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Lessons from 2020: Commercial landlords should revisit casualty and damage provisions in lease forms

The year 2020 was fraught with dramatic unforeseen events for the entire world. Closer to home in the Nashville business district, in addition to the COVID crisis, commercial landlords had to respond to tornadoes and a tragic Christmas morning bombing which inflicted damages to buildings (commercial and residential).

Following these catastrophic events, many commercial landlords are revisiting their standard lease forms to make sure such provisions are clearly written and accurately reflect the practical realities that can make restoration of a damaged building painfully slow and frustrating.

As we digest lessons from 2020, here are a few things commercial landlords should consider:

Abatement of Rent

Abatement of rent following an event of casualty is a common right of tenants in leases. Following the experiences of 2020, commercial landlords should be asking whether their lease provisions clearly state: (a) when rent abatement begins and ends; (b) whether abatement applies to Base Rent only or applies to both Base Rent and Additional Rent (i.e., pass-through of operating expenses such as real estate taxes, insurance and utilities); and (c) the condition of the premises which triggers an abatement and who gets to decide whether that “condition” exists.

Restoration of Damaged Areas

Every well-written lease addresses the restoration of improvements damaged as a result of an event of casualty. The lessons from 2020 suggest commercial landlords should ask whether their lease form clearly states which repairs the landlord as opposed to the tenant is responsible to complete. Leases often vary on the duration of time that a landlord or tenant has to complete such repairs and restoration. Deadlines for repairs and restoration are all over the map, ranging from 90 days to 180 days to 365 days. Commercial landlords – in consultation with their insurance advisors – should be asking whether the time frame required by its lease form for repairing casualty damage is appropriate given the realities of how claims are adjusted by commercial insurers and the current environment with general contractors and suppliers working at full-capacity. Is it reasonable to expect that any casualty repair that involves a commercial insurer’s claims adjustment process can be completed (much less started) within 180 days of the occurrence of the damage?  Commercial landlords would be prudent to ask whether the time frame required by their existing lease form remains realistic in the current environment.

Termination Rights

Following an event of casualty, the first question that most landlords and tenants ask is -- do I have the right to terminate the lease?  The events of 2020 suggest it is a good time for commercial landlords to revisit the termination rights in their existing lease forms.  Do landlord’s termination rights make sense in the current environment?  Are they clearly written?  Are termination rights in favor of a tenant in need of adjustment and updating?  Should such termination rights be triggered by the time it takes to repair the damage, percent of space lost due to damage or the cost for repairing the damage?  The answers these questions may well be different depending on the type of building and the tenant mix in the building.

Business Interruption Insurance

In the aftermath of a fire or other casualty, the absence of business interruption insurance (insurance coverage that replaces business income lost as a result of a casualty event) can inflict pain on the businesses of tenants and commercial landlords. After 2020, it seems appropriate for landlords to consider whether its tenants should be required to carry business interruption insurance and whether a lease form modification is needed to make that requirement binding on its tenants.

If you are a commercial landlord, we urge you to heed the lessons of 2020 and make revisiting your lease forms a priority.

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Jeff Calk
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