Negotiate Protections if You Pay TIA in Installments

It’s not uncommon for tenants to plan to spend more than you’ve agreed to pay for a tenant improvement allowance (TIA). Owners have a dual goal when providing a TIA: It entices tenants to lease the space and, by being updated, the space is more valuable overall. But generally it takes some time—several weeks to several months—to complete a buildout in a commercial space. Ideally, the tenant would complete its improvements, the space would be ready to go, and you would reimburse it for your share. But a tenant, and especially one that doesn’t have deep pockets, could be nervous that you won’t come up with your share of the cash in the end. You could give the tenant the lump sum of the TIA before the project starts, but in that scenario, you risk a wrench being thrown into the works: The tenant could run out of money during the course of the buildout, but you would’ve already sunk your money into improvements that may never be finished unless or until the tenant comes up with more funds, and you could ultimately be the party that’s forced to finish the space.

A popular compromise for an owner in this situation is to agree to make conditional “progress payments”—that is, partial payments of the TIA over the course of the buildout. Every month or so during the buildout, the tenant will apply to you for a progress payment. You’ll make the progress payment, but only after getting proof from the tenant that the buildout work up to that point has been performed correctly. This pattern will continue until the TIA is used up or the buildout is finished, whichever occurs sooner.

But what happens if the tenant hasn’t done its buildout work correctly or doesn’t deserve a payment? You have several options to protect yourself if you agree to a conditional progress-payments compromise. For example, make sure to set conditions for payment. Ask the tenant to meet these before you will make a progress payment (excluding the final progress payment) of the TIA during the tenant’s buildout:

• Tenant can’t be in default. The tenant can’t be in default of the lease when a progress payment is requested and due.
• No mechanic’s lien is filed. No outstanding mechanic’s lien can be filed against you, the tenant, the space, or the building.
• Tenant must submit required documents. Require the tenant to give you items such as a requisition for payment, architect’s certificate, itemized bills from its architects, contractors, and other professionals, and mechanic’s lien releases from the professionals it has worked with, confirming that the materials, services, and work have been paid for.
• Tenant must give you adequate time to review documents. Build in some time—for example, 30 days—after you get the documents from the tenant before you have to make a payment.
• You’re not obligated to make more than one payment a month. Don’t make more than one progress payment in a calendar month.

For five more protections and a Model Lease Clause that will help you avoid being forced to make a progress payment when the tenant doesn’t deserve it, see “Strike Progress Payment Compromise for Shared TIA Expenses,” available to subscribers here.