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Thursday, October 1, 2009

Buildout Allowance

FACTS: The tenant leased a property from a commercial Landlord. Part of the lease agreement was a building allowance of $699,000 to be paid by the Landlord for improvements. The tenant hired a contractor to do the improvements to the property. The Contractor accidentally demolished an unoccupied improvement on the property. Upon noticing their mistake the same day, the Contractor offered to remedy by either rebuilding the improvements or allowing for a credit for the value of the improvements. Instead of accepting one of the offered remedies the Landlord decided to withhold $301,000 of the tenant's allowance. When the tenant and the contractor sued for the allowance, the landlord counter-claimed for lost rent and replacement of the improvement even though the Landlord did not have a tenant for the demolished space and did not replace the demolished improvement.

COURT RULING: The Court determined that the Landlord's counter-claims were without merit; and that the Landlord and its counsel should have known of the meritless nature of the claim. Judgment was entered against the Landlord for $351,057.65 for the withheld allowance plus interest. The Court also sanctioned the Landlord the sum of $251,018.16 for attorney's fees and costs for the baseless counter-claim and defenses, which prolonged the litigation (Va. Code § 8.01-271.1).

ACTION ADVISE: A building allowance is an enforceable right of the tenant. If the landlord withholds payment for the allowance, it will need good cause to do so. Furthermore, if a landlord does not have a tenant for the demolished or damaged space, it should not withhold a building allowance on the basis of lost rent. If the landlord has no intention of rebuilding the damaged improvements, the landlord is not acting in good faith by charging the contractor for the repair cost. Finally, asserting baseless claims in a court proceeding can result in sanctions. Try to resolve these disputes out of court!

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