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Wins & Insights

Tenant Leasing Illustrated – Oct 2014 – Between a Rock and Your Casualty Provision

Between a Rock and Your Casualty Provision

I recently read a review of a book about the overuse of clichés called “It’s Been Said Before” by Orin Hargraves.

Mr. Hargraves complains that clichés are used in ways that make things less clear and can cause the reader to feel that the writer is not really thinking carefully about, or thinking carefully through, what he is or she is writing.

But lawyers who work in glass offices should not throw stones. We leasing attorneys, who like all attorneys have our creativity surgically removed during law school, have taken cliché to new heights. We call it boilerplate.

With the use of word processed forms and precedents, many boilerplate provisions in commercial leases are employed without careful thought as to whether or not they express what the parties actually intend, or reflect what is likely to be the parties’ real concerns at the time.

There are many good examples of these types of provisions in leases, from condemnation to remedies after default, and from force majeure to estoppel certificates. Today we focus on the casualty or fire damage provision.

Fires, hurricane damage, nuclear disaster, my Mets winning the pennant. What are the odds that these things will actually happen to you?

Perhaps unlikely, but as is true with many things, a casualty is never a problem until it is a problem. As with other boilerplate provisions, haste makes waste and casualty provisions can contain hidden perils that must be carefully reviewed.

For example, nearly every casualty provision provides the landlord with a termination option in the event it chooses not to rebuild after a large casualty, but not every such provision provides the tenant with an adequate termination option.

To some extent this is understandable, since a landlord needs its tenants to stick around (with rent abated, of course) while it rebuilds. But there are instances where a tenant should not be obligated to hang in there and many customary landlord termination options provide the landlord with too much latitude.

Avoid kicking the can down the road when it comes to the casualty termination provisions in your lease by following these six suggestions:

  • “The devil is in the details”; Specify and narrow the circumstances when your landlord can terminate your lease. Your landlord should not be entitled to make an arbitrary determination or to treat you differently than it treats other tenants. Typical prerequisites include that:​

○​  the Building has been totally damaged or destroyed, or so damaged that repair would require more than an agreed upon period of time (e.g., 9-12 months) or the expenditure of more than an agreed upon percentage of the full insurable value of the Building (e.g., 30-50%); and​

○​  your landlord has terminated all leases in the Building or some agreed upon percentage of such leases (e.g., 75%, 80%).​

  • “The early bird gets the worm”; Require a timely determination by your landlord. You will need to make alternate arrangements so your landlord needs to exercise any termination right within a specified period of time after the casualty (e.g., 60-90 days).​
  • “What is good for the goose, is good for the gander”; Provide yourself with a termination right if the damage is substantial. If more than an agreed upon amount of your space is damaged (e.g., 30%, 40%), or if the building is so damaged that your landlord’s restoration work would take more than a predetermined period of time, then you should have your own option to terminate. The timing for the restoration work should be based upon the determination of a reputable and independent licensed architect, engineer or contractor.​
  • “Time will tell”; If your landlord chooses to rebuild, allow yourself the right to terminate if there are substantial delays. Your landlord is entitled to some leeway to negotiate with its insurance company, to address possible “force majeure” events beyond its control and/or to deal with the inevitable construction delays, as long as there are some outside limitations. If the estimated time for restoration is exceeded by a predetermined period of time (e.g., 2 or 3 months), for whatever reason, you should have a right to walk away.​
  • “The writing is on the wall”; Give yourself flexibility to terminate toward the end of the term. Provide yourself with a termination right if a casualty occurs during the final one or two years of your lease term, or if after restoration there are not more than one or two years left in your lease term. At that point, finding temporary alternative space and then moving back makes little economic sense.​
  • “Painted with the same brush”; Cover adverse impacts on your business not tied solely to the amount of damage. Even if your space ends up fit as a fiddle, you may need a termination right (and an abatement of rent right as well) if a casualty causes any material impact to your business. An example is a terrorist attack that does not damage your premises but results in reduced or impeded access to, or reduced parking at, your building. If you are a retail tenant you will have particular concerns if damage outside your premises reduces traffic, impairs visibility or results in the loss of nearby anchor tenants or other valuable stores which attract customers to your store.​

Cat got your tongue with all these clichés? Understandable. But if you follow the suggestions above the proof will be in the pudding and you will have the flexibility to move on after a fire or other casualty.​