Build-Out Allowance Agreement Drafting Prompt

You are an experienced commercial real estate attorney tasked with drafting a comprehensive Build-Out Allowance Agreement that will serve as an addendum to an existing commercial lease. This transactional document establishes the terms under which a landlord will provide financial assistance to a tenant for initial improvements to leased premises.

Document Context and Purpose

Draft a Build-Out Allowance Agreement that clearly delineates the financial arrangement between landlord and tenant regarding tenant improvements. This agreement must protect the landlord's interests while providing the tenant with clear guidelines for accessing improvement funds. The document should be sufficiently detailed to prevent disputes regarding allowance usage, payment procedures, and completion requirements, while maintaining enforceability under applicable commercial leasing law.

Essential Document Components

Introductory Provisions

Begin with a formal document title and establish the relationship between this agreement and the underlying lease. Include the complete legal names of both landlord and tenant, the execution date of the original lease, and a clear statement that this agreement supplements and is incorporated into the lease. Specify the premises address and any suite or unit numbers to ensure absolute clarity regarding the location of the improvements. Draft language that confirms this agreement's status as an integral part of the lease, subject to all terms and conditions thereof except as specifically modified herein.

Allowance Amount and Scope

Articulate the precise dollar amount of the tenant improvement allowance, specifying whether this is a per-square-foot calculation or a lump sum. Define with particularity which costs qualify as reimbursable expenses under the allowance, including but not limited to hard construction costs, architectural and engineering fees, permit and inspection fees, and project management costs if applicable. Equally important, explicitly enumerate excluded costs such as tenant's personal property, trade fixtures, telecommunications equipment, security systems, furniture, and any specialty items unique to tenant's business operations. Consider including language addressing whether any unused portion of the allowance may be applied to rent credits or is forfeited, and specify the time period within which the allowance must be utilized.

Construction Management and Approval Rights

Establish the tenant's role as the party responsible for managing all aspects of the build-out construction while preserving the landlord's approval rights over critical elements. Require tenant to submit detailed construction plans, specifications, and drawings prepared by licensed architects or engineers for landlord's prior written approval, which shall not be unreasonably withheld. Mandate that tenant obtain landlord's approval of all contractors and subcontractors, with specific requirements that such parties maintain adequate insurance coverage naming landlord as additional insured. Include provisions requiring tenant to obtain all necessary governmental permits, licenses, and approvals before commencing work, and to conduct all construction in compliance with applicable building codes, ADA requirements, and landlord's building standards. Address coordination with building systems, required working hours, and tenant's obligation to minimize disruption to other building occupants.

Disbursement Procedures and Documentation

Detail a comprehensive payment procedure that protects the landlord from mechanic's liens while ensuring tenant receives timely reimbursement for qualified expenses. Require tenant to submit draw requests accompanied by detailed invoices from contractors, conditional lien waivers from all parties providing labor or materials, photographic evidence of work completion, and architect's certification that work has been completed in accordance with approved plans. Specify that landlord shall disburse funds directly to tenant's general contractor or, at landlord's option, issue joint checks to tenant and contractor. Establish a retainage percentage, typically between five and ten percent, that landlord may withhold from each draw until final completion and receipt of unconditional final lien waivers. Set forth reasonable timeframes for landlord's review and payment of draw requests, generally between ten and fifteen business days after receipt of complete documentation.

Cost Overruns and Additional Expenses

Clearly state that tenant bears sole financial responsibility for all costs exceeding the allowance amount, and that landlord has no obligation to provide additional funds regardless of circumstances. Address how change orders will be handled, requiring landlord's prior written consent for any modifications to approved plans that might affect building systems, structure, or common areas. Include provisions specifying that tenant must demonstrate financial ability to complete the project, potentially requiring tenant to deposit funds for anticipated overruns into an escrow account before work commences if the project budget exceeds the allowance.

Completion Requirements and Final Disbursement

Define "substantial completion" with precision, typically as the point when the premises are ready for tenant's intended use and a certificate of occupancy has been issued. Require tenant to provide landlord with written notice of substantial completion accompanied by a comprehensive completion package including final unconditional lien waivers from all contractors, subcontractors, and material suppliers; copies of all permits and final inspection approvals; as-built drawings showing the improvements as actually constructed; warranties and operating manuals for all installed equipment and systems; and photographic documentation of the completed work. Establish that landlord shall conduct a final inspection within a specified timeframe and release the final retainage only upon satisfactory completion of all punch list items and receipt of all required documentation.

Default and Remedies

Address the consequences if tenant fails to complete the improvements within the agreed timeframe or abandons the project. Specify that any allowance funds already disbursed for incomplete work may be treated as a loan to tenant, immediately due and payable, or alternatively may be offset against future rent obligations. Include provisions allowing landlord to complete the work using the remaining allowance funds if tenant defaults, with any excess costs becoming immediately due from tenant as additional rent.

Signature Block and Execution

Conclude with a formal signature block containing spaces for authorized representatives of both landlord and tenant, including printed names, titles, and dates of execution. Include acknowledgment language confirming that signatories have authority to bind their respective entities. Consider whether notarization is advisable based on local recording requirements or institutional lending considerations.

Drafting Standards and Tone

Employ clear, precise legal language appropriate for a commercial real estate transaction while avoiding unnecessary legalese that may obscure meaning. Use defined terms consistently throughout the document, capitalizing them after initial definition. Structure the agreement with numbered sections and descriptive headings to enhance readability and reference. Maintain a balanced tone that protects the landlord's interests while remaining fair and commercially reasonable to encourage tenant acceptance. Ensure all monetary amounts, percentages, and timeframes are presented as bracketed placeholders for customization to the specific transaction.

Legal Considerations and Risk Mitigation

Incorporate provisions that minimize the landlord's exposure to mechanic's liens by requiring comprehensive lien waivers at each payment stage. Address insurance requirements, including builder's risk coverage during construction and ongoing commercial general liability coverage. Consider including provisions regarding hazardous materials, requiring tenant to warrant that no hazardous substances will be used or stored in connection with the improvements except in compliance with all environmental laws. Ensure the agreement addresses what happens to the improvements at lease termination, typically specifying that they become landlord's property, and whether any removal or restoration obligations exist.

Draft this agreement as a standalone document that can be attached as an exhibit to the underlying lease, with clear cross-references ensuring integration between the two documents.