Build-to-Suit Leases: A Construction Contract and a Lease Merged into One

One of the hybrids in real estate practice is a build-to-suit lease. It is both a construction contract and a lease combined into one document. A practitioner must focus both on issues arising in lease negotiations and on construction contract issues when drafting and negotiating a build-to-suit lease. This article will address the construction-related issues of build-to-suit leases.

What Is a Build-to-Suit Lease?

A "build-to-suit" lease has various definitions. The simplest definition is any lease that references some construction to meet the tenant's requirements. This construction can range from adding minor tenant finish items to a general business office to the full design and construction of a new building particularly suited to the tenant's business needs. Some examples of leases with a build-to-suit component (and varying levels of complexity) include minor building renovations, major renovations such as moving walls or expanding the premises, tenant finish of a shell space, cookie-cutter type construction of a standard building, such as a chain retail store or restaurant, and architectural design and construction of a special use building optimized for a particular site such as a manufacturing plant, corporate campus, or a one-of-akind architecturally significant office.

Minor construction on an existing building is typically handled by adding a simple work letter to a standard lease agreement. Typically, these work letters become longer and more detailed as the level of construction increases. For a full design and construction lease, the work letter can approach the complexity of a full construction contract. In effect, the parties are entering into two related transactions. The tenant is contracting with the landlord for the construction of a significant building and is at the same time entering into a transaction to lease the newly constructed building, usually for a substantial period of time. Construction concepts also tend to become more integrated into the actual lease document (as opposed to the work letter) as the construction becomes more integral to the transaction.

This article focuses on leases of new buildings to be designed and constructed under the lease. Transactions of this type necessarily involve numerous aspects of both a lease and a construction contract. References to build-to-suit leases in this article will refer to ground-up construction projects and may or may not apply to leases...