Lease Casualty and Insurance Clauses

Competing Interests – Equitable Sharing of Risks and Costs

Well it took more than two or three weeks, but I now post the fifth of five articles on commercial leasing issues. Though one of the articles previously posted concerns the insurance related issue of subrogation clauses in leases, another related area for you to consider is the topic of this post: that of the terms of the lease in the event of casualty, the requirements of insurance, and how the casualty and insurance provisions (which are often times separate clauses) relate to each other.

The casualty provision in the lease will generally include an “out” for either party, or both, in at least some cases where casualty has occurred. The terms will be different from lease to lease, and the party given the different types of rights will differ depending upon which party (landlord or tenant) is in what I call the “power position” in the lease. The interests and concerns of each of the two parties is very different when casualty occurs. A landlord will be concerned with maximization (or continuation)of income and protection (or restoration at the least cost to landlord) of its improved real property asset. The tenant will be concerned with the injury to, and replacement of, its business property, as well as the delays or stoppage of operations and revenue caused due to the casualty that has occurred. I have decided to give you a list of considerations this month. If you are in the position of making a preliminary review of a lease, either as landlord or tenant, here are some things to consider:

1. If you are a landlord dealing with a large national tenant , you may find that there is pressure by the tenant to allow tenant to self-insure. In the past this was primarily a concern due to the fact that even if the national tenant is financially stable as a self-insurer, many landlords reported that the process of claims adjustment is much more time consuming, contentious or cumbersome than with an independent provider of commercial insurance (which has a more limited interest in the specific leasehold estate). Additionally, however, due to our recent downturn in the economy, as we see some of the once mighty corporations crumble, it certainly would not be unreasonable for any landlord to require substantial proof of the financial condition of the tenant before agreeing to allow a tenant to self insure.

2. In any commercial lease, the casualty provision should be fair in light of the circumstances. You will want to carefully check the casualty provision with due consideration to your position as landlord or tenant. A full service lease for space within a building containing numerous commercial tenants, is to be viewed quite differently than a long term triple net lease of a standalone commercial building. Where a landlord has multiple tenants, and great control over common areas, repair, and selection of insurance, the commercial tenant will need to consider negotiating a shorter landlord repair timeframe, together with rent abatement during repair, and the right to terminate if the casualty is more than a certain extent of damage (often described as a percentage of damage to the premises). In the triple net scenario noted above, the Landlord might consider insisting upon proof of insurance, repair and no rent abatement in the event of casualty (leaving all burden and risk on the tenant).

3. Landlords should be aware that large national commercial tenants are going to be looking for lease provisions which assure that the proceeds of insurance are to be used for restoration of the leased premises, and that any deed of trust affecting the leased premises clearly permit this use of insurance proceeds without the ability of the lender to instead require payment against the loan balance.

4. Many commercial leases will leave it up to the tenant to determine whether or not they will insure personal or business property within the leased premises (which is not otherwise covered by the Landlord policy), and actually the extent to which this is obtained (giving wide discretion to tenant to simply decide to forgo the cost) . Landlords should seriously consider to not allow this to be left to the tenant’s own choosing. Tenants should be required to (and should in any event) have insurance to cover the full replacement of their business property contained within the leased premises. In addition, a prudent landlord will insist upon the lease containing a provision which clearly absolves the landlord from any liability for damage or loss to such tenant business property.

I hope that these articles on lease provisions are helpful to those of you who are involved in commercial leasing, either as landlord or tenant. McGuire, Wood & Bissette, P.A. has an extensive practice in the area of leasing and has provided lease drafting services for virtually every type of commercial setting imaginable in North Carolina. If we can be of assistance to you, either in your capacity as a landlord or tenant in drafting of a lease, or with respect to the review of a lease that you are considering entering into, please call or email at any time.


Tom Grella