In a series of three articles we intend to look at pre-letting agreements. The scenario that we will be considering is that a landlord is developing its own site without external funding for its tenant who will occupy the resulting investment on a lease at a full market rent.
There are a number of often quite difficult issues particularly relating to development that a landlord must address to achieve its objective of an investment with a minimum of ongoing liability attracting to a landlord.
Building obligations
A major area of discussion in a pre-letting agreement will be the building obligations placed on a landlord. Typically a landlord will accept an obligation to complete or procure that the building will be completed "in a good and workmanlike manner" or in a "proper and workmanlike manner" in accordance with building practice and using good quality and suitable materials. A landlord will be extremely anxious to make sure that its development obligations are mirrored in the building contract that a landlord will have with its contractor. Although landlords may be prepared to accept primary liability to a tenant for building obligations, he must ensure that its obligations are covered generally.
The tenant, dependent on the timing of the development, may want to exercise some control over the selection or subsequent replacement of the building contractor and the other professionals or consultants employed by the landlord. This should be limited as a landlord does not want any timing issues to arise in obtaining approval of contractors. Obligations will be placed on a landlord to procure suitable warranties. The extent to which all of the consultants and professionals will have to provide warranties will be dependent on the nature of the building contract entered into by a landlord. A topical issue is whether or not sub-contractors should themselves provide separate warranties as often their areas of responsibility are in turn covered by the contractor.
A landlord having procured a full set of warranties for a tenant and having ensured that the building has been practically completed will be anxious to secure its release from all of its building obligations under a pre-letting agreement. Without a specific release a landlord will remain potentially liable to its tenant for a period of 12 years. Landlords are understandably anxious to escape from this residual liability and a release clause is normally fiercely negotiated in a pre-letting agreement.
Variations
Procedures will be negotiated permitting a tenant to request variations to the agreed specifications. Landlords must be extremely careful to ensure that such variations, which can be very extensive will not prejudice a landlord's other obligations under the agreement for lease. The time periods and the timing of a landlord's obligations generally must be carefully considered with a tenant being very clearly obliged to reimburse the landlord the additional cost of any such variations.
A landlord will in turn wish to have an ability to vary the specification within the building contract should materials not be readily available or through any factors beyond its control, for example, unexpected conditions attaching to a planning permission. Landlords must be very careful not to get put in a position where they are obliged to carry out works within the specification where they cannot legally do so.
Timing
Tenants will want certainty as to the development of their buildings for good operational reasons. A landlord will be extremely nervous at being legally obliged to deliver a building on an absolutely fixed date. There are many factors which could prevent a landlord delivering a building on time including unexpected planning conditions, damage to the construction work in the course of construction, insolvency of a contractor, unavailability of materials and which are not necessarily due to the fault of a landlord and most certainly are outside its control.
The way in which the often irreconcilable difference between a landlord and tenant as to timing is resolved will depend on the respective negotiating positions in a specific transaction. A typical solution will be for the landlord to be obliged to do all possible to meet certain dates without being under an absolute obligation to do so. The penalties for not achieving specified dates will often be specific sums of damages for each week of delay. Although such damages will not compensate a tenant for loss of potential profit or any other day to day trading factors, they may well prove a suitable incentive for a landlord and its contractor to do all possible to deliver the building on time.
The negotiation of a long stop date permitting the agreement for lease to be rescinded is likely to have similar problems on both sides. A landlord having committed significant expenditure will want to make absolutely sure that he is covered even in the event of total destruction of his works close to completion.
For further information please contact Jon Vivian on 0171 367 2116 or by e-mail at jmv@cms-cmck.com.
