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Lease Language

With the construction of "big boxes" proliferating at an ever-increasing pace, it seems appropriate to address a number of the issues that landlords and tenants face with respect to development of such big boxes.

Taking the lead Once a landlord and tenant have agreed on the location for a new building, perhaps the first decision should be which party will construct the new building.

One option is for the landlord to construct the building to the tenant's specifications (a "build-to-suit" lease). With a build-to-suit lease, the landlord retains greater control over the development of its property and uses its existing knowledge of the site and local construction practices.

A second option is for the tenant to construct its building subject to landlord's approval and payment of a construction allowance (a "reverse build-to-suit" lease). With the reverse build-to-suit lease, both parties benefit from the tenant's experience in constructing virtually the same building in many locations.

A third option might be to use a combination of the build-to-suit and reverse build-to-suit options, whereby the landlord will perform the site work and the tenant will construct its building. This option often may be the most efficient because it combines the landlord's familiarity with the site with the tenant's familiarity with its prototype building.

Making plans The sooner the parties can get their respective construction personnel together, the better. Regardless of which party will be performing the construction, both parties need to get comfortable with the plans for construction as soon as possible, because, in addition to each other's approval, they must have the approval of the appropriate municipal planning authority in order to obtain permits.

In considering tenant's plans, a landlord will need to make certain that the new building conforms to the other buildings at the center and that the plans comply with existing restrictions placed on new development at the center. Typically, such restrictions will have been recorded against the site in one or more documents. However, a prudent landlord also should review the leases at the center to confirm that other tenants have not placed restrictions on development of the site.

In terms of plan approval from the tenant's perspective, a tenant will want to use its prototype to the greatest extent possible and will want to make certain that there is sufficient access, visibility and parking to meet its needs. A preliminary review of tenant's prototype plans (which most big-box tenants will be able to provide) will often bring any major planning issues to the forefront and is thus advisable early in lease negotiations.

Assigning liability Because of the increased probability of injury to persons and property during periods of construction, in a reverse build-to-suit context, it is important for a landlord to revisit the insurance provisions in a lease to confirm that it is adequately protected.

For example, a landlord should consider requiring that the tenant add comprehensive automobile liability coverage (particularly in light of the construction vehicles that will be at the center) and "builder's risk completed value form" coverage.

In addition, the landlord should confirm that the lease language requires that the tenant not permit contractors or subcontractors to begin any work until certificates evidencing all required insurance have been delivered to the landlord.

Paying the construction allowance In the reverse build-to-suit context, where the tenant is advancing funds for construction and is concerned with the financial capabilities of the landlord, the parties may want to consider providing a reasonable protective device to ensure that the landlord promptly reimburses the tenant.

Such protective measures might include: * having the landlord provide a letter of credit in the amount of the allowance;

* having the landlord place the amount of the allowance in an interest-bearing escrow account to be released to tenant upon satisfaction of enumerated conditions; or

* having the lease convert to a ground lease at a negotiated lower rent if payment is not made within a specified time period.

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