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Lease Strategies

Product Overview

This LARG contains the following items:

Anchoring the Casualty Clause to Reality, and the Lease Clause Critique: The Pro-Tenant Casualty Clause With Option to Purchase.

Number of Single Spaced Pages: 12





This LARG looks at the humble casualty clause, which is also commonly called the damage and destruction clause. The first section lists a number of practical issues that the parties might overlook if they adopt a mechanical approach to negotiating and drafting casualty provisions. The Lease Clause Critique features a lengthy pro-tenant casualty clause which also contains an option to purchase the building in favor of the tenant exercisable if the lease is terminated due to casualty.

Anchoring the Casualty Clause to Reality

Face it, the casualty (or damage or destruction) clause is a provision that Rodney Dangerfield could appreciate--it gets no respect. Who can get excited by a well drafted destruction clause? A casualty will probably never happen anyway, right? Those office buildings on fire on the evening news are far away, aren't they? Are they even real?

Yup, they're real. Even so, the tendency of the negotiating parties to focus on the economic terms of the deal, and the lack of drafting ardor generally associated with casualty clauses usually makes the landlord and the tenant approach the casualty clause with mechanical resignation. The parties normally go through a little give and take about the percentages of the building that must be affected before the parties can terminate, and how long the landlord has to restore the premises after a casualty, and that's about it.

Such abbreviated consideration is dangerous, because when the parties fail to focus critically on how the clause would really operate in the event of a casualty, they're asking for disaster in pairs. First comes the real casualty. Then comes the disaster of living with a casualty clause which operates without regard to how the real world functions.

Real World Casualty Issues

The parties should review the following issues during their negotiation of the lease's casualty clause, and give careful consideration to the mechanics of the clause.  For example:

  • Are the time periods in the casualty clause for restoration and termination reasonable in view of the time required to draw new plans for the restoration work?  Many casualty clauses use a "magic" time limit of 180 days as the cut-off for restoration work by the landlord. However, in the unhappy event of major damage to the premises or the building, it may take weeks or months to revise the original plans of the building so that plans are complete enough for permit submittal. In some cases, the landlord is hard pressed to find complete accurate drawings of the building, or has incomplete "as-builts" following the casualty.
  • Even if the landlord has complete plans of the original construction available upon which to base the new reconstruction plans, the landlord may not have the right to use those plans if the original design consultants retained copyright or other contractual rights in the design contracts restricting the use of the plans subsequent to the original construction.
  • The architects and other consultants used for the original construction may be dead, in different firms, or otherwise unavailable.
  • If the damage was extensive, a number of design consultants will need to be coordinated by the landlord or its architect (including mechanical, electrical, structural, and seismic consultants)--this takes time.
  • In many cases, building code requirements covering the preparation of the restoration plans will differ from those in effect when the original improvements were built. The original plans will need to be reviewed for subsequent code revisions.
  • After the restoration plans are complete, how long will it take for the landlord to bid the work (or negotiate a construction contract), and obtain the necessary permits? The landlord will likely be under the gun to get the work completed at a cost covered by insurance proceeds available for the restoration. Negotiating price and construction contract terms takes time, and the process cannot be finalized until the plans are complete (or at least very close to complete). After that, of course, the landlord or its consultant will need to obtain permits--in some places, plan review moves at a snail's pace.
  • What type of casualty is covered by the clause? Both of the parties should give some thought to the precise type of "casualty" that triggers the clause. Many older clauses define casualty narrowly, and are drafted to conform to the type of risks covered by the landlord's casualty insurance. Is this what the parties have in mind? What about earthquakes? What about toxics released in or near the building making the building untenantable (e.g., PCBs)? What if asbestos is discovered in the building which must be removed? If a broad definition of casualty is used for the clause (e.g., anything that makes the premises untenantable), does that expose the landlord to uninsured restoration obligations?
  • Must the casualty affect the premises? Will a casualty to the building's or complex's common areas, parking garages, pedestrian or vehicular access roads or walkways trigger the clause?
  • Are the obligations of the parties to carry casualty insurance expressly spelled out in the lease? Does the landlord's insurance cover work performed by the tenant in the premises, or the tenant's personal property, fixtures, and furnishings? If not, is the tenant obligated to carry casualty insurance covering such items? Is the landlord only obligated to restore the premises if its insurance proceeds are adequate to do so?
  • What exactly is the landlord obligated to restore? Some casualty clauses fail to define precisely what the landlord must restore following a casualty. For example, are the tenant's own improvements, non-standard building work, personal property, trade fixtures, furniture and decorating included in the landlord's restoration obligations? It is also important to include the standard to which the restoration must conform (e.g., to the condition of such improvements immediately prior to the casualty).
  • Does the clause give the tenant the right to purchase the property in the event the lease is terminated for a casualty? In some single tenant building deals, this could make sense for the parties (see the Lease Clause Critique). If the parties consider an option to purchase, must a casualty and lease termination occur for the tenant to be able to exercise?


End of Excerpt