Part I of this post focused on basic provisions found in commercial real estate leases such as assignment and subletting, use restrictions and the determination of the commencement date. Here in Part II, below, we will address other important issues from the tenant’s perspective including insurance, mutual waivers and defaults.
Tenant’s Insurance and Self-Insurance.
· Liability Insurance. Landlords typically carry their own liability insurance policies, so tenants should not be too concerned over the amount of tenant’s coverage limits. Instead, the tenant should check with their risk management department (or outside insurance agent) to determine the current and appropriate coverage amount. Tthe landlord and property manager will likely be required as additional insureds. The primary benefit to these parties is the insurer’s obligation to defend claims, which is not limited by the amount of the policy.
· Property Insurance. Most landlord form leases require tenants to fully insure the tenant’s furniture, equipment and other personal property. Unless there is a special reason that landlord wants this equipment insured, these clauses can often be revised in the negotiations to allow tenant to carry such insurance at its option or self-insure.
Release and Waiver of Subrogation. This is a legal issue that is often overlooked, but is very important from a risk management perspective.
· Release. In a good mutual clause, the landlord and tenant “release” each other from liability for damage to their respective property and agree that they will look solely to their insurance, regardless of negligence or fault. The rationale from the landlord’s perspective is that a leak in the roof that destroys valuable computer equipment owned by tenant is something that is more easily insured by the tenant, since the tenant better knows the value and the potential risk of loss. That said, a tenant should be able to obtain reciprocal provisions from the landlord for the benefit of the tenant, even in small leases. Typically, tenants are paying for the landlord’s insurance either as an element of rent in a gross lease or as a direct pass-through; accordingly, it is equitable for the tenants to receive the benefit of this insurance. Note, however, that most form leases only protect the landlord in this regard. A one-sided waiver of claims provision requires the tenant to look to its own insurance coverage, even if the casualty is the result of the landlord’s negligence.
· Waiver of Subrogation. Insurance policies provide that the insurer is “subrogated” to any claim its insured may have against third parties for damages to the property insured under the applicable policy. In the absence of a “waiver of subrogation”, if the tenant’s negligence caused fire damage in the landlord’s building, the landlord’s insurer could “step into the shoes” of the landlord and pursue a claim against the tenant for the damages through its right of subrogation. If the lease contains release language, the applicable party must obtain waiver of subrogation provisions in its policy; otherwise, the party risks validating their insurance coverage.
· Insurance Company Responses. Insurance companies often resist waiving subrogation even though they rarely use the right. Push hard and you will generally prevail.
Indemnity and Hold Harmless. The parties should agree to protect each other based on who can most easily and efficiently obtain the insurance protection.
· Indemnity. The term “indemnity” relates to one party “indemnifying” or protecting the other against claims of third parties.
· Hold Harmless. The term “hold harmless” is another term for “release”, pursuant to which one party agrees to release or hold harmless the other party with respect to claims between the parties. The term “hold harmless” is often mistakenly used when the parties intend to refer to indemnification.
· Objective. Similar to the discussion regarding release and waiver of subrogation above, the objective of indemnification provisions should be to allocate claims amongst the parties so that they are covered by appropriate insurance.
· Notice of Monetary Defaults. It is crucial that a tenant receive adequate notice of monetary defaults. Remedies for default are often severe, and it is not unreasonable to require the landlord to give the tenant an opportunity to cure before pursuing eviction. On the other hand, landlords typically will not want to have to give a default notice every month in order to collect the rent. A common compromise for smaller tenants is to limit the number of notices in any given 12 month period and perhaps the total number of notices during the lease term.
· Vacating. Most landlord form leases provide that deserting, vacating or abandoning the premises is an event of default, especially so in retail leases. Covenants to operate in retail leases cannot be specifically enforced in Virginia and are rarely found in anchor tenant leases or other leases involving sophisticated parties. A reasonable compromise that protects the interest of both parties is to provide the landlord with a right of termination in the event tenant vacates the premises or “goes dark” (in a retail context). From the tenant’s standpoint, you will want to negotiate a requirement that the premises be vacant for a minimum period and exclude vacancies due to fire, remodeling and similar circumstances. Also, if the tenant has made a substantial investment in improvements, the tenant may want to negotiate for reimbursement of its unamortized costs.