Negotiating Work Letter Simultaneously with Lease

Q: I’m about to start negotiating with a prospective tenant for office space that will require a substantial buildout by me before the tenant moves in. To protect itself, the tenant has asked to negotiate a detailed, comprehensive work letter. I understand that some owners wait until the rest of the lease is negotiated before starting work letter negotiations. But I’ve heard nightmare stories of snafus during work letter negotiations that sank entire deals. When should I start negotiating a work letter with this tenant to avoid wasting time and money like that?

A: Try to start negotiating a work letter as soon as you start negotiating the rest of the lease. The work letter, which is typically an exhibit to the lease, is one of the most important parts of the lease. That’s because it covers one of the few situations in a lease that will actually occur. That is, while lease negotiations focus on clauses covering events—such as assignment and subletting—that may never occur, the work letter covers an actual event—construction of the tenant’s space. But many owners and tenants may not fully understand what a work letter does or says. So they wait until the end of lease negotiations to deal with it.

Don’t wait until the end of lease negotiations; it’s important to negotiate the work letter simultaneously with the rest of the lease rather than at the end for two reasons. First, the work letter covers some of the most important business and legal issues in the entire lease, issues that potentially could raise serious disputes between you and the tenant. The later you wait to negotiate the work letter, the greater the loss of time and money if the deal is ultimately terminated or severely delayed by a work letter-related dispute.

Second, often architects and contractors have to provide their input for a work letter—and they could take a lot of time in doing so. Getting those parties involved with the work letter at the end of lease negotiations will unnecessarily delay the lease’s finalization. The earlier the work letter is negotiated and those parties can provide their input, the earlier the lease can be finalized and you’ll start receiving rent from the tenant.