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You are bound to come across a change order during a commercial real estate construction project. In fact, you are likely to come across it more than once. A change order is not a negative thing; however, it is important to understand what it means to all parties involved in the commercial lease. So, just what is a change order in a commercial lease?
A change order is simply an alteration being made in the construction contract that deviates from the original plan. This change agreement is often made between the owner and the contractor – the owner in this case is often the landlord. The change order states that both parties agree to the price and scope of the work. The negative effects of a change order come into play when the two parties struggle to come to a compromise on the terms or cost, resulting in a delay in the construction and therefore an increase in the cost.
Issues in the project that may result in a change order stem from design errors or alterations, change in materials, procurement or regulatory changes, and modifications requested by the owner or tenant.
Change orders are typically fine when you are paying for all the leasehold improvements - as long as the landlord approves of the alterations, the cost is coming out of your pocket, so why would he care?
They become awkward when there has been a misunderstanding on a landlord turnkey, in which the landlord is paying the full amount and it was just part of the lease negotiation.
These situations can arise regardless of whether the construction project is simply a renovating of your space on the lease renewal, or if you are starting from a plain vanilla shell.
If a situation occurs in which the contractor and owner do not agree on a price set for a change order, the contractor may proceed with the change anyways without a signed contract. The contractor will then pursue a claim for extra work under a breach of contract theory if the owner continues to refuse to pay. In order to avoid situations as such, it is important to come to an agreement that suits the needs of both parties.
The majority of the hassle that comes with change orders can be avoided if the two parties can come to a no-cost change orders agreement. This would entail that any alterations needed to be made have no cost associated with them; a “working for free” sort of understanding.
Although this exists in a very selected number of cases, it does bring the benefit of avoiding conflicts between parties.