Contributed By McGuireWoods LLP
Tenants will incur various costs at the start of a lease, which will vary depending on the nature of the lease, the condition of the space, and the nature of their business. At a minimum, tenants must typically deliver a security deposit (usually in cash, but sometimes in the form of a letter of credit) and also the first one or two months of base rent and additional rent, although this will vary depending on the creditworthiness of the tenant.
Tenants may also incur costs for the buildout or upfitting of their space, to prepare the premises for use and occupancy. In many commercial leases, landlords will offer an “improvement allowance” that may be utilized by the tenant for the performance of its work. The terms of these allowances are heavily negotiated, but common features include requirements that (i) the landlord must approve all plans and specifications, and the identity of all contractors, (ii) the allowance may be drawn down by the tenant at regular intervals (usually monthly) only upon the delivery of invoices, lien waivers, and other customary documentation, and (iii) the allowance must be utilized within a fixed period (eg, one year). In addition, many landlords require that the allowance may be applied only to the “hard costs” of construction, as opposed to soft costs such as architects’ fees, moving costs, or furniture costs. In some cases, however, parties may negotiate for all or part of any unused allowance to be applied to offset the base rent or to be applied as a “refresh” allowance later in the term.