious location, or a new build to fit a particular way of working, taking a lease off-plan gives the tenant the opportunity to input into the finished product in a way that repurposing existing space might not manage. So, with that look and feel so important, those acting for tenants in these agreements for lease must draft comprehensive landlord’s development obligations tied into an exacting specification.

Alongside the agreed specification for the landlord’s works, the tenant will want to be sure that the landlord’s ability to vary that specification is as restricted as possible. Perhaps only variations to comply with statute, or to replace materials in short supply, but both with a caveat that replacement materials shouldn’t compromise the quality of the all-important appearance or the tenant’s planned, particular way of using the building. Variations for other reasons or more material in nature should be subject to the tenant’s prior written approval.

However beautiful the product, timing is key to the tenant. Relocating from existing premises may be time critical following service of a break notice, or accommodating business growth might be urgent, so a tenant will hope for a strict timetable to be built into the agreement for lease. In particular, the tenant will be looking for an absolute obligation on the landlord to procure that practical completion of the landlord’s works occurs by a specified target completion date. The target date might move if specified events occur that delay the landlord’s works, for example to address extensions of time granted under the building contract, insolvency or force majeure. Conversely, a landlord will look to limit its obligation to meet the specified date to one of reasonable endeavours and to provide for: legitimate reasons for delay caused by the tenant, such as default or a modification to the landlord’s works requested by the tenant itself; and the occurrence of any event beyond their reasonable control.

And, if the worst happens, the agreement should provide for remedies for the tenant for the delayed completion of the landlord works. Typically, these remedies are at first liquidated damages or a pushed back rent commencement date, moving through to the tenant’s right to terminate the agreement and be entitled to compensation for the nightmare scenario of practical completion not even achieved by a set long-stop date.

To provide greater flexibility and get a new building just how they want it, tenants will look for a right to request variations to the landlord’s works during the course of the build. There will be negotiation around the timing of those requests: at any time up to the target date for completion will say the tenant, at any time up to six months (or more) before the target date for completion will counter the landlord. Landlords will cost up the requested variations, predict timing changes to the build programme, and refer back to the tenant for the commitment to pay and bear the delay. In return, the tenant will have to supply sufficient detail alongside its request for the landlord to be able to adequately assess the consequences of the modification. There will be some circumstances in which the landlord will want to be able to refuse requests for variations out-right, and some circumstances in which a landlord’s refusal to incorporate a requested variation might be subject to a consultation and perhaps amendment process. Then the flip-side to a tenant’s requested modification is the issue of reinstatement of those works at the end of the lease. How likely is it that future tenants of the building will want a slide/ball pond/coffee-shop/bar/sound studio/double height ceiling, just like the first tenant?

Whilst the construction work is on-going for its new location, a tenant will look to secure sufficient visibility around the progress of the landlord’s works and to be sure that the landlord is committed to procuring that the works begin promptly and are diligently performed. Tenants typically have the right to attend all formal site meetings and to make representations in relation to the quality and progress of the landlord’s works. It is then for the landlord to procure that its employer’s agent gives due regard to the tenant’s concerns.

When it comes to the actual certifying of practical completion, a tenant will want to be entitled to attend the inspection, having been given due notice of when that inspection will take place. But more than just the right to turn up, the tenant should be entitled to make oral and written representations to the employer’s agent as to whether or not practical completion should be certified that day, and the landlord should be obliged to procure that its agent has all due regard to all such representations, often with the caveat that the representations will not fetter the employer’s agent’s discretion.

With increasingly complicated and "intelligent" buildings, there is increased attention around the commissioning process prior to practical completion. Many tenants now appoint their own commissioning engineer as part of their professional team and require weekly meetings with the landlord’s own commissioning engineer (the identity and terms of whose appointment is subject to tenant approval) in relation to plant and machinery, air-conditioning, water quality and lifts.

Then of course there is the issue of collateral warranties or third party rights in favour of the tenant. Nearly some 20 years since the Contracts (Rights of Third Parties) Act 1999 came into force, the market is still heavily weighted towards collateral warranties: an unnecessary weighting provided third party rights are correctly drafted. However provided, the agreement for lease should provide the tenant with a full security package from the landlord’s contractor, members of the professional team and any sub contractors with design responsibility. There will inevitably be push and pull as to the deadline for those warranties or third party rights notices to be provided: before completion of the lease, as a condition of completion of the lease, or within six months of completion but with a percentage rent reduction for each outstanding item. Whatever the obligation and sanction agreed, a tenant should seek to ensure that the landlord remains liable for providing any required but outstanding warranties or third party rights once the landlord is released from its obligations in relation to the landlord’s works, often at the end of the defects liability period.

These are just a few of the issues to be addressed in a development agreement for lease, but there are many more. The form of the building contract and professional team appointments, professional indemnity insurance criteria, even the identity of the contractor (in this post-Carillion world) may well be some of the other provisions to be drafted and negotiated. So, every landlord and tenant lawyer acting for a trophy tenant taking new premises off-plan needs a construction lawyer ally.

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