Cover 14 Key Points in Moderate ‘Damage and Destruction' Clause for Strong Tenant's Lease

With the looming threat of fires, hurricanes, terrorist acts, and other disasters, you would be wise to take closer look at your leases' “damage and destruction” clause. It spells out both owner's and tenant's rights and obligations when a casualty occurs, so it will be the first clause you turn to after your office building suffers a casualty.

Several years ago, we gave you a tough, pro-owner damage and destruction clause that you could use in your leases (see “How to Protect Yourself if Tenant's Space Is Damaged,” CLLI, http://www.vendomegrp.com). But New Jersey attorney Marc L. Ripp has found that strong tenants typically refuse to accept such a one-sided clause. He now suggests using a more moderate damage and destruction clause. “A moderate clause eliminates protracted and time-consuming negotiations with prospective tenants on the subject of damage and destruction, as well as multiple redrafts of leases,” says Ripp. But the moderate clause still can protect you, he adds.

With Ripp's help, we'll give you a checklist of 14 points to cover in a moderate damage and destruction clause if you're negotiating a lease with a strong tenant. We'll also give you a Model Lease Clause (see p. 3) that includes those points, which you can adapt and use in your leases.

Damage and Destruction Clause Basics

A typical damage and destruction clause sets out the parties' rights if the tenant's space or certain critical common areas of the building—such as the entrance or hallway leading to the space—are damaged, explains Ripp. The clause requires you to make certain repairs and restore the space within a specified time frame or lets you terminate the lease if the cost of repairing the damage is too high.

The clause also sets out the tenant's rent obligations while you're making the repairs. Typically, the tenant gets a rent abatement in an amount proportionate to the amount of space it can't use, Ripp says.

14 Points for Moderate Damage and Destruction Clause

Make sure that your moderate damage and destruction clause, like our Model Lease Clause, covers these 14 points:

* Tenant Must Notify You of Casualty

Require the tenant to immediately notify you or your property manager if the building or the tenant's space is damaged or destroyed by a casualty, to the extent it knows about that damage, says Ripp. And make it clear that the lease will continue in full force, despite the damage or destruction, except as otherwise noted, he adds [Clause, par. a].

* Keep Tenant on Hook for Rent After Casualty

Make it clear that the tenant is still responsible for paying rent after a casualty, unless the lease says otherwise, notes Ripp [Clause, par. b]. If this isn't clear, the tenant may think that its rent will stop if it can't use or access its entire space.

* Get Right to Decide if Damage Can Be Reasonably Repaired Within Set Time Frame

You shouldn't always be forced to make repairs when the tenant's space is damaged. Instead, make the repair obligation your call. That is, state in the lease that if, in your reasonable judgment, you believe that you can reasonably repair the damage in the tenant's space within a set time frame—for example, 180 days from the casualty date— you'll carry out the repair work at your sole cost, says Ripp. Although you're the one making this judgment, you'll have to be reasonable, he adds. If you believe that you can reasonably repair the damage within that time frame, notify the tenant of this in writing within, for example, 30 days of the casualty date, so that the tenant isn't left guessing whether you'll do the repair work [Clause, par. c].

* Require Total or Substantial Damage to Space

Don't let superficial damage trigger your repair obligation, says Ripp. Instead, to trigger this obligation, require that all or a substantial portion of the space be damaged or rendered unusable or inaccessible by damage to the building from the casualty, he says [Clause, par. c].

Practical Pointer: The term “inaccessible” takes into account that damage occurring outside the tenant's space could prevent the tenant from gaining access to its space, says Ripp. For example, suppose a fire or terrorist's bomb damages the building's lobby so severely that there's no access to the elevators, stairway, or hallway leading to the tenant's space. As a result, the tenant's space becomes inaccessible, he says.

* Use ‘Reasonable Efforts' to Make Your Repairs

Don't agree to repair the space to exactly the same condition it was in before the casualty, says Ripp. If you do and something is slightly different from before—perhaps the color of the replacement carpeting is darker than the original—the tenant could claim that you've violated the lease. Instead, agree to use only “reasonable efforts” to repair and restore the space and/or the building to “substantially” its former condition, he says [Clause, par. c]. This relieves you of responsibility for an exact restoration and gives you some leeway, he explains.

