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Wins & Insights

Tenant Leasing Illustrated – Dec 2012 – A Generator for Your Lease

A Generator for Your Lease

I tend to be very skeptical when I hear the media hyping a “Frankenstorm” or “storm of the century”. Unfortunately, Hurricane Sandy lived up to her advance billing and hit New York, New Jersey and the surrounding area pretty hard.

Luckily, compared to the suffering of many hurricane victims, I only had the inconvenience of a loss of power for nine days at home and one week at the office.

Stepping back in time, after a few feet of water in my finished basement in each of the two previous “100 year storms”, I took a drastic step and purchased a 7,500 watt generator to run a few emergency systems and lights.

Certain things just do not go together. Peanut butter and pickles. My Mets and post-season baseball. And a middle-aged Jewish lawyer turned suburban homeowner and a generator.

I am not sure whether the notion that I could start the generator without blowing myself up was more terrifying or comical.

Miraculously, the generator worked. I even managed to change the oil when necessary. Hey, give me some credit – – my people wandered the desert for 40 years because they could not change the oil in their generator!

And yes, besides being thankful that I had the generator ready “just in case”, I admit there was a clearly noticeable strut in my step for the next few days.

All of this got me thinking about the effect of disasters on tenants.

Most leases contemplate fires and other casualties, and typically provide the landlord (and sometimes the tenant) with certain flexibility, such as various rights to terminate the tenancy or rebuild with an abatement of rent during the construction process.

But is that enough? What is the tenant’s equivalent of a spanking new generator, i.e., what should a tenant consider in order to afford it the appropriate flexibility to handle the next disaster, natural or otherwise… just in case?

  • Start by carefully reviewing your fire and casualty clause. Too many tenants skim over this provision as unlikely to be needed “boilerplate”, but there are certain necessary and standard tenant protections:​

○​  Your rent should be abated with respect to the space affected during the period it is not usable. Ideally, the party that built out the space should rebuild after the casualty, but in any event the abatement should run until all of the tenant improvements are restored.

○​  Require the landlord to rebuild unless the damage is material. And make sure that the landlord carries adequate insurance to do so (if you are a larger tenant, you may be able to require that the landlord’s lender be precluded from applying the insurance proceeds to the payoff of the mortgage rather than rebuilding).

○​  The landlord should quickly decide whether or not to rebuild. The landlord needs time to assess the damage, but you should not have to wait an unreasonably long period of time to plan for your own business.

○​  Protect yourself if the casualty or fire only affects other premises in the building. The landlord should not terminate your lease unless it is terminating a majority of the other similarly situated leases and, if your space remains intact, request that in order to terminate the landlord reimburse you for your unamortized tenant improvements.

○​  You should be entitled to terminate the lease in a number of circumstances. You should be entitled to terminate if a material casualty occurs and the landlord cannot rebuild within an agreed upon period of time (e.g. 12 or 15 months) or does not rebuild within three or four months after the reasonably estimated completion date or if there will be less than an agreed upon amount of time remaining (e.g. 18 or 24 months) in the term after the reasonably estimated completion date.

  • Protect yourself from a materially adverse impact on your business. Hurricane Sandy was clearly a casualty, but what if there was no actual damage to your premises or building but you still could not access or make use of your premises? This problem arose in Manhattan during 9-11 when tenants were not able to access entire blocks due to the terrorist attack on the World Trade Center, even though there may have been no damage to their particular building. The landlord is not at fault and cannot control the problem, but the tenant is still not able to operate its business and should be entitled to rent abatement and, eventually, a right to terminate.

In addition to lack of access, your business can be affected by a disaster in a materially adverse manner due to a change in your permitted use (e.g., the loss of nonconforming use status) or parking rights or, with respect to a retail premises, pedestrian traffic or visibility.

  • Carefully review the “force majeure” provisions which excuse the landlord’s non-performance due to events beyond its reasonable control. This can arise in terms of services that the landlord is required to provide but cannot due to a casualty affecting areas other than your building and/or rebuilding after a fire or casualty. This clause provides reasonable flexibility to the landlord, but make sure that there is an outside date even with respect to force majeure events. At a certain point, you should not be required to remain in limbo even if the lack of services or delay in rebuilding is beyond the landlord’s control.​
  • Create a disaster relief plan for your business. You should always have your lease insurance clause reviewed by your insurance/risk management professionals, but also discuss with them how your business can be protected in the event of a disaster notwithstanding any requirements under your lease.

In addition to insurance, consider back-up redundancies for your information technology/servers, telephone systems and power sources (ah, generators again) and make sure that you have the flexibility under your lease to install these systems and have licenses from your landlord as necessary to use portions of the common areas outside of your premises.

Follow our suggestions when negotiating your lease so that you can be best prepared in handling future disasters. And if you need help starting your generator, you know who to call (after all, we are a full-service firm).​