Don’t Get Burned After Pre-Lease Expenditures

Not all prospective tenants need architectural plans right away. But sometimes a prospective tenant needs to occupy new space so quickly that it wants you to start the buildout process before it signs your lease. You might agree to authorize your architects and engineers to prepare plans for the buildout to accommodate the tenant’s needs and severe time constraints. After all, you expect the prospective tenant to sign your lease. But if the tenant disappears after your architects and engineers prepare the plans, you’ll be burned by that problem.

Especially if you’ve had a hard time filling that space, you might be hesitant to push the tenant to do anything it doesn’t want to. But remember that, when a tenant is up against time constraints, it gives you the leverage you need to protect yourself.

Draft Indemnification Agreement

So try to not start the architectural and engineering plans process without a lease—but if you must, draft an indemnification agreement. An indemnification agreement can help you avoid paying for a prospective tenant’s unused architectural and engineering plans. Among other key points in the agreement, you should:

• Require the tenant to give a security deposit upon signing the agreement; and
• Require reimbursement of enforcement costs if you must pursue the tenant later.

Don’t Factor ‘Fault’ into the Equation

Don’t let the tenant shift costs based on fault. The big question for each deal is whether the tenant will accept the indemnification agreement. If it does, be prepared for the tenant to try to limit its reimbursement obligation to those situations where it causes the lease deal to fall through. It may argue that if the lease falls through because you dropped the ball, it shouldn’t have to reimburse the architectural and engineering plan costs.

Giving in to this argument could lead to disputes over who actually dropped the ball on the lease deal, thus delaying your reimbursement. If a prospective tenant is adamant, remind it that you don’t typically start the plans process before a tenant signs its lease; you’re agreeing to start the plans process to accommodate this prospective tenant’s time constraints and, therefore, the prospective tenant should bear the risk if the deal falls through—for any reason.

For a full list of the key points to include in this type of indemnification agreement, see “Ensure Reimbursement for Pre-Lease Plans When Deal Falls Through,” available to subscribers here.