Archive for May, 2009

Waiver of Subrogation

Sunday, May 31st, 2009

Empty Boilerplate or Valuable Content?

One of the most common questions I get from my lease clients as to the form and substance of the standard commercial lease is the meaning and intent of what is known as the “Waiver of Subrogation” clause. Perhaps some of the other questions that my client may think are: 1) Is the provision really that important, and 2) Does my attorney really know what it means himself, or is it just one of those standard “boilerplate” provisions used to increase the size of the document and the size of his fee?

The reason that the Waiver of Subrogation provision is necessary in most cases of premises damage is quite simply that having such a provision is fair to all parties involved. In many instances both a Tenant and Landlord will have insurance on the leased property and premises, and in many or most instances there may be an overlap of coverage between the two policies. In other commercial lease situations, the Landlord may obtain the insurance, and pass the cost on to the Tenant, and Tenant may not have other overlapping coverage. In any event, in many commercial lease situations (and arguably in every commercial lease situation even if not specifically stated), the Tenant will actually be the party who has paid the premium of property and casualty insurance even if that policy is actually in the name of the Landlord; either directly by virtue of a pass-through of the premium, or indirectly as an increase to the rental rate. In the situation where both parties to a lease have obtained insurance, both of the policies (of both Landlord and Tenant) will normally allow the insurance company to be subrogated to any interest of the inured in the event that the insurance company is stuck paying a claim. In other words, if the insurance company is required to pay a claim, it naturally desires to step into the shoes of the insured party, and take action against the party responsible for the damage if its insured otherwise has the right to do so.

Practically speaking, if a Tenant has been negligent in some way and damage occurs on the premises, or if damage otherwise occurs and Tenant is responsible regardless of fault, the Tenant will normally have the responsibility of payment of the expense to repair or maintain the premises, assuming there were no insurance to pay for the damage sustained. If insurance in the name of the Landlord has been obtained, and that policy pays the claim, without a waiver of subrogation provision the insurance company may have the right to claim reimbursement from the Tenant, or Tenant’s insurer (in the event that Tenant has overlapping coverage). If Landlord has the right to subrogate, in the event where Tenant’s has overlapping coverage, Tenant can expect its future insurance premium to increase. In the event that no overlapping coverage exists, Tenant is likely to find itself paying for damage as a reimbursement to the insurer, even though Tenant has already paid for coverage though payment of the premium.

It is beyond the purpose of this short blog article to get into all of the various case interpretations of instances under which a tenant whose lease lacks a Waiver of Subrogation clause might make the case that it should not be subject to subrogation based on some legal theory (such as the parties intentions, or term end obligations). Suffice it to say that there are such theories out there. Instead of reliance upon a legal theory to create intention of agreement, the lease can instead contain a clear and unambiguous Waiver of Subrogation provision. Inclusion is a valid way to keep an insurance company from proceeding against a Tenant for reimbursement after a claim has been paid by the insurer pursuant to the terms of an insurance policy that Tenant has actually or effectively paid for.


Tom Grella

Commercial Leasing

Tuesday, May 26th, 2009

Downward Economy = Increase in Leasing Opportunity

As the economy took a downward turn last year, there were a few areas of legal representation that seemed to take an upward swing. One of these areas, seemingly on the increase in my most recent experience, is commercial leasing. The reasons for this upward turn could be many, however certainly it is at least in part due to the fact that purchase money is less available through commercial lenders. Many potential commercial operators simply do not have the ability to purchase, and as business closings increased, available sites also increased, and owners of commercial properties became more receptive to lease as an alternative to sale. Because of this increase in commercial leasing, I thought it would be good to review some of the provisions contained in typical commercial leases. The types of things that clients seem to always ask questions about. Over the next two or three weeks I will be posting to this blog five separate articles about leasing. I expect that the following five areas of leasing will be explained and discussed:

1. Subrogation
2. Tenant security deposits
3. Options to purchase and rights of first refusal
4. Assignment and sublease
5. Casualty and insurance

Feel free to let me know if you would like me to cover any other commercial leasing topics in this blog.


Tom Grella

HUD -The Only Game in Town??

Tuesday, May 19th, 2009

HUD Multifamily Construction Financing

Over the past few months I have received several calls from existing and potential clients about legal representation for HUD apartment new construction financed transactions. The HUD apartment program is described in Section 221 (d) (4) of HUD’s Federal Housing Administration (FHA) multifamily mortgage insurance program. For several years (especially in the first few years of this decade), I had one of these types of construction projects going on all the time. Clients had found the process cumbersome, but it allowed for a longer amortization, and more favorable terms than conventional loans. Many developers were open to wading through the added time and expense to realize longer term benefits. In more recent years, however, this type of representation had basically dried up for me, with conventional mortgage loans readily available for all types of new construction. Though the amortization period in the HUD loan has always been favorable, other less desirable characteristics (such as unbelievably long processing times, and cumbersome underwriting issues) steered clients away from this financing mechanism because of the relative ease of finding alternative quick conventional sources.

Because of the way the process works, if you move forward on this type financing, you will be dealing with a special HUD approved lender from the outset. Though these special lenders charge high fees for the services they provide, your need to have direct contact with the HUD office, and the need to know the minutiae of the government program will be reduced. Your legal counsel will handle most of the extensive legal paperwork needed.

I have read in recent months that developer inquiries are way up for this HUD program, one claim being that it is sevenfold. In two recent articles I have read, due to the difficulty in obtaining new construction financing of any sort, this program has been represented as “the only game in town” for multifamily housing acquisition and refinancing. If you are a developer who has considered and developed condominium in the past years but now find that lending options are limited, you might consider this HUD program for financing a slightly different type of ownership and occupancy.

The process is represented generally as taking 10 months, but in fact a developer considering this process should understand that it might take up to 12 months. In any event, without the option of conventional sources, unless a developer has a pool of rich accredited friends (see my other blogs on private placements), this truly may be the only game in town.

Tom Grella