What Is a Work Letter in a Commercial Lease?

A work letter translates a promise like "the landlord will improve the space" into a process. Ballard Spahr describes it as usually an exhibit, schedule or separate agreement that sets out the condition of the premises at delivery, and calls that condition one of the most important parts of a lease negotiation.

Scope depends on the existing space and your intended use. Taking over offices from a similar company may need little work. An older building, a new shell or a change of use may need a lot more. Ballard Spahr suggests inspecting early and bringing in an architect or space planner, since costs should be estimated before signing and not only during later planning.

The work letter usually answers these questions:

• What work will be done, and how detailed are the plans at signing?
• Who performs and supervises it?
• Who pays for it, including overruns, fees and changes?
• Who approves plans, contractors and changes, and how quickly?
• What counts as complete?
• What happens if either side causes a delay?

The structure sets where the cost risk and the control sit. These labels can be used loosely, so read the actual terms.

• Turnkey. Scope is fixed before signing and the landlord delivers the finished space. Ballard Spahr says the landlord assumes the risk of cost overruns and gets the benefit of any savings. The protection is only as strong as the scope, so the plans and finish specifications should be attached.
• Tenant improvement allowance. The landlord contributes a fixed amount, often per rentable square foot, and it is built into the rent. The tenant pays any excess. Ballard Spahr suggests confirming the allowance covers the work, avoiding overruns the tenant did not cause, and seeking the right to use unused funds for items like furniture or moving costs.
• Optional allowance. An additional amount that works like a loan, repaid through base rent if you use it.
• Building standard. A landlord’s defined set of finishes and materials. It is not a deal structure by itself, but it can shape all the others. A "turnkey to building standard" offer may mean that anything better becomes an extra cost.
• As-is or no allowance. No landlord work is performed. You take the space as it stands and pay for any improvements.

Comparing a turnkey offer with an allowance offer is hard until both are priced against the same plan. A test fit and a contractor estimate turn two labels into numbers you can compare.

Either party can hire the contractor, and they often split the work. Ballard Spahr notes that a landlord’s contractor may be faster and cheaper because it knows the building, while tenants may prefer their own team. If the tenant builds, the landlord typically approves contractors, subcontractors and plans, and may require coordination with its own contractors.

Control and cost are linked. If the landlord builds with your allowance, you may have less visibility into pricing, so ask about competitive bids and access to cost information. If you build, you control more decisions but also take on more schedule and cost risk.

Two details are easy to miss. Landlords usually charge a construction management fee whoever performs the work, according to Ballard Spahr, so find out what the fee is calculated on and whether it comes out of your allowance. And tenants typically pay for their own change orders and resulting delays, so decide who at your company can approve a change and how quickly.

If the landlord is doing the work, Ballard Spahr adds that tenants may ask to attend construction meetings, inspect reasonably and audit construction costs. These rights are worth asking for because they cost the landlord little and make problems visible earlier.

Delays are the second major subject of a work letter, and the answer depends on who is building. When the landlord builds, Ballard Spahr says delivery usually means substantially completed or the tenant taking possession, whichever is earlier. When the tenant builds, the rent start date is usually fixed after a reasonable construction period, so the tenant bears the schedule risk and should seek extensions for landlord-caused delays.

Two delay definitions should sit side by side. A tenant delay moves the date against you, often because of late plan approval or change orders. A landlord delay should move it in your favor. Some leases use a deemed substantial completion date, meaning when the work would have finished without specified tenant delays, so rent can begin before the work actually finishes. A landlord delay extension may also require proof that the missed obligation actually postponed completion.

Ask for protection against a late delivery too. Ballard Spahr notes that tenants often set an outside delivery date that allows termination if missed, and that stronger tenants may negotiate rent abatement or reimbursement of holdover costs. Our guide to commencement dates covers how those dates fit together.

Tenant Advisory Group represents tenants and buyers, and on a build-out we work through the work letter with your architect and attorney alongside the rent terms, because each one changes the value of the other.

• ✓Are plans, specifications or finish schedules attached, or is the scope still a general description?
• ✓What finishes count as building standard, and how are upgrades priced?
• ✓Who pays for design, permits and project management, and can the allowance cover them?
• ✓What fee does the landlord charge, and on what amount?
• ✓Can the allowance be used for furniture, cabling or moving costs, and is there a deadline to use it?
• ✓How and when is the allowance paid, and what paperwork is required?
• ✓Who pays for code work or building conditions discovered during construction?
• ✓How quickly must each side respond to plans and change requests?
• ✓What exactly counts as tenant delay, and do we receive notice when one is claimed?
• ✓What defines substantial completion: an architect’s certificate, a certificate of occupancy, a walk-through?
• ✓Is there a punch list process, and a construction warranty on landlord work?
• ✓Can we enter early to install furniture and cabling without triggering rent?
• ✓Is there an outside delivery date, and what remedy applies if it is missed?
• ✓Does the landlord have the capacity to fund its promises, and does the lender’s SNDA disclaim them?

Ballard Spahr’s point about warranties and early access is worth noting. It says tenants should always obtain a construction warranty, usually one year, on landlord-performed work, and that early entry should not count as occupancy for rent purposes. Ask your attorney and architect to review the final language, since small definitions in this exhibit can move your rent date.