Negotiating Commercial Lease Casualty Provisions: Insurance, Termination Rights, Tenant Improvements

Description

Commercial leases will typically include a casualty provision. This provision may provide for a rent abatement for the tenant, identify the circumstances which obligate a landlord and/or tenant to restore the leased premises following a casualty, and set forth how and when the parties can terminate the lease.

The effect of insurance is a significant consideration in assessing a casualty event. Since most, but not all, casualty events are covered by property insurance, the landlord's insurance on the real estate and the tenant's insurance on the personal property located on the premises will both bear on resolving the event.

But, it is essential to consider situations that appear to be a casualty event, such as COVID-19 lockdowns or damages to utilities but not the actual leased premises, which most insurers have interpreted as not being covered under their policies. As such, landlords and tenants should review how both casualties are defined in their agreements and what their insurance policies include as exceptions when negotiating a lease.

While termination rights arise most often when the premises are destroyed, a landlord may have a right to terminate based on how long damage may take to repair or the percentage of the property rendered untenantable, or in the event the landlord's property insurance does not cover the damage.

Tenants who seek to limit the landlord's right of termination want to restrict these non-total loss provisions. Tenants concerned with the impacts of potential casualty events and enjoying the flexibility of relocating their business should consider including additional termination rights in the lease.

Many tenants renovate and improve properties at substantial cost and time. Tenants may therefore incur significant losses if the landlord has broad termination rights arising out of casualty events and property damage, including the right to terminate a lease in case of a casualty with minor uninsured damage to the premises. Tenants should consider including a threshold restoration cost for the landlord to have the right to forgo restoration of the premises and terminate the lease.

Listen as our expert panel discusses casualty provisions, the interplay of insurance, and how landlords and tenants should approach termination rights in commercial leases.