Landlord Work vs. Tenant Work: How Commercial Work Letters Divide the Job
Almost every Houston commercial lease that involves construction has a work letter attached. It is often an exhibit near the back of the lease, and it is often the part that gets the least attention during negotiation. Then construction starts, and the work letter becomes the most-read page in the deal. It decides who builds what, who pays for it, who gets the permit and what happens when something goes wrong.
This FAQ explains how work letters divide a project into landlord's work and tenant's work, and what owners and tenants should look for. It is general information, not legal or leasing advice. Have your broker and a real estate attorney review the actual documents.
What is a work letter?
A work letter is the part of a lease that describes the construction needed to get a space ready for the tenant. It typically covers the condition the landlord must deliver, the improvements each party is responsible for, how plans are approved, how costs are paid and how the schedule ties to rent. A comparison from Owners Rep NY describes how landlord's work letters differ from tenant-managed improvements.
What is landlord's work?
Landlord's work is the construction the landlord agrees to perform, usually before the tenant takes possession. It often includes items such as:
- Base building systems in working order: roof, structure, main electrical service, plumbing stub-outs and HVAC.
- Demising walls separating the space from neighbors.
- Code-required base building items, like accessible restrooms in common areas.
- Specific improvements negotiated for the tenant, such as a new storefront or restroom.
The more specific the description, the fewer arguments later. "HVAC in good working order" is better than "existing HVAC," and an engineer's report on capacity is better still.
What is tenant's work?
Tenant's work is everything the tenant builds after the landlord delivers the space: interior walls, finishes, millwork, specialty electrical and plumbing, low-voltage cabling, signage and equipment. The landlord usually approves the tenant's plans and contractor, and the tenant pays for the work, sometimes with an allowance from the landlord. Our guide to turnkey vs. allowance tenant improvements explains how allowances are structured.
What does "delivery condition" mean?
Delivery condition is the state the space is in when the landlord hands it over. Brokers often use labels like cold shell, warm shell or second-generation space, but those terms mean different things to different people. The work letter should spell out the actual items: floor slab condition, ceiling, lighting, HVAC distribution, restrooms, fire sprinkler layout and electrical panels. If the space is second-generation, list what stays and what is removed. Our guide to second-generation space covers what is often worth reusing.
Who pulls the permit?
Usually the party performing the work. In the City of Houston, interior finish-out of commercial lease space is typically permitted under a Buildout Permit, and a Certificate of Occupancy is generally needed before the tenant opens. When landlord's work and tenant's work overlap, the work letter should say which party is responsible for each permit, inspection and the final certificate. Our guide to certificates of occupancy for Houston lease space explains that process.
Who pays for code upgrades triggered by the tenant's work?
This is one of the most common disputes. A tenant's buildout can trigger upgrades the landlord did not plan for, such as accessibility improvements, fire alarm changes or sprinkler modifications. Federal accessibility rules are in the 2010 ADA Standards for Accessible Design, and Texas runs its own accessibility program through the TDLR Architectural Barriers program, which covers registration, plan review and inspection for many projects. The work letter should state who pays for code items inside the premises, in common areas and in base building systems.
How are plans approved?
Most work letters set up a sequence: the tenant submits a space plan, then construction documents, and the landlord approves or comments within an agreed period. Look for:
- Required submittals and the level of detail.
- Landlord review periods and what happens if the landlord does not respond.
- Building standards for finishes, ceilings, doors and hardware.
- Requirements for the tenant's architect and engineers.
How does the schedule tie to rent?
Many leases link the rent start date to substantial completion of landlord's work, the tenant's opening or a fixed date. The work letter should define substantial completion, describe what happens if the landlord's work is late and say whether tenant delays move the dates. Delays caused by permitting, long-lead equipment or unknown conditions should be addressed directly.
What about change orders?
Changes during construction are normal. The work letter should explain how changes are requested, priced and approved, and who pays. A tenant change to landlord's work usually means the tenant pays the added cost. A required change because of hidden conditions in the base building often falls to the landlord. Write the process down before construction starts.
Who can the tenant hire?
Landlords often require tenants to use approved contractors, carry specific insurance and follow building rules for deliveries, noise and after-hours work. Some landlords require their own contractor for roof penetrations, fire sprinkler and fire alarm work to protect warranties and life-safety systems.
How are liens and payment handled?
Unpaid contractors on a Texas project may have lien rights against the property under Texas Property Code Chapter 53. Landlords typically require lien waivers from the tenant's contractors before releasing allowance payments. Tenants should expect to provide invoices, waivers and proof of payment.
What should closeout include?
Closeout should include a punch list, permit finals, the certificate of occupancy, warranties, as-built drawings and a final accounting of any allowance. Our punch list process guide shows how to run that walk.
How can a contractor help before the lease is signed?
A contractor can walk the space during lease negotiation, compare the existing conditions with the tenant's needs and identify base building items that should be landlord's work. That early review gives both sides a clearer picture of the scope before the work letter is final. Our tenant improvement cost drivers guide explains what typically moves the budget.
Reviewing a work letter or planning a buildout? BPC Development LLC provides free on-site estimates in Houston, TX. Call (281) 301-4737.