The idea of allowing a tenant to start to perform work in, or to move its equipment into a space before a lease is fully negotiated and executed is anathema to most landlords and lawyers. However, in the right circumstances this can be appropriate and necessary.
Situations arise where a tenant is negotiating to lease the space but has not yet executed a lease, or where the lease is executed but the parties are in a due diligence period during which the tenant can elect to terminate, or has a termination right after the period. A lease may be executed but the term of the lease has not yet commenced and may never commence because of various conditions, such as alterations that have not yet been approved by the appropriate governmental authorities or a lender has not yet executed an agreement.
Nonetheless, there can be numerous benefits to both parties to allow the tenant early access to the premises while one or more of these matters remain outstanding.
When a potential tenant asks for early access to the property, the landlord will likely have one of two reactions.
On the one hand, the landlord may feel that if the lease is not yet executed, there is a significant risk that if the lease is not executed, the tenant may make alterations that the landlord will later have to remove. Or perhaps the tenant will damage the space and leave the landlord with costs that the landlord would not otherwise incur.
In addition, the landlord may also believe that granting such early access to the tenant may give the tenant increased leverage in the lease negotiations, because it shows that the landlord has committed to the tenant and is at risk for expenses.
On the other hand, if the tenant is putting money into improving the space, it demonstrates both a moral and economic commitment to the space and the lease, which should give the landlord substantial comfort.
In fact, this can change the negotiating leverage in the landlord’s favor, because the landlord will require the tenant to restore any work or damage and that will be wasted money if the tenant elects not to go forward with the lease.
The tenant’s show of commitment changes the leverage dynamic of the deal because now the landlord knows the tenant is serious about completing the transaction and will incur costs if it does not go ahead.
The question then becomes, what obligation, or lack thereof, does such early work create on the part of the tenant to actually sign a lease? The answer to this question is not cut and dry.
Except in rare instances, the term sheet, letter of intent, or Early Access Agreement granting the tenant the right to access the premises prior to lease execution will contain a provision stating that this agreement is not a lease and that a lease does not exist until it has been executed and delivered. Additionally, that document will also state that the execution of this document does not create any obligation on the part of the potential tenant to go forward and negotiate a lease.
The execution of this document merely outlines the terms that the parties have agreed upon, serves as a roadmap for the drafting of the lease and establishes a moral obligation among the parties not to renegotiate the terms set forth in that document.
Of course, there are cases where there is a binding letter of intent or an agreement to negotiate good faith, but this is very rare. The middle ground can be to have a document or a separate agreement that is not binding as to the terms of the lease but is binding as to the issues related to early access.
As a general rule, as long as proper protections are included then there can be strong advantages to a landlord in giving a tenant an early access right. Some of the issues which should be addressed in the agreement are:
(1) the tenant’s obligation to restore;
(2) the posting of a security deposit or a guarantee by a creditworthy party;
(3) requiring that appropriate insurance and indemnities are in place;
(4) placing limits and strict parameters on the work to be performed, including rules about the performance of any invasive work or environmental sampling or remediation and setting a finite time frame for completion of the work;
(5) determining if the space can or cannot be restored to its prior condition and if appropriate requiring or giving the landlord the option to require such restoration;
(6) deciding if the landlord will have the right to keep some or all of the work if it deems it valuable and if the lease is not executed;
(7) deciding whether the early access right will be transferable (which would rarely be the case);
(8) providing a mechanism for resolution of disputes and;
(9) providing the landlord with remedies for a breach by the proposed tenant.
Taking into account both the possible risks and rewards, Early Access Agreements can be very favorable for both the landlord and the tenant if properly documented.
Jeffrey Moerdler is New York section head of the real estate and communication sections of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.