* Repair Space as Permitted by Law

Agree in the lease to repair the space only to the extent permitted by law, he says [Clause, par. c]. Since the lease was signed, zoning, fire, or other significant laws may have changed, says Ripp. For example, you may not be able to rebuild columns in the tenant's space if they'll block an emergency exit door required by a new fire law. In that situation, you don't want to get caught between your lease obligations to the tenant and legal trouble from your local government.

* Tenant Responsible for Certain Repairs

If you choose to repair the space, make sure that you're not responsible for also repairing the tenant's and subtenant's personal property, fixtures, or alterations, says Ripp [Clause, par. d]. The tenant should pay for those repairs itself, using its insurance.

* Require Tenant's Cooperation with Repairs

Require the tenant to cooperate with your repair obligation by removing its inventory and equipment from the space, says Ripp [Clause, par. d]. Otherwise, you may be unable to do the repair work in its space properly or quickly.

* Abate Rent Proportionately

Although the tenant may argue that it shouldn't have to pay any rent until the damage is fixed, agree instead to this compromise: Give the tenant a rent abatement proportionate to the percentage of the space that's unusable or inaccessible, he says [Clause, par. c]. For example, if the tenant can't use any of the space, it shouldn't have to pay any base rent or additional rent, he says. If the tenant can use only 50 percent of the space, it should pay only 50 percent of its base rent and additional rent.

Practical Pointer: Some owners try to require the tenant to pay additional rent—such as operating expenses, real estate taxes, and utilities—no matter how badly damaged the space is, says Ripp. But many tenants won't accept that, he says.

* End Rent Abatement by Substantially Completing Repairs

Make sure that the rent abatement ends once you've substantially completed the repairs, says Ripp [Clause, par. c]. This way, you don't have to wait until you've fully completed the repairs to get the tenant's rent.

Practical Pointer: If you're worried that the tenant will dispute whether the repairs are substantially completed, add language saying that your architect will make the decision on whether repairs are substantially completed, advises Ripp.

* Get Right to Terminate Lease

Get the right to opt out of your repair obligation if the space or the building is so damaged that it makes no financial or business sense for you to make the repairs, says Ripp. To do that, state in the lease that you have the right to terminate the lease if either the space or the building is totally or substantially damaged, unusable, or inaccessible, and in your reasonable judgment, you can't repair the damage within a set time frame—for example, 180 days from the casualty date. The tenant gets a similar termination right because its business could be seriously hurt while it waits for you to decide to terminate the lease [Clause, par. e].

* List Termination Procedures

If you believe that the damage can't be reasonably repaired with the set time frame, notify the tenant of this soon—for example, 30 days—after the casualty, in writing. Then either party can terminate the lease by sending the other a written termination notice that must be received within, for example, 30 days of the date of your original notice, specifying the lease's termination date. Ripp suggests that the termination date be between 90 and 180 days after the casualty so that you can take whatever steps are necessary with respect to the space or building.

On the termination date, the tenant must have paid up any base rent and additional rent then owed and move out of its space, without affecting your rights and remedies against the tenant. And if the tenant paid you rent for any month after the termination date, you'll credit the payment against any other amounts the tenant owes you and then refund the excess [Clause, par. e].

* No Abatement, Termination Right if Damage Caused by Tenant's Negligence

Let the tenant know that if its bad acts caused the damage—for example, one of its employees lit a match that set fire to the tenant's space—the tenant won't get a rent abatement or be able to exercise the termination rights under the damage and destruction clause, says Ripp. Also let the tenant know that it will be liable to you for any damage you suffer because of its negligence [Clause, par. f].

* Require Waiver

State laws may give a tenant whose space has been damaged the right to terminate the lease, says Ripp. To prevent the tenant from taking advantage of those laws, make it waive its rights under those laws, he says [Clause, par. g]. Expect a tenant to demand that you also waive any termination rights that state laws give you under these circumstances, he adds.

Practical Pointer: A tough damage and destruction clause typically states that you're not required to make repairs to a tenant's space to the extent that they would cost more than the insurance proceeds you get. But strong tenants balk at that limitation, says Ripp. They argue that you should be responsible for all repairs, even if the insurance proceeds are insufficient. After all, you should know how much insurance is necessary to cover the repair or restoration work, and it's not the tenant's fault if you've chosen to be underinsured. Ripp deliberately keeps this insurance limitation out of his clause to avoid such disputes.

CLLI Source

Marc L. Ripp, Esq.: Counsel, The Gale Co., 100 Campus Dr., Ste. 200, Florham Park, NJ 07932; (973) 301-8057; MRipp@TheGaleCompany.com.