Pre-letting agreements, Part III - The landlord’s perspective

Completion

The basis upon which a landlord can be deemed to have completed its building works is one of the most important and occasionally contentious issues within a pre-letting agreement. A landlord's preferred position will be to permit a landlord's agent to certify that building completion has taken place for the purposes of the pre-letting agreement. Due regard may be had to objections from the tenant's surveyor as to why practical completion should not take place.

A tenant's surveyor would not be able to prevent the certificate being issued for the purposes of the pre-letting agreement. Although this typically will cause certain tenants problems, practically speaking a landlord will be careful to ensure that a certification under its building contract with its contractor has taken place. Tenants will argue that a joint certification of practical completion is more equitable. This can cause landlords severe difficulties in imposing identical obligations within their building contracts. Tenants need to be aware that a joint certification of practical completion could lead to landlords lengthening the period for completion of the works and being extremely wary as to agreeing any fixed period for building.

In any event, it is important that a pre-letting agreement is drafted to allow for all of the practicalities of inspection and re-inspecting the landlord's works prior to practical completion. A reasonable period of notice should be given with a much shorter period for any reinspection.

If a landlord is forced to concede joint certification of practical completion, there should be an ability to refer to a third party for determination of completion on a fast track basis. Any delay in appointment of an arbitrator or expert could be potentially disastrous to a landlord.

Completion of lease
The date of actual completion of the lease to its tenant is likely to be an extremely significant date for a landlord for a number of reasons. It may trigger the commencement of any rent free period granted to its tenant; if funding is being obtained, a significant part of this may be released to a landlord on grant of the lease. Most importantly, it will signify to a landlord that (subject to the rent free period expiring) an investment has been created.

Typically, a tenant will argue that the grant of the lease will be subject to a number of pre-conditions, for example, the obtaining of collateral warranties, supply of as built drawings and the grant of a licence to alter authorising the tenant's works. Landlords need to be very careful to resist these pre-conditions, particularly where third parties are involved. A delay in the obtaining of a relatively unimportant collateral warranty should not prevent completion of the lease. Often a tenant will already be in occupation fitting out and will have absolutely no incentive to execute this critical document.

A landlord should not forget about completion of a licence for alterations dealing with its tenant's fit-out works. It is most important that this document should fairly reflect these works and whether or not they will have any effect on rent review.

A landlord should remember to deal with the issue of insurance as typically the contractor's insurance will terminate on practical completion of the building contract with the tenant maintaining that its responsibility will not arise until completion of the lease. Payment of insurance premiums and insurance charge should be dealt with on completion of the lease.

Long Stop Date
This issue, although referred to in our earlier article, is a potentially critical one for both landlord and tenant. Ideally a landlord would want to see a long stop date inserted which would enable it to rebuild the property in the event of fire or other destruction occurring immediately before the intended initial date for practical completion. In practical terms, tenants' own business requirements will often not allow them to grant landlords such a lengthy date. The discussions over long stop dates will invariably contain an element of compromise. A landlord may well have to adopt some risk to secure its tenant.

Termination
The capital expenditure and other obligations under a pre-letting agreement are primarily the landlords in the stages of construction. A tenant's capital expenditure on fit-out and subsequent outgoings under the lease are likely to occur at a later stage. A landlord therefore needs to be very careful over the general issue over covenant of its tenant. An ability to terminate on a tenant's insolvency will almost invariably be required.

Often pre-letting agreements will contain abilities to terminate on material breach of obligations. Landlords need to be aware that almost invariably the obligations under a pre-letting agreement are on a landlord and that such a provision could lead a tenant to be able to walk away from a pre-letting agreement with potentially disastrous results for a landlord.

In general terms, a landlord needs to view any provisions of a pre-letting agreement relating to termination extremely cautiously as the very serious consequences of these provisions being invoked could prove extremely expensive.

CONCLUSION
Within the last three articles, we have tried to look at one or two of the main areas of discussion between a landlord and a tenant in interpretation and completion of pre-letting agreements. Possibly the most difficult area is that of timing in a landlord being asked to guarantee that a building is delivered absolutely on time to facilitate a tenant's business strategy. Understandably tenants are concerned where latitude on timing is requested. Landlords are concerned that factors beyond their control could lead to very serious consequences in the event of a delay. Invariably a compromise is negotiated.

For further information please contact Jon Vivian on 0171 367 2116 or by e-mail at jmv@cms-cmck.com.