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Drafting Casualty Provisions

Although the likelihood of a tenant's premises or a shopping center being destroyed by fire, hurricane, earthquake or other casualty may seem minimal (and indeed, even in areas of the country that seem more susceptible to earthquakes and hurricanes, such as California and Florida, respectively, the risk is minimal), landlords and tenants need to be comfortable with the casualty provisions in the lease.

Obligation to restore. A tenant understandably will look for a landlord to be obligated to restore its premises under any circumstances in the event of a casualty. However, although a landlord will expect to be required to restore a tenant's premises, landlords typically will seek to place certain limitations on such an obligation.

Termination rights. For instance, a landlord should try to limit its obligation to restore a tenant's premises to the insurance proceeds that are actually available. That is, the landlord should seek a right to terminate the lease and thus, not restore the premises in the event that its insurance proceeds are either insufficient to cover the cost of restoration or if its lender requires that such insurance proceeds (or a significant portion thereof) be applied to the mortgage debt.

Tenants may be able to negotiate to "soften" such termination rights by either requiring that the landlord cover any deductible amounts under its insurance coverage, or by obtaining a right to pay the difference between the available insurance proceeds (in addition to deductible amounts -- if the landlord has agreed to this) and the actual cost of restoration. In addition, tenants can perhaps gain some comfort that such termination rights will not be triggered by requesting evidence of the landlord's insurance in order to verify that it should be sufficient to cover the cost of restoration.

In addition, landlords should (and typically do) seek a right to terminate the lease if a certain percentage of the shopping center or tenant's premises are damaged. Not surprisingly, landlords will want to keep the percentages lower, while tenants will argue for higher percentages (the parties will commonly come to agreement somewhere between 20 percent and 50 percent).

As to a landlord's right to terminate based on damage to the shopping center, tenants may want to request that the landlord agree to be non-discriminatory in its application of this right to terminate.

End of term casualty. A landlord also should try to provide itself with a right to terminate the lease if a casualty occurs at the end of the term (e.g., during the last year). Although such a right seems reasonable (with such a short period of time remaining in the lease term, it may not make sense to restore the space for the tenant), a tenant may argue that it also should have such a right (in light of the short time frame, it may not make sense for the tenant to expend funds to restore its space, either).

Timing. Even if a landlord is proceeding to restore a tenant's premises, a tenant understandably may not want to wait for an extended period of time for the landlord to rebuild. Accordingly, tenants may ask for a right to terminate the lease if the landlord has not completed restoration of the premises within a specified period of time.

Landlords, if inclined to agree to this, should be certain that they are comfortable with any amount of time they agree to, and should perhaps consider how long it took to initially construct the premises (somewhere between nine months and two years usually will work).

Rent abatement. Even the most protective of landlord form leases will include a provision for abatement of rent after a casualty. However, prudent tenants should be careful to consider whether all rent will be abated (sometimes landlords will attempt to abate only base or minimum rent). Because a landlord's insurance usually will cover all rent loss, a landlord should be able to agree to provide a tenant with abatement of all rent (i.e., base rent, percentage rent, CAM, taxes, insurance, any promotional and media funds, and any and all other additional rent) in the event of a casualty. Tenants also should be mindful of how long the rent abatement will continue.

Landlords will commonly limit the abatement so that it continues only until the date that the landlord delivers the repaired space to the tenant. However, if the tenant initially needed three months to build out its space, it should look to have the abatement run for three months after the landlord delivers the repaired space to the tenant so that it does not find itself paying rent prior to re-opening for business.

Marc A. Benjamin is an associate in the Chicago office of Los Angeles-based Pircher, Nichols & Meeks.

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