Determining Who Keeps Insurance Proceeds After Casualty

Issue to Negotiate

Most office leases require the tenant to get property insurance that covers any tenant improvements in the space. But who gets to keep the insurance proceeds if the tenant improvements are damaged by a major fire or other casualty, and the lease is terminated?

Owner's View

You want to keep the proceeds from the tenant's insurance. After all, the tenant improvements are part of the space, which you own. If the tenant moves out after the casualty, you should be able to use these proceeds to repair the tenant improvements and the space to make them desirable to new tenants.

Tenant's View

The tenant will argue that it's entitled to keep the insurance proceeds because it paid for the property insurance policy. Even if it has to rebuild at a different location, the tenant will argue that it needs the insurance proceeds to do so. And since your property insurance often will cover a great deal of this damage, the tenant will maintain that you'll be reimbursed through your own insurance.

Distribute Proceeds Depending on Who Terminates Lease

New York City attorney Jacob Bart has seen this type of dispute arise often. To prevent similar disputes, he suggests a two-part compromise that, in his experience, owners and tenants have been receptive to: Say in the lease that you get to keep the insurance proceeds if the tenant terminates the lease after a casualty. But the tenant keeps the insurance proceeds if you terminate the lease.

If a tenant knows that terminating the lease will cost it the insurance proceeds, it may be reluctant to opt for termination—and that may be to your benefit, says Bart. Likewise, a tenant may be happier knowing that you also may be reluctant to terminate the lease because you'll have to forfeit the insurance proceeds, he adds.

To use this compromise, add the following language to the lease where it discusses the tenant's right to terminate the lease if there's a major fire or casualty, says Bart:

Model Lease Language

• a. Tenant Terminates. If Tenant exercises its right to terminate this Lease under this Clause, Tenant shall make available (or pay over) to Landlord the proceeds of insurance carried by Tenant pursuant to Clause [insert # of clause requiring the tenant to get property insurance] with respect to such fire or other casualty (excluding any insurance proceeds received by Tenant for any of Tenant's personal property).

• b. Landlord Terminates. If Landlord exercises its right to terminate this Lease under this Clause, Landlord agrees that Tenant shall be under no obligation to make available (or pay over) to Landlord any proceeds of insurance carried by Tenant pursuant to Clause [insert # of clause requiring the tenant to get property insurance] with respect to such fire or other casualty.

CLLI Source

Jacob Bart, Esq.: Member, Stroock & Stroock & Lavan LLP, 180 Maiden Ln., New York, NY 10038-4982; (212) 806-5400.