Commercial leases are full of provisions that can each have a significant impact on a tenant’s business operations. When negotiating, it may be tempting to focus more on provisions that seem the most critical, and less on provisions that are considered “unlikely” to happen. However, when unlikely events do happen, preparation is often the key to better outcomes.

Recent wildfires and other natural disasters in Oregon, Hawaii, and along the West Coast are a reminder of the importance of the damage and destruction provisions in a commercial lease. Damage and destruction provisions are what set forth the rights and obligations of the landlord and the tenant in the event a building, or space within a building, is damaged or destroyed by fire or other defined casualty, like a natural disaster.

Here are some tips and considerations for negotiating damage and destruction provisions in commercial leases:

Notice of damage

Consider requiring the landlord and tenant to give notice of the damage to the other promptly upon learning of the damage.

Rights to terminate the lease

Parties should consider whether they can terminate the lease in the event of casualty. That may depend, at least in part, on the extent of the damage and how long it will take to restore the leased premises and any associated common areas. If the landlord and/or tenant has a right to terminate, specify in the lease when and how each can exercise such a right, as well as the effect of early termination on other obligations (e.g., rent obligations, whether any prepaid rent should be returned to the tenant, and whether any indemnity or obligations in the lease should survive early termination of the lease).

Rights and obligations to rebuild

If either party is to have a right or obligation to rebuild the leased premises, in part or in whole, following a casualty, the lease should describe the circumstances that trigger those rights and obligations. It is also important to include the standard to which the leased premises should be restored (e.g., equal in value and function, or to some other standard). If the tenant has an obligation to rebuild any tenant improvements, or to replace their own fixtures, the lease should include that obligation.

Restoration obligations

Effective damage and destruction provisions should work cohesively with other provisions, such as insurance, or obligations under a deed of trust securing a loan to the landlord. Regardless of who carries the property insurance policy, the lease should provide for the insurance proceeds to be available to the party responsible for rebuilding. The lease should also identify who is responsible for the deductible on the property insurance policy, as well as whether the obligation to rebuild is limited to the available insurance proceeds. The lease should also consider what the parties should do if the landlord’s lender does not make insurance proceeds available for restoration.

Rent abatement

If any of the rent payable by the tenant is to be temporarily abated on account of the damage or destruction, the lease should specify the conditions and the time period for rent abatement to apply. For example, parties may specify abatement only while the leased premises are not reasonably usable, or only to the extent any loss of rent insurance proceeds are available under the property insurance policy.

Clear and precise language

Clearly define terms (such as what determines a “casualty”) to avoid ambiguity and potential disputes.

Customization to fit specific needs

The interests of parties following a casualty will vary widely depending on whether the lease is a gross lease or a net lease, or whether the lease is for office space, retail space, industrial space, or land. It is important for these provisions to fit the unique needs of the parties.

The importance of well-negotiated provisions around damage and destruction from casualty in a commercial lease cannot be understated. Failing to incorporate unique considerations in these agreements can lead to highly unfavorable outcomes. Considering the destruction from wildfires and other natural disasters in recent times, it is best to approach lease negotiations on these issues with a well-prepared strategy.

Steve Moore is a partner in Stoel Rives’ real estate group. Contact him at 503-294-9490 or steve.moore@stoel.com.

Anna Reutin is an associate in Stoel Rives’ real estate group. Contact her at 503-294-9553 or anna.reutin@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the authors and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither author nor the 91��Ƶ guarantees the accuracy or completeness of any information published herein.

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