Last Updated on November 15, 2022
In our last blog, we began discussing commercial leases. As I wrote, the most accurate way to describe a commercial lease is to call it a document that limits the rights and increases the obligations of a tenant and enhances the ability of a landlord to receive more than that which is afforded by law. Almost every word or phrase in a commercial lease puts the burden on the tenant and relieves the landlord.
While all clauses of a lease are important and binding for both parties, some are more important than others, most notably insurance, subletting, operating expense pass throughs, and default.
In this piece, we’ll focus on insurance clauses. Typically, this section of the commercial lease will outline the required amounts of liability insurance the tenant is required to have and the quality of the insuring company. It should also outline the right for either party to terminate the lease if an occurrence makes the building untenable in the last 12 months of the lease term. It should also note that the property owner should be an additional insured, but not a loss payee. If the owner were the loss payee, any insurance money would go to them directly and you would then have to get your money to rebuild your space from the owner.
If your business operates in multiple leased locations, each landlord may have different requirements regarding insurance. The easiest way to solve challenges related to this issue is to include wording in the lease that states the insurance you carry for all your locations is accepted by the owner as being sufficient to satisfy the requirements of the lease and make the declaration page an exhibit to the lease.
Landlords often like to use the word “gross” throughout a lease. It is usually found in the insurance clause and states that the landlord will only be responsible for its gross negligence, unlike the level of responsibility imposed on the tenant, which is typically “standard” negligence. Gross negligence is a high standard to have and is very difficult to prosecute. Another tactic owners use is to include a clause that states the owner will only be responsible in insurance issues if they are 100% responsible for the insured incident. This is also a tough thing to adjudicate in your favor.
There are some provisions you can request to include in your insurance clause that will help protect you and your business. For example, you should advocate for a time frame in which the owner must rebuild damaged parts of the property, and if it cannot be completed in the agreed upon time frame, you have the right to terminate the lease. You could also ask for language that states that the owner will give the tenant five- or ten-days’ notice when the premises are ready for occupancy. But what if they tell you on the 28th of the month that the space will be ready on the 2nd of the following month? The temporary space your company is occupying requires you to pay for the entire month, and the rent in the permanent space will start on the 2nd as well. If you don’t ensure the wording in the lease specifying the rent will commence on the first day of the following month of occupancy or you’ll be paying rent in both places.
These are just a few of the things to watch out for in a lease insurance clause. Our best advice is to work with an experienced commercial real estate broker like McBride Corporate Real Estate to walk you through the maze of lease negotiation. Contact us today to get started.