Commercial Leases: Dividing Lines

Fine-tune project parameters to reduce risk:

This issue's focus brings to mind the potentially complex interaction of the design and construction of base buildings with tenant build-out arrangements. Electrical contractors retained to perform work on either scope need to understand the precise contours of their responsibilities, which include determining the contracting entities, the parties arguably relying on your work and the parties who can sue in your jurisdiction. Commercial facility work, while lucrative, may have hidden risks depending on your jurisdiction when the landlord/tenant overlay is added to the analysis.

Basics of commercial leases
The lease defines the geographic scope of the premises, the base rent and extra rent obligations incurred by the tenant for leasing the premises. It defines the length of time it is in effect, and it often provides for extensions or options after the expiration of the term of the lease. In addition, commercial leases often contain important provisions, which contractually define the respective obligations of the landlord and the tenant with regards to the condition, design, construction and maintenance of the premises. The lease may contain express limitations on the use of the premises, the use of signage and the premises and its conditions. A failure to adhere to these guidelines may trigger liability. Leases often include contractual indemnification provisions, which give either or both parties remedies to recover for damages to premises, property, persons or for breach of obligations in the lease.

Base building work and build-out
The base building is generally designed and constructed by entities performing work for the owner. After completion of that phase of work, and sometimes concurrent with the its scope, tenants perform build-out work within their leased space. The landlord/owner is responsible for the base building work, and the tenants are responsible for the build-out work. These responsibilities may shift, however, depending on the contracts. The law and facts often do not present such clean distinctions. Base building electrical work may actually cause difficulties or even damages to the leased premises if performed improperly. Naturally, the reverse is true as well. The specific terms of the commercial leases at issue may also have an impact on legal responsibilities. For example, while the tenant may only actually perform build-out work, an overly broad scope of indemnification in the tenant’s lease may actually offer broader liability for portions of the landlord’s scope of work.

Interplay of construction
You may not be concerned with the lease terms. It is tempting for an electrical contractor to say, “I do not care what the tenant or landlord agrees to because that is not my deal.” This is a dangerous path. Many construction contracts contain indemnification language, which provide that the electrical contractor indemnifies a party against matters “arising out of or relating to” the contract. This form of indemnification provision may be interpreted more broadly than a contractor may anticipate. A court might hold that a landlord’s or tenant’s indemnity obligation under the lease is tied sufficiently to the electrician’s work to trigger indemnification and defense obligations.

Who are possible claimants?
Another issue with retail is the scope of potential claimants. If you are working in a state where courts require a contractual relationship to sue for economic loss, you are somewhat insulated from claims outside of the party with whom you contract. If, on the other hand, your state permits a broader range of parties to file suit, you may actually end up liable to the landlord when you are working only for the tenant. Given the possibility of design and construction conflict that is inherent in the base building versus build-out context, you need to know, evaluate and understand these risks before you do the work and sign the contract—really before you even bid and price the job.

Commercial projects offer a potentially lucrative market for electrical contractors. Retail in particular brings with it certain risks due to the split between base building and build-out work responsibilities. Contractors should be familiar with the underlying leasehold issues and the state-specific laws to evaluate the meaningful costs and benefits of these projects. 

This article is not intended to provide specific legal advice, but instead as general commentary regarding legal matters. You should consult with an attorney regarding your legal issues, as the advice you may receive will depend upon your facts and the laws of your jurisdiction.

HUGHES ESQ. is the principal of the Northern Virginia law firm of Hughes & Associates, P.L.L.C., He may be reached at HANSEN is an associate with Hughes & Associates. He may be reached at or at 703.671.8200.



About the Author

Bradley J. Hansen

Freelance Writer
Bradley J. Hansen is an attorney with the Northern Virginia law firm of Hughes & Associates, P.L.L.C. He may be reached at or 703.671.8200.

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