Reviewed by Gary E. Wilson, President & Designated Broker · Managing Greater Seattle rentals since 1982
Tenant improvements are the largest discretionary cost in commercial leasing and the one most likely to be settled on a handshake and regretted in a change order. A landlord agrees to "build out the space" during a negotiation where both parties are focused on rent and term, and the specifics — what exactly is being built, to what standard, who pays for what, and what happens when the price comes back higher — get resolved later, under time pressure, with the tenant's move-in date approaching.
Almost every tenant improvement dispute traces back to an ambiguous scope rather than a disputed price. The remedy is boring and effective: settle the scope, the standard, the allowance and the process before work begins.
Wilson Management manages tenant improvement projects for commercial property across Bellevue, Seattle and the Eastside. For the wider service see Commercial Property Management.
The Structures, and What Each One Puts at Risk
Turnkey. The landlord delivers the space finished to an agreed specification for an agreed price. The tenant's exposure is capped; the landlord carries the cost and schedule risk. Attractive to tenants and only safe for a landlord where the specification is genuinely complete — "turnkey to tenant's reasonable requirements" is a blank cheque.
Allowance. The landlord contributes a stated amount, commonly per square foot, and the tenant pays the excess. This is the most common structure and the one where the details matter most: what the allowance may be spent on, when it is paid, and what happens to any unused portion.
Landlord work plus tenant work. The landlord delivers a defined base condition and the tenant does the rest. Clean, provided the base condition is genuinely defined.
Amortised improvements. The landlord funds work and recovers it through rent over the term, at a stated rate. Effectively lending to the tenant, which means the tenant's covenant matters more than usual and the recovery is exposed if the tenancy ends early.
The Work Letter Is the Document That Matters
The work letter sits alongside the lease and governs the project. Where it is thorough, projects proceed. Where it is thin, everything becomes a negotiation at the point of maximum pressure.
It should establish the base building condition being delivered; the scope of improvements with drawings or a specification; the standard and the finish schedule; the allowance amount, what it covers and the payment mechanics; how excess cost is funded; who selects and contracts the contractor; the approval process with response times; the schedule with key dates; how change orders are priced and approved; and what happens to unused allowance.
Response times deserve particular attention. A work letter requiring landlord approval of drawings without stating how long the landlord has to respond hands the landlord an unlimited delay — which sounds advantageous until the tenant argues that landlord delay pushed rent commencement, and the argument is a good one.
This page is general information, not legal advice.
Controlling Cost
Tenant improvement budgets go over for a small number of recurring reasons, and each has a control.
Scope that was never fixed. The dominant cause. A scope described in adjectives rather than specifications will be interpreted generously by whoever is spending the money.
Conditions discovered after opening the space. Older buildings hide surprises — non-compliant existing work, unexpected structural or mechanical conditions, hazardous materials. Where a building's age suggests it, investigating before pricing is far cheaper than discovering mid-project.
Long-lead items. Equipment and materials with long lead times drive schedule, and schedule pressure drives cost. Identifying them at design rather than at ordering is the whole control.
Change orders. Individually small, collectively decisive. Every change priced and approved in writing before it proceeds, with a running total visible to both parties, so nobody is surprised at the end.
Permitting. Jurisdictions vary in how long review takes, and a schedule built on optimistic permitting assumptions fails at the first correction cycle.
Approvals and Compliance
Tenant work needs landlord approval of drawings, contractors and insurance, and the review is substantive rather than procedural. Does the work affect base building systems? Does it compromise anything structural? Will it interfere with other tenants during construction? Does it comply with applicable codes and accessibility requirements? Is the contractor licensed, bonded and adequately insured, with the landlord named where required?
Construction in an occupied building brings its own obligations: noise and dust control, protection of common areas, working hours that respect other tenants, and lien waivers collected as payments are made. Lien waivers are the item most often skipped and the one that matters if a subcontractor goes unpaid.
Reinstatement at the End
What happens to the improvements when the tenancy ends should be settled at the start, and frequently is not.
Some improvements enhance the space for the next tenant. Others are so specific to one occupier that they reduce the value of the space and cost money to remove. A lease that is silent on reinstatement leaves that argument for the end of the term, when the tenant is leaving and has little incentive to be generous.
The workable approach is agreeing at the outset which improvements must be removed and which may remain, ideally by reference to the approved drawings, so that a decision made during construction is not relitigated a decade later.
Paying the Allowance
How and when the allowance is disbursed is worth as much attention as its amount, because it determines the landlord's exposure if a project stalls.
Payment against documented progress — invoices, lien waivers from the contractor and subcontractors, and inspection of the work claimed — protects against paying for work not performed. Paying a lump sum in advance transfers the risk entirely to the landlord and leaves nothing to withhold if the tenant's contractor walks off.
The final payment is the leverage that gets punch-list items completed, so releasing it before the work is genuinely finished removes the only practical incentive.
Unused allowance is a term worth settling in the work letter rather than assuming. Some leases allow the tenant to apply an unused balance against rent; others let the landlord retain it. Both are common, and the difference is real money.
Where the tenant is funding the excess, confirming they have the funds before construction starts is prudent. A project halted halfway because the tenant cannot pay the overage leaves the landlord with an unfinished space, a delayed rent commencement and a difficult conversation.
Frequently Asked Questions
What causes most tenant improvement disputes?
Ambiguous scope, not disputed price. A scope written in adjectives rather than specifications gets interpreted generously by whoever is spending.
What is a work letter?
The document governing the improvement project — base condition, scope, standard, allowance, funding of excess, approvals, schedule and change orders. Where it is thorough, projects proceed; where it is thin, everything becomes a negotiation under time pressure.
Why do landlord response times matter?
Because a work letter that requires landlord approval without a response deadline hands the tenant a strong argument that landlord delay pushed rent commencement.
What can a tenant improvement allowance be spent on?
Whatever the work letter says — and whether soft costs, cabling, furniture and tenant-side project management qualify varies considerably. It should be confirmed before payment rather than assumed.
How are change orders controlled?
Priced and approved in writing before proceeding, with a running total both parties can see. Change orders are individually small and collectively decisive.
Should improvements be removed at the end of the term?
Decide at the start, by reference to the approved drawings. A lease silent on reinstatement leaves the argument for the moment the tenant is leaving and least motivated to concede.
What is most often overlooked during construction?
Lien waivers collected as payments are made. They only matter when a subcontractor goes unpaid, and at that point they matter a great deal.
Should the allowance be paid up front?
No. Paying against documented progress — invoices, lien waivers and inspection of the work claimed — protects against paying for work not performed, and holding the final payment is the only practical leverage for getting punch-list items finished.
What happens to unused allowance?
Whatever the work letter says. Some leases let the tenant apply the balance against rent; others let the landlord keep it. Both are common, and the difference is real money, so it is worth settling rather than assuming.
Get Started
Tenant improvements are settled well before anyone picks up a tool, in the scope and the work letter. Wilson Management, Inc. manages them from that end.
Request a free analysis or contact us. You can also reach our Bellevue office at (425) 453-0089, 1380 112th Ave NE #203, Bellevue, WA 98004.