by: Peter D. Morris CRX, SCLS, SCSM, SCMD
Greenstead Consulting Group
Specialists in Commercial Real Estate Training and Consulting
Space Preparation
This part is typically called the space build out or tenant improvements. Several different parties may be involved in this stage including your space planner, your general contractor, their sub-trades as well as the landlord’s contractors. Your designer and contractor should have already been selected before the landlord is ready to hand over the keys, and ideally before the lease was finalized. I say this because there may be some things in the design of the space that will affect the lease negotiation. The landlord will have a set of procedures outlined in the lease concerning the tenant’s space build out and may have a separate design guideline too. If these need modification the time to discuss it is before you sign the lease.
Don’t be surprised if the landlord requires a set of your construction drawings for approval. The landlord may be looking to see if the base building systems can support your requirements and the overall look and compatibility with the property and other tenants, in the case of a regional, enclosed shopping centre.
The landlord’s contractors may be involved if there is landlord’s work to do, or if the landlord is completing a build to suit or if your contractor needs to interface or tie into base building systems such as fire suppression, electrical mains, mechanical systems, etc. Most landlords don’t want tenants or their contractors touching the base building systems. Also be aware that the landlord may have several charges and fees that you will need to pay during the build out of the space, and these need to be negotiated too.
The landlord may require that you use their consultants such as mechanical, electrical and structural engineers and may require that you use unionized forces. It is a good practice to compare any landlord trades and consultants with other providers to ensure fair pricing.
While the space is being prepared, now is the time to make all the other arrangements regarding your occupation of the space. It is time to obtain permits, licenses, insurance, staff, stock in trade, fixtures, new utility accounts, equipment, signage; and in the case of relocation, notifying customers and stakeholders of the new location.
It is important in the lease negotiation step to be realistic about the timeframe to obtain permits, construct the premises and obtain any municipal inspections required during the build out. Most leases provide a specified fixturing period to build the space with either no or little rent paid, but once the fixturing period ends all the rent starts, whether you are ready to open or occupy the space or not. It is not uncommon for a 3-month fixturing period or even longer depending on the nature of the business.
Obviously, if the space is suitable as is, your fixturing period can be quite short. You will essentially just need to move in your fixtures, furniture and equipment as well as staff, inventory, etc. However, one word of warning about assuming existing improvements and fixtures. Have the landlord warrant that there are no encumbrances on those and to indemnify you if there are.
Here is an excellent case study of the importance to do this. A restaurant went bankrupt and the business owner simply walked out the door one night leaving everything as it was. The building owner advertised the location as fully fixture and ready to go. A new restaurateur signed a lease and opened in the location using all the bankrupt’s equipment, furnishings and fixtures. Shortly thereafter, the new restaurant owner received a letter from a bank stating they had a lien on all those items and demanded payment of the bankrupt’s outstanding loan balance in exchange for the fixtures. If payment wasn’t made, the bank would repossess all the fixtures, kitchen equipment, etc. effectively shutting down the new restaurant.
Ultimately, there was a negotiated settlement, but the new tenant suffered many sleepless nights, and felt the landlord and bank had hoodwinked him. All this could have been avoided — and the new restaurant owner could have been in a stronger initial lease negotiating position — had the lien been discovered at the beginning of the negotiation.