Casualty and Condemnation Clauses Explained

Most tenants never need these paragraphs, which is why they get skipped. But the event that triggers them is the one that threatens the business: you cannot operate, you may still owe rent, and the landlord has the decision about what happens next.

A Mesch Clark & Rothschild article notes that these provisions are often overlooked, even though they can have major operational and financial effects. Both clauses are negotiable, usually at low cost, because neither side expects to use them.

The default rules differ by state when a lease is silent or unclear, so the goal is to make sure yours is not silent. Ask your attorney what applies where you are.

A typical clause, as described by Mesch Clark & Rothschild, has the landlord repair and restore the improvements, but only to the extent insurance proceeds are available, unless the lease is terminated. That limit matters. Stoel Rives advises that the lease state who pays the property insurance deductible and whether the rebuild obligation is capped at available proceeds.

It also matters who rebuilds what. A landlord’s repair duty may stop at the base building, leaving your improvements, furniture and equipment to you. Stoel Rives says that if the tenant must rebuild tenant improvements or replace its own fixtures, the lease should say so, and that insurance proceeds should reach the party responsible for rebuilding, whichever party carries the policy.

The clause should also give you a date. Without one, you are waiting on someone else’s adjuster and contractor, with no way to plan. Ask that the landlord deliver an estimate of restoration time, from an independent professional if possible, within a short period after the event. Mintz & Gold suggests using an independent professional’s determination of how long restoration will take.

Do not assume it does. Rent abates only if the lease says so or the law supplies it. Mesch Clark & Rothschild describes abatement lasting while the premises cannot be occupied, until repairs are complete, except where the tenant’s gross negligence or intentional misconduct caused the damage. Stoel Rives adds that some leases tie abatement to whether the space is "not reasonably usable" or to available loss-of-rent insurance.

• ✓Does abatement begin on the date of the casualty, and does it cover all rent, including operating expenses and taxes?
• ✓Does it cover the part of the space we cannot use, and does that include the whole space if the rest is no longer practical to run?
• ✓Does it depend on the landlord having collected on its rent-loss insurance? If so, what happens if the landlord did not carry it?
• ✓Does it continue until we have had reasonable time to restore our improvements and move back in, not only until the landlord finishes?
• ✓Does it apply if we lose access or parking, or building services, without physical damage to our floor? Mintz & Gold recommends this.
• ✓Would an event that we are accused of causing take away our abatement? How are negligence and misconduct defined?
• ✓Is free rent or another concession preserved, instead of being used up during the repair period?

Then line up your own insurance. Mesch Clark & Rothschild suggests business interruption coverage for this reason. KMRD Partners makes the same point from the insurance side: how a lease treats rent during an outage affects how much coverage you need.

Landlord forms usually keep a termination right for the landlord. Your first job is to narrow it, and your second is to obtain one of your own. Mintz & Gold’s points are a useful list.

• Limit the landlord’s right to defined triggers, such as damage that would take longer than an agreed period to repair or cost more than an agreed share of insurable value.
• Require the landlord to have terminated a set share of leases in the building, so it cannot use a fire to remove only you.
• Require the landlord to decide within a fixed period, and Mintz & Gold suggests something like 60 to 90 days.
• Give the tenant its own termination right if a set share of its space is damaged or restoration will take too long.
• Let the tenant out if restoration runs past the estimate by an agreed margin.
• Add a right for a casualty in the final one or two years of the term, or if little term would remain after restoration.

Mesch Clark & Rothschild also flags that a tenant whose gross negligence or intentional conduct caused the casualty generally loses the right to terminate, and has to repair promptly and keep paying rent. So look at how those terms are defined.

Write these periods down with your team’s real needs in mind. How long could your business survive out of this location? That number is the one your termination right should track.

A condemnation clause sets out what happens when the government takes all or part of the property through eminent domain. As a Barnes Walker glossary puts it, the clause can cover payment for the taking, reduced rent or ending the lease. Most office tenants will never face one. The question is more pressing where road widening or redevelopment is plausible, such as a retail or flex property on a major road.

There are three questions to ask.

• Does the lease end? Read what the clause says for a taking of the whole property and for a taking of part. For a partial taking, ask for your own right to leave if what remains no longer works, including loss of parking or access, and for rent to be reduced if you stay.
• Who gets the award? Many landlord forms give it to the landlord. A Nochumson article on a Pennsylvania case describes a lease where the tenant waived any interest in the award and could not independently take part in the proceeding.
• What can you still claim? Keep the right to a separate claim. A Florida Bar Journal article advises that even a tenant waiving its share of the real estate compensation should expressly preserve claims for trade fixtures and other tenant improvements. It also advises preserving business damages and moving costs where the law allows them.

The article also notes that the federal Uniform Relocation Act may provide relocation benefits for displaced businesses on federally funded projects, and that this federal right cannot be waived by lease. State rules differ widely on the rest, and the Florida and Pennsylvania examples will not carry over everywhere. If you hear about a possible taking, have your attorney read the clause right away.

1. Ask your attorney to read these two clauses with the insurance clause, since they all work together.
2. Ask your insurance broker to confirm that your property and business interruption coverage match what the lease makes you responsible for.
3. List the tenant improvements you paid for, and agree on who insures and rebuilds them.
4. Agree on a repair estimate deadline, an outside date for restoration and your own right to leave.
5. Keep a copy of the lease off-site and know the notice deadlines in advance, since a right that expires in a set number of days after an event is easily missed in a crisis.

Tenant Advisory Group represents tenants, and we raise these points during the first round of lease comments, while the landlord still wants the deal. They seldom hold up a transaction, and they are hard to change once you have signed.