Pay Overage if Tenant's Terrorism Insurance Is Too Costly
Issue to Negotiate
Since Sept. 11, 2001, terrorism insurance coverage has been increasingly in demand. But this coverage may be expensive. If the lease requires the tenant to rebuild the entire building after a casualty and to get insurance to cover that rebuilding, should it also require the tenant to get terrorism coverage for the building?
Owner's View
You may think terrorism coverage is vital because your building is a possible terrorist target. So you want to require the building's tenant to properly insure the building against terrorism. Otherwise, the tenant could suffer a huge loss if the building is damaged by terrorism. And whether or not you think your tenant needs such insurance, a lender may refuse to give you a mortgage unless your tenant gets that coverage. Also, getting terrorism coverage shouldn't be a burden for the tenant in the long run. Although terrorism insurance is expensive, premium rates have dropped since the federal government agreed to step in to protect insurers as a last resort.
Tenant's View
The tenant may argue that the cost of getting terrorism insurance is still prohibitive, if the insurance can be gotten at all. Many insurers still refuse to offer it because the risks of providing terrorism coverage are too great. And those that offer it are still charging high premiums.
Compromise: Cap Tenant's Cost of Terrorism Coverage
To persuade a reluctant tenant to agree to get terrorism coverage, New York City attorney Jacob Bart suggests this compromise: Cap the tenant's cost for the coverage. That is, say in the lease that the tenant is only required to spend up to a specified amount for that coverage and you'll pay the amount above that cap, he says.
How do you determine the cap amount? First, you'll need to figure out how much terrorism coverage costs. Talk to insurance brokers about what the current premium for terrorism coverage would be for the building now and what it may be in the near future, advises Bart. You may want to build in some flexibility or margin for error by inflating those numbers somewhat—just in case they're off, he adds. Then you and the tenant will negotiate how much of that amount each of you will be responsible for, he says.
You'll want to negotiate as high a cost cap as possible, since you'll be paying the overage, says Bart. Also, set a maximum total cost for the terrorism coverage—to give you further protection on costs. To do that, say in the lease that if the cost of terrorism coverage exceeds a certain amount, the tenant can't get the coverage, Bart advises. Otherwise, you could wind up paying much more for this insurance than you anticipated.
Example: You learn that the cost of terrorism insurance would currently cost your tenant about $1.00 per square foot. You might agree in the lease that the tenant will be responsible for paying up to $0.75 per square foot of the terrorism coverage and you'll be responsible for paying any overage up to $1.00 per square foot.
Add Lease Language
To use this compromise, Bart suggests adding the following language to your lease where it discusses the insurance coverage that the tenant must get to rebuild the building after a casualty: CLLI0010
Model Lease Language
…including coverage for terrorist acts, if such coverage is available, with limits and deductibles reasonably satisfactory to Landlord. Tenant shall be responsible for up to the first [insert amount, e.g., $0.75] per square foot of the cost of such terrorism coverage and Landlord shall be responsible for up to the next [insert amount, e.g., $0.25] per square foot of such terrorism coverage; provided, however, that Tenant shall not carry any such terrorism coverage if its cost exceeds [insert amount, e.g., $1.00] per square foot.
Practical Pointer: What if your lender demands that the tenant get terrorism coverage regardless of the cost? Then, depending on the strength of the tenant, you may need to agree not to limit the amount you'll pay above the tenant's cap.
CLLI Source
Jacob Bart, Esq.: Partner, Stroock & Stroock & Lavan LLP, 180 Maiden Ln., New York, NY 10038-4982; (212) 806-5400; JBart@Stroock.com.