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The Effect of 9-11 on Commercial Leases Commercial real estate has a new risk: terrorism. As a result, casualty, insurance, force majeure, and safety issues are now at the forefront of commercial leases. Not exactly the sexiest provisions of any lease. Perhaps even standard "boilerplate" to be quickly scanned in the past, but no more. Casualty Clauses When you think of "casualty" think damage of some sort. Earthquake, hurricane, flood, fire, explosion, and perhaps an act of terrorism. Some of these can be caused by the act of a tenant or landlord, such as fires. Landlords and tenants often have very different concerns when a casualty happens. A tenant wants, in fact needs, to stay operational, without interruption, somewhere. The landlord wants to rebuild as quickly as possible to maintain rent cash flow. The Twin Towers are gone, and so are the leases of all that space, and the rents those leases generated. Instead, the landlord collects rent insurance proceeds, and the tenants have moved to other space. Deciding what to do in that instance was easy. The buildings were a total loss, and would not even be fully dismantled for nearly one year. But what happens when the loss is not total? Most leases allow the landlord (and may require the tenants) to undertake repairs, and require repairs to be completed within a certain amount of time. If they cannot be completed in that time frame, one or both parties may terminate the lease. Nearly every tenant would have a problem with paying rent on space they could not use, but that's what a lot of commercial leases require. Some leases give the landlord a different (usually longer) amount of time to terminate the lease than the tenant gets. The longer the time period, the more uncertainty exists for the tenant. One of the best solutions I have seen on this issue is to trade tenant's ability to terminate the lease for the landlord's agreement to make a good faith effort to relocate the tenant to temporary quarters as a condition for the tenant not terminating the lease. And in every casualty event, both landlord and tenant will pull out their insurance policies to see what's covered and how much they can collect from their insurers. Insurance Coverage The definition of casualty is critical, not just in the lease itself, but in the insurance policies insuring the property. Both landlord and tenant must know what their insurance policies cover, and that depends in large part of which, and how many, casualties are covered. For example, in connection with 9-11, the owner of the Twin Towers is claiming that each plane's impact was a separate event, so he should be able to file two claims and collect to policy limits on both. But his insurance company is claiming both planes were one act of terrorism, meaning the landlord can only collect half as much as he thinks. With this much money at stake for both sides ($3.6 billion), a trial is almost a certainty. What many don't know is that the landlord, Silverstein Properties, had just entered into a 99 year lease on the World Trade Center just 10 weeks before the attacks. And the coverage was at the "binder" stage, meaning final insurance may not have been in place at the time of the attacks. The typical insurance coverages are for:
Because 9-11 pointed out many ways in which the insurance policies fail to answer very expensive questions, you can be sure insurance companies are rewriting their policies to address more possibilities now. And the advantage goes to he who writes the policies. As a result, shopping for insurance will become more important. We have assisted several of our clients in auditing and bidding their insurance coverages, helping to eliminate duplicate coverages, making sure the insurance company understands what it is insuring to obtain the proper rating, and making sure the client has enough insurance without being overinsured. These efforts typically reduce insurance premiums, and in today's market keeping insurance costs under control is getting more and more critical. Tenants now have more of an interest in the landlord's insurance. Many leases require the landlord to only repair to the extent of insurance proceeds received. If the landlord's insurance excludes coverage of acts of terrorism, and the building is hit, and there are no proceeds, what is the tenant to do? Also consider anthrax in this context. Someone sends another tenant an anthrax-filled letter, causing the building to be unfit for human habitation for months. Would this be a "casualty" that would trigger insurance coverage? Also consider that some leases provide for rent abatement if utility services are interrupted for a long period of time. But back to the anthrax example: what if the lights work but the air is unfit to breathe? The answer can't be "I don't know." There has to be some decision, and that will depend on the terms of the policies and leases. 9-11 showed us that our insurance policies are vague and ambiguous, which is quite strange."Uncertain insurance" is an oxymoron. There should be no such thing, because insurance is all about certainty. And so another result of 9-11 will be longer, and more specific, insurance policies, with more general exclusions of anything not specifically covered. In other words, what is included will be more specifically defined, while exclusions will be more generally defined. Useful websites on insurance-related issues include:
Finally, insurance from a different perspective. A restaurant owner near the Twin Towers fled the scene on 9-11, but returned several days later to feed the volunteers at Ground Zero-for free. When his insurance company found out, it refused to pay his business interruption claim on the ground that he "reopened" by cooking for the volunteers. Let no good deed go unpunished. Force Majeure I love force majeure (pronounced in Texas like "muh-jure") clauses, being first introduced to them in my law school class on International Law. I like to include very broad force majeure clauses in my client's agreements to give some added flexibility (and "arguability" due the ambiguity it can create) when time for performance becomes an issue. Basically, force majeure clauses excuse a party from performing their obligations under a lease (other than monetary obligations) if they are prevented from performing because of matters beyond the party's control. Labor strikes, war, Acts of God, acts of terrorism, are examples of matters covered by most force majeure clauses. Building owners and operators may cite a "force majeure" clause as an excuse for not servicing a building, or even making an effort to do so, after an act of terrorism. For this reason, tenants will want to narrow the scope of these clauses as much as possible. And while both parties come at this issue from opposite sides, force majeure clauses will certainly be subject to more negotiation time than ever before. Safety In New York, in response to the 1993 WTC bombing, some tenants began negotiating "safe occupancy" clauses into their leases, where the landlord agreed to operate the building in a safe manner from the perspective of fires, security from theft and assault, and environmental safety, such as the absence of asbestos, environmental hazards, "sick building" syndrome, and other causes of indoor pollution. Since 9-11, more emphasis is being placed on building safety. Texas is somewhat unique in that it has a "warranty of habitability" created by our courts, that protect them from premises unfit for human habitation (the Texas Supremes just issued a landmark decision on this warranty; read our second Commercial Real Estate article in this month's Alert). Anthrax and any other environmental condition caused by a terrorist act would certainly fall under the warranty of habitability (note in Texas, at least right now, the warranty of habitability cannot be waived or released by a tenant). But notwithstanding Texas law, 9-11 exposed the need for tenants to make every attempt to obtain and keep premises that are useful, while allowing them to terminate their leases and move on in the event the space becomes uninhabitable. Public Image Buildings Signature buildings will require even more external security, including:
No, this isn't Men In Black III, it's just our new Post 9-11 world. Legal guidance through these and the many other issues involved in a commercial lease will be more critical than ever. Close
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