Speculative Suites Are On the Rise: 5 Lease Provisions Landlords Should Consider

In today’s office leasing market and with recent construction challenges, landlords are seeing a competitive market advantage in developing and offering speculative suites to attract tenants.

In recent years, many companies have faced uncertainty over their space needs, particularly with work-from-home arrangements for employees gaining popularity. In addition, construction has become challenging with labor and material shortages increasing, supply-chain issues, and inflationary price increases. These factors, combined with approaching lease expiration dates, have resulted in tenants wanting turnkey office space quickly.

Speculative suites are a viable solution to this problem and are becoming increasingly popular. Speculative suites are usually “move-in ready,” with little to no design decisions to be made by the tenant. Often, the construction of the speculative suite is either completed or approaching completion at the time of lease execution. For tenants, this reduces their risk of late delivery/commencement and gives them the ability to visualize the space they will be occupying. For landlords, the risk of construction running late or over budget is minimal given that the landlord is in control of the construction process. Office furniture and other appliances are often included as part of the speculative suite package, further reducing tenant decision-making over space needs and increasing the tenant’s ability to step into a fully completed space ready for their occupancy.

However, as office building landlords integrate speculative suites into their business plans, they should consider certain protections and concessions in the drafting of speculative suite leases.

1. Build-Out. In office leases where the build-out has not commenced or will not be completed prior to lease execution, the parties should consider attaching a work letter to memorialize key phases of the construction process. Work letters for speculative suites should have minimal (or no) tenant input over the selection of consultants, engineers, and contractors, approvals over plans and specifications, or the selection of materials and finishes. The landlord may require a statement that the tenant has approved all preliminary plans and that the landlord will build out the speculative suite using the landlord’s personnel and building standard materials without tenant input or approval. Tenants may ask for landlord representations as to the quality of the work and that the landlord remain responsible for space compliance issues arising from the initial build-out. One solution to limit the landlord’s exposure for such representation and compliance costs, is for the landlord to agree to instead obtain a construction warranty from the general contractor performing the build-out and either enforce the warranty on behalf of the tenant or assign the warranty to the tenant.

2. ADA compliance. Generally, in office leases where the tenant takes the premises “AS-IS”, the landlord is responsible for compliance with the Americans with Disabilities Act (ADA) in the common areas, and the tenant is responsible for compliance with the ADA within the premises. Tenants typically push for some sort of representation from the landlord that the landlord is not aware of any ADA compliance issues in the premises or common areas serving the premises; however, the landlord typically does not take on any compliance costs with respect to the premises. For newly built-out speculative suites, however, since the landlord controls the initial build-out, tenants may require that the landlord warrant that the premises is ADA compliant. A standard compromise here is to make the landlord responsible for rectifying ADA compliance issues in the premises to the extent the same are required as of the date the premises are delivered to the tenant. The tenant would remain responsible for all ADA compliance necessitated by the tenant’s use of the premises after a tenant takes possession.

3. Furniture. Landlords will often deliver speculative suites fully furnished. The furniture for the speculative suite will then be leased to the tenant during the term. Landlords should make it clear in the lease that it is the tenant’s responsibility to take good care of the furniture, maintain the furniture, insure the furniture, and pay all property taxes on the furniture. The tenant surrender obligations should expressly require the tenant to return the furniture to the landlord in good condition at lease expiration or earlier termination.

4. Alterations. A standard provision in office leases is the requirement that all tenant improvements and alterations performed during the term of the lease be subject to the landlord’s prior approval. Tenants often request that such landlord’s approval not be unreasonably withheld and not be required for cosmetic changes. However, because the landlord is putting a significant investment in the speculative suite, it has a vested interest in maintaining the building-standard improvements, so for speculative suite leases, the landlord may want to consider taking the position that all alterations and improvements are subject to landlord’s approval, which approval may be withheld in the landlord’s sole and absolute discretion. Landlords may also be reluctant to allow tenants to perform cosmetic alterations without landlord approval. If a tenant pushes for minimal cosmetic work, such as new paint and carpet, landlords should make it clear in the lease that, upon surrender, the tenant must restore the premises to the condition in which it was delivered.

5. Market terms. For any lease provisions that are determined based on “market terms” for the premises, such as renewal options or rights of first offer, it would be prudent for the landlord to tailor the definition of market terms to speculative suites. Specifically, “market terms” should capture the landlord’s initial investment in the speculative suite so that allowances and other concessions are properly accounted for. Given that investments in speculative suites vary across buildings, landlords may want to push for “market terms” to be determined based on other speculative suites in the landlord’s building and not in the general building submarket.

Speculative suites can be an efficient and appealing solution for landlords looking to redevelop tired space in a building and turn it into an attractive alternative for tenants not looking to undertake a build-out of their own, but landlords should be careful to protect their investment and craft the lease accordingly with these considerations in mind.