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Lease Strategies

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This LARG looks at the response of the landlord of the World Trade Center in 1992, when the WTC was first struck by terrorists. It is illustrative of the issues landlords face in such circumstances.

The LARG does not pertain to the tragic events of September 11, 2001.

Number of Single Spaced Pages: 12





This LARG looks at the increasingly important issues of disasters and building safety responsibilities in the lease. The first section focuses on the World Trade Center Bombing, and how it was managed by the WTC's owner. The second section contains a rider for an office or retail lease with several unusual disaster and building safety provisions, including mandatory security practices for the landlord and the tenant, a disaster clause covering temporary disaster space, rental abatements, and a limited landlord indemnity for building security negligence. The Lease Clause Critique looks at two casualty clauses—one pro-landlord, the other pro-tenant.

After the Bomb: World Trade Center Acts Fast to Retain Tenants

For years the World Trade Center was not only a major player in the downtown Manhattan real estate market--it was the downtown Manhattan real estate market. Its two 110-story buildings with 10 million square feet of class A office space and supporting retail space had few real competitors. 55,000 people went to work in the WTC, and 145,000 people passed through the complex each working day. It was the premier address for financial service companies such as Dean Witter, Merrill Lynch, and Shearson Lehman Hutton. The Windows on the World restaurant on the top floor was world famous. Even the WTC's observation deck attracted at least 5,000 people on an average day.

Unfortunately, the owner of the WTC--the Port Authority of New York and New Jersey-- had an attitude to match. Tenants thought the Port was complacent and ossified, and that the Port didn't care about its tenants. Building maintenance was less than energetic. Tenants felt that they were taken for granted.

Worse, it could take years to negotiate a WTC lease, and the Port's legal department was notorious for its lack of flexibility. Requests by tenants during negotiations for rights to assign and sublet were almost always refused. Lots of WTC tenants had no termination rights if their building or premises were destroyed, no matter how long it took to repair the damage--so long as the Port was in the process of repairing it. And most WTC leases provided for no abatement of rent during the restoration period after the casualty, even though the tenant had no access to its premises.

In 1992, several large WTC tenants were making noises that they wanted out of their leases which were negotiated during the hot market of the 1980's, and which exacted rentals of about $40 per square foot. The rental market for class A office space in New York in early 1993 was hovering at between $28 and $30, and competing brokers and owners were calling WTC tenants on a weekly basis to peddle space in other buildings. Office vacancy rates in lower New York exceeded 25% at the time, and competition for tenants was fierce.

The Big Bang

Then, on February 26, 1993, explosives in a van parked in the underground garage ripped Tower One open, knocked out power, lights, communications, and elevators in the WTC. Two million gallons of water from the Hudson River quickly flooded the lower portions of the bombed building, gushing through a severed pipe which furnished water for the WTC's cooling system.

The next day, a Saturday, the WTC's managers had to dispatch New York City policemen around Manhattan to locate plans for the building's various component parts, such as the structural plans, the heating and cooling systems, the electrical and mechanical plans, and so forth. Most of the Port's data on building systems was stored on its computers which didn't work anymore. The following Monday, 45 construction and consulting firms were put on the payroll, and clean-up and restoration work began in earnest.

On March 18, 1993, tenants began returning to Tower Two, and the lion's share of the 350 firms with space in the complex was reinstalled in both towers by the end of the month. Although the restoration effort took an incredibly short period of time given the extent of the damage, perhaps the more amazing story--at least for the real estate community--is how well the Port's tenant retention efforts worked.

The WTC's competitors recognized the bombing as a tremendous opportunity to sign some high quality office tenants. The Monday after the blast, several competing properties ran ads in New York papers showcasing their buildings. Other office building owners were in the process of finalizing mailings offering to relocate WTC tenants to new office space.

A number of large developers offered temporary space to WTC tenants at basically no cost. Some offered completely free temporary space; others indicated that any tenant taking temporary space would only be charged for operating costs and real estate taxes allocable to the temporary stay. Real estate brokers offered to link up WTC tenants with office building owners with empty space on a gratis basis--no commissions would be charged for these temporary deals.

The Specifics of the WTC's Post-Blast Tenant Retention Program

After figuring out that Economic Injury Disaster Loans available through the Small Business Administration would only help tenants that completely shut down their businesses during the restoration of the WTC, the Port and the State of New York quickly announced a loan program to provide cash for temporary relocation and other operating expenses incurred by its tenants. Most WTC tenants never considered shutting down after the blast--they simply moved across the street, across town or to New Jersey where they had other operations. The loans were good for one year, accrued interest at 4%, had a maximum of $50,000, and were secured by the security deposits made by the tenants. 270 of the 350 affected tenants qualified for the loans.

After the blast, in order to retain its tenants, and to recover from the effects of the bombing, the Port:

  • Suspended rentals for all tenants during the time that they could not use their premises--even though in most cases, the casualty provisions in WTC leases provided for no such rental abatement.
  • Arranged for free counseling for employees of tenants in the building who suffered from the psychological effects of the blast, and from being trapped in the 110-story towers without power, lights and elevators.
  • Agreed to pay for relocation costs, and for the costs of temporary space of affected tenants.
    Provided free gas masks and flashlights to returning occupants of the buildings.
  • Gave tenants $150 per employee to defray dislocation expenses.
  • Subsidized a week long "Spring Back Celebration" sale for the retail tenants located on the WTC's shopping concourse with heavy print and promotional advertising. Most of the retail tenants stayed open during the restoration period, but there was virtually no traffic for them, and business was nil.
  • Beefed up WTC security by adding visitor desks in both towers, and by requiring all visitors to sign in before they have access to the elevators.
  • Issued special ID hologram passes which are extremely difficult to duplicate to tenants who routinely enter the towers after normal working hours. Adopted a policy that requires any vehicle entering underground space or garages to have a security escort.
  • Installed special "glow in the dark" directional signs in stairwells that are visible with little or no light.
  • Provided WTC staff with portable communications gear that works during emergencies and power failures.
  • Installed battery operated lighting in the towers.


End of Excerpt