When the Rules Change Mid-Build

Recently, a client encountered a challenging situation while constructing its new office, one I have not seen in more than 30 years of tenant advisory.

The landlord modified its construction rules and regulations to prohibit noise-producing work during regular business hours.

The problem: our client’s construction project had been planned based on the rules in place when the lease was executed, which did not include the same restrictions. The project budget did not contemplate extensive overtime for after-hours work, nor did the schedule anticipate the complications such a change would create.

Interestingly, it is common for the section of a lease dealing with construction, often called the Work Letter, to incorporate the building’s construction rules and regulations, including rules that may change from time to time at the landlord’s discretion.

Typically, those rules remain within a fairly narrow band of market norms. But that does not necessarily mean they have to.

In this case, the landlord’s position is that tenants are leasing space in the building in part to provide an optimal workplace experience for their employees, and construction noise has a direct negative impact on that experience. This is a premium building in a Canadian market.

Upon learning of the issue, we elevated the discussion beyond the building management team and directly to ownership in an effort to mitigate the extent to which our client must comply with the new restrictions. Fortunately, given the scale of business we do across markets, there is always some degree of reputational sensitivity. Building owners understand that we represent a large pool of tenants, and most genuinely want to maintain strong working relationships with us.

While this appears to be an isolated issue, and one we do not expect to become normalized across the market, it presents an opportunity to reconsider how we protect clients from similar situations.

Going forward, our solution will be to explicitly preclude landlords from modifying construction rules and regulations when those changes would have a materially adverse effect on a tenant’s construction budget or schedule, particularly after the tenant has established both in reliance on the rules in place at the time the lease was executed.

Thirty years into this business, there are still occasionally new lessons to learn.