Every commercial buildout involves a fundamental question: which work does the landlord do, and which work does the tenant do? The answer determines who hires the contractors, who pays for what, and who bears the risk if construction goes wrong. Getting the division right in the lease prevents the finger-pointing that derails so many tenant improvement projects.
Landlord’s work and tenant’s work are defined in the lease, usually in a construction exhibit or work letter. Landlord’s work covers the base building elements the owner provides. Tenant’s work covers everything the tenant builds to customize the space. The line between them is negotiable, and where it falls has major financial consequences for both sides.
What Counts as Landlord’s Work
Landlord’s work typically includes the structural and base building systems: the building shell, roof, foundation, and common areas. It covers the main HVAC equipment, the base electrical service to the building, the sprinkler mains, and the plumbing risers. In new construction, it includes delivering the space in the agreed shell condition, whether cold shell, warm shell, or vanilla box.
The landlord also handles work required by building codes for the base building: fire alarm systems, emergency lighting in common areas, and accessibility compliance in lobbies and shared restrooms. These are the owner’s responsibility because they serve the entire property, not just one tenant’s space.
In some deals, the landlord’s work extends further. A turnkey deal makes the landlord responsible for completing the tenant’s entire buildout to approved plans. The tenant approves the design, and the landlord’s contractor builds it. Turnkey arrangements are common with creditworthy tenants and in markets where landlords want maximum control over construction quality in their buildings.
What Counts as Tenant’s Work
Tenant’s work covers everything inside the premises that customizes the space for the tenant’s business. This includes interior partitions, doors, flooring, ceilings beyond the base building standard, lighting fixtures, and wall finishes. It covers the distribution of HVAC, electrical, and plumbing within the space beyond the base building stub-outs.
Specialized improvements are almost always tenant’s work. A restaurant’s kitchen equipment and grease duct, a medical office’s exam room plumbing, a tech company’s server room cooling, and a retailer’s custom millwork all fall on the tenant’s side of the line. These improvements have value primarily to the specific tenant, so the tenant funds and manages them.
The tenant’s work also includes obtaining the permits for its construction, hiring licensed contractors, and complying with the building’s construction rules. The tenant bears the risk of cost overruns on its work unless the lease says otherwise. This is why accurate contractor estimates before signing the lease are so important.
The Gray Areas
Some items sit in a gray area that the lease must resolve explicitly. Demolition of the prior tenant’s improvements is a classic example. One side’s trash is not automatically the other side’s responsibility. The lease should state who demolishes, who pays, and what happens to materials with salvage value.
Restrooms are another common gray area. In a warm shell delivery, the landlord typically builds the base building restrooms. But if the tenant needs additional restrooms for its occupancy load, the extra ones are usually tenant’s work. The lease exhibit should show exactly which restrooms each party builds.
Exterior signage, storefront modifications, and patio areas also need clear assignment. A retail tenant may assume the storefront is its domain while the landlord considers it part of the building facade. Writing the division into the lease exhibit avoids a standoff mid-construction.
How the Division Affects Cost
Whoever performs the work controls the spending, at least initially. Landlord’s work is funded by the landlord and built into the property’s capital budget. Tenant’s work is funded by the tenant, often with help from a tenant improvement allowance paid by the landlord. The allowance is a fixed dollar amount, usually stated per square foot, that reimburses the tenant for approved construction costs.
The division affects cost control in subtle ways. Landlords building their own work use their own contractors at their own prices, which may be higher or lower than what the tenant could get. Tenants doing their own work choose their contractors but bear overrun risk. Each side prefers to control the work it understands best, which is why the standard division follows the base building versus interior split.
When negotiating, tenants should compare the total cost under different divisions. A larger landlord’s work package with higher rent may beat a smaller package with a big allowance, or vice versa. The comparison requires real contractor pricing, not guesses. This total-cost analysis is the same discipline behind smart rent negotiation, applied to construction instead of rent.
Allowances and Amortization
Tenant improvement allowances interact directly with the work division. The allowance reimburses the tenant’s work costs up to a cap. Anything the landlord agrees to build as landlord’s work reduces the amount the tenant needs from the allowance. Tenants should negotiate both the division and the allowance together, since moving an item across the line changes the dollars needed.
Some landlords offer to amortize improvement costs into the rent instead of paying a cash allowance. The landlord funds the construction and recovers it through higher rent over the lease term, often with interest. This can help tenants who lack upfront capital, but it increases the total rent obligation. Tenants should compare the amortized cost against funding the work themselves.
Coordination and Scheduling
When both sides are building simultaneously, coordination is critical. The landlord’s base building work must be complete before the tenant’s contractor can start on systems that connect to it. Electrical distribution cannot be wired until panels are set. Sprinkler branch lines cannot run until mains are in place. The lease should establish a sequencing schedule with milestones for each side.
Delays by one side cascade to the other. If the landlord’s work runs late, the tenant’s contractor stands idle, burning through the construction schedule. The lease should give the tenant remedies for landlord delay, typically day-for-day extensions of the delivery date and rent commencement. Symmetric protections for tenant-caused delay protect the landlord in return.
A single point of coordination helps. Many deals designate the landlord’s construction manager as the coordinator for base building interfaces, while the tenant’s general contractor runs the interior work. Regular coordination meetings during construction catch conflicts before they become expensive rework.
Quality Standards and Approvals
The lease usually gives the landlord approval rights over the tenant’s plans. This is reasonable: the landlord has a long-term interest in what gets built into its building. But the approval standard matters. A “reasonable approval” standard with a defined review period keeps the process moving. An unrestricted approval right lets the landlord stall the tenant’s construction indefinitely.
Material and quality standards should be spelled out. The landlord may require commercial-grade finishes, specific ceiling heights, or particular HVAC equipment brands. These requirements protect the building’s long-term value but add to the tenant’s cost. Tenants should get the standards in writing before pricing the job, not after the lease is signed.
Final inspections and sign-offs close out the work. The lease may require the tenant to provide as-built drawings, lien waivers, and certificates of occupancy before the landlord releases the final allowance payment. Tenants should track these deliverables throughout construction rather than scrambling for them at the end. Good documentation at this stage also simplifies the move-in inspection and the eventual move-out.
Disputes and How to Avoid Them
Most landlord-versus-tenant work disputes come down to ambiguous exhibits. “Landlord to deliver HVAC in good working order” means different things to different people. Detailed exhibits with drawings, specifications, and equipment schedules leave less room for argument. The extra effort during lease drafting pays for itself many times over during construction.
Change orders are the other major dispute source. When the tenant requests changes mid-construction, who pays and who approves? The lease or work letter should establish a change-order procedure with pricing rules and approval thresholds. Without one, every change becomes a fresh negotiation under deadline pressure.
The division between landlord’s work and tenant’s work is ultimately a business negotiation shaped by leverage, market conditions, and the physical realities of the building. Tenants who define the line precisely, price both sides accurately, and build in protections for delay and quality end up with a buildout that finishes on time, on budget, and ready for business.
