The Most Important Lease Provisions to Review When Your Office Space is Damaged

These three lease provisions will be crucial to review in the event your office space is damaged.

 

Hurricane viewed from space

WHAT TO DO WHEN OFFICE SPACE IS DAMAGED

Each year in Houston brings a new round of floods and storms – seemingly worse than the last. With memories of Hurricane Harvey still fresh on our minds, now is an appropriate time to discuss damage to your office space. Companies leasing space in multi-tenant office buildings need to be aware of the specific language in their lease addressing these situations, and how it affects them. A well-negotiated lease can serve to protect tenants when their office space is damaged.

The following are three key lease provisions to know and understand:

 

1 – TENANT AND LANDLORD INSURANCE

Most commercial leases will stipulate required insurance that the landlord and the tenant must carry. Failure to maintain the necessary insurance policies can mean a breach of the contract and create conditions of default which will need to be remedied. The tenant will typically be required to carry insurance for Commercial General Liability and Property within the leased premises including leasehold improvements, equipment, fixtures, etc. The exact levels required for the policy per occurrence and in aggregate are negotiable and will vary from lease to lease. When tenants are negotiating a new lease agreement it is advisable to consult an insurance agent to understand the costs and implications of the required insurance levels.  The insurance requirements are designed to protect both parties, but it is important to ensure the types of insurance and levels required make sense for each particular tenant and their business.

When a tenant’s office space is damaged the insurance policies will hopefully cover the costs for replacement of property and repair of the premises. Generally the landlord will be listed as beneficiary of proceeds for the policy in order to collect payouts and to perform the necessary repairs to the building.

 

2 – INTERRUPTION OF SERVICES

It is typical for a commercial office lease to describe standard building services to be furnished by the landlord for tenant use. These services may include access to passenger elevators, electricity, janitorial service, heating and air conditioning (HVAC) within specified hours, access to common areas, and hot/cold water in restrooms and within the tenant’s premises (when water access exists). A well negotiated lease will also dictate what happens in the event these standard building services are unavailable for an extended period of time. The landlord should agree to rental abatement if these services are not available after a certain number of days. The landlord may want additional language inserted covering them for service interruptions outside of their control. If it is within the landlord’s control to correct the issues and restore these essential services, the tenant should be granted abatement from all rental expense until services are restored.

 

3 – PARTIAL OR TOTAL DESTRUCTION OF THE BUILDING

It may not be something many office tenants consider when signing a lease, but damage to the building due to fire, flood, storms such as hurricanes or tornadoes, can and does occur. Though rare, it is critical that the lease is properly structured to reduce risk and financial exposure for the tenant. Again, rental expense should be abated for the tenant if the space is untenantable (meaning unusable for the purposes of conducting business).  If the building or premises are partially destroyed or inaccessible, the rental abatement should be in proportion to the percentage of space affected. If the partial damage makes it impossible to conduct business operations in the premises at all, the tenant should be granted full abatement from rental expense. As always, these points are negotiable and it is important that your commercial real estate broker understands them and negotiates to have them incorporated in the lease. If the tenant is able to reduce or eliminate the rental expense they can consider finding temporary office space while repairs are made.

In the event of total destruction of the building the lease generally allows the landlord the decision to re-build or collect insurance and terminate leases for all tenants. The tenant should also have a termination right under this scenario so pay attention to the wording in this section of the lease. It is also recommended to have a licensed real estate attorney review the lease to strengthen the tenant’s position on this and many other issues.

 

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