Ambiguity, Part 1

Curiosity may have killed the cat, but ambiguity would have landed the cat in litigation. In both good and bad economic times, one theme remains consistent in our practice: everyone wants to get their deal done quickly. In real estate, a property available today may be gone tomorrow if the seller or landlord has a better offer. With that being the case, our buyer and tenant clients are always concerned about getting bogged down in details that may slow the pace of a negotiation. However, since ignoring details leads to ambiguity in the document, we find that the additional time spent on specific issues serves our clients well in the long run.

One area that may elude focus is the work letter agreement, which is a document that is attached to a lease and describes each party’s obligations with respect to the construction of the space. Many landlords have a standard form that they prefer to use, but the danger, as with any form, is forgetting that each deal has its own idiosyncrasies. This can be especially true with respect to construction, as the parties may agree to take on certain responsibilities with respect to the work or the funding of the work that may not be typical to another deal.

confusing Yield sign.jpgWe suggest to both our landlord and tenant clients that they carefully consider the work letter agreement as it applies to the individual deal. During the negotiation process, each side should sit down with its architect and contractor to confirm that the document as proposed represents the space as envisioned at completion. This includes examining plans and specifications as well as all of the details listed in the work letter agreement, from electrical requirements to door hardware. They should also confirm that the party responsible for funding the expenses of construction, and the method for the other party to obtain such payments, is clearly explained in the document. If a tenant is building out its space and relying on the landlord to fund construction, then the tenant should be aware of exactly when the payments can be expected as well as the requirements imposed by the landlord and its lender that the tenant must meet before the funds can be released.

If the landlord expects to fund the improvements after completion and the tenant expects payment at lease execution or as construction progresses, that misunderstanding can lead to project delays and, as noted above, costly litigation. It is always better to spend more time before you sign a lease and work letter agreement to be sure that everyone is in agreement as to the terms rather than spending money later arguing over everyone’s intent.