Casualty: A Tenant's Perspective

If the tenant has not settled with its insurance company, the tenant will need to perform its construction work without the benefit of receiving its insurance proceeds. Depending on the type of business conducted by the tenant and the number of store locations it operates, a tenant may need to incorporate into its reconstruction obligations the same rights as the landlord has with regard to settlement with its insurance company. A tenant needs to provide specifically in its lease that it will not be required to rebuild the premises until it has received the insurance proceeds from its insurance company. Even if the tenant is successful in obtaining this language, however, the landlord will typically still want an outside date by which the tenant will commence its rebuilding of the premises, whether or not the tenant has received its insurance proceeds from the casualty.

In addition, a tenant needs to be careful in its drafting of the lease so that the premises that the landlord turns back over following the casualty is in the same condition as it was when the tenant accepted possession from the landlord at the inception of the lease. Frequently, a casualty provision in a lease will indicate that the landlord must return to the tenant a “vanilla box” or a “warm vanilla box” in order to satisfy the landlord's construction obligations. A savvy tenant should ensure that all items relating to utility facilities, mechanical facilities, structural elements, flooring, conduit and other necessary elements of the premises are reconstructed by the landlord before the landlord is deemed to have completed its work. The difference in cost to the tenant for its reconstruction and the time period necessary in order to reconstruct will be substantially different if these elements are not included in the landlord's reconstruction obligations.

Please note: Be very careful when the lease is executed prior to the premises being constructed by the landlord. Often, in the form lease, the landlord's reconstruction obligations will be limited to the condition of the premises as of the date of the lease. If such is the case, the tenant could wind up expending far more in the construction of the premises than it otherwise believed was its responsibility, since as of the date of the lease, no improvements were in place at the premises.

Timeframe for Reconstruction of The Premises

In an existing project, a tenant may have a standard timeframe in which to construct its improvements to the premises (e.g., 90, 110 or 120 days). The thought process is that in the event of a casualty, it will take the tenant the same period of time to complete improvements in and to the premises. However, in the event of a major casualty that not only encompasses the premises but the building of which the premises forms a part (for instance, an enclosed regional mall), several factors may serve to elongate the tenant's construction timeframe. Those factors may include: 1) a longer time to obtain approval from the local building department (since the local building department will need to approve plans for all of the tenants located in the large retail facility); 2) procuring the necessary contractors to perform the work (since virtually all of the tenants at the retail facility will need to obtain the services of such contractors in order to rebuild their premises; and 3) the timing utilized by the tenant to reconstruct the premises (since the original construction was planned a substantial period of time in advance of the tenant's obligation, whereas the construction following a casualty ' which was not planned and which was not included in the construction budget or the construction timeline for projects that the tenant was expecting to undertake at the start of the year ' will all serve to elongate the construction process).

As a result, it is wise to provide for additional time for performance of the tenant's reconstruction work (perhaps an additional 60 days or more, in order to make sure that the tenant can satisfy its reconstruction obligations in a timely manner). While typically landlords are resistant to extending the construction timeline, a discussion of these time delay issues will often lead to the landlord's agreeing to extend these timeframes.

Abatement of Rent

A tenant should make sure that in the event of a casualty, and in the event the tenant cannot reasonably operate from the premises, either because the premises is substantially damaged or destroyed or because there is no reasonable access to the premises, the tenant's rent will abate from the date of the casualty until the date the tenant reopens the premises for business. This time period for abatement of rent would include not only the time period for the landlord's work to be performed, but also the time period within which the tenant will perform its work. A tenant should be certain that all of its rent will abate, including its base rent, as well as all “extra” charges that are payable by the tenant under the lease ' including operating costs, taxes, insurance and marketing costs.

A landlord may want to limit the time period for the abatement of the tenant's rent and be certain that after a certain period of time the rent will recommence, whether or not the tenant has completed its work and reopened for business in the premises. A tenant, however, should be certain that there is a sufficient period of time for both the landlord to complete its work and then a sufficient period of time following the completion of landlord's work for the tenant to complete its work (as addressed earlier in this article) before the tenant's rent will recommence.

Termination of Lease

While the form lease will typically provide the landlord with the ability to terminate the lease in the event of a casualty, a tenant needs to be certain that it has incorporated certain termination rights for the tenant and certain limitations on the landlord's termination rights in the event of a casualty. These rights would include the following:

• The right for the tenant to terminate the lease in the event the premises is damaged or destroyed during the last two years of the term; and
• The right to terminate the lease if the landlord has not completed its construction within a certain number of days following the date of the casualty (e.g., 270 days following the date of the casualty).

The first of the above termination rights will protect the tenant from having to rebuild a location that it was going to vacate at the termination of the lease. The second termination right protects the tenant from having no outside date by which the retail facility (and the premises) will be reopened for business. This is especially important because the tenant may start to lose its labor force if the premises is closed for a substantial period of time with no reopening date known to the tenant's employees.

A tenant should also be certain that in the event the landlord wants the right to terminate the lease in the event of a casualty, the landlord is obligated to terminate all of the leases of all of the tenants that are similarly situated as the tenant. Moreover, the term of the lease should be tolled during any period that the premises is closed for business so that valuable term is not lost during any period of closure.

By carefully negotiating the language in the lease, a tenant can avoid the pitfalls that often result following a casualty situation.

Glenn Browne is a partner in Braun, Browne & Associates, P.C., Riverwoods, IL.

When a fire or other casualty damages a tenant's premises, especially when the premises is part of a larger retail facility like an enclosed regional mall, the rights outlined in the tenant's lease will dictate how the casualty is handled, including, without limitation, determining what obligations the landlord and the tenant have in the reconstruction of the premises, how long a landlord and a tenant will have to perform their work in order to rebuild the premises, any rent abatement that will occur and any termination rights that either the landlord or the tenant will have based upon the casualty. This article examines a tenant's perspective with regard to those topics, and offers certain insights into how a tenant should draft its lease in order to protect itself in the event of a casualty situation.

Landlord's and Tenant's Tasks Following a Casualty

Once a casualty occurs, and if neither the landlord nor the tenant terminate the lease (as discussed later in this article), both will typically each look toward their insurance company in order to reimburse them for the loss caused by the casualty. This concept is important because in a typical lease situation, where the lease form is most often drafted by the landlord, the landlord's obligation to commence its reconstruction efforts will be triggered by the landlord's receipt of insurance proceeds from its insurance company. However, the tenant's reconstruction obligation is most often triggered by the completion of the landlord's work and the landlord's delivery of the premises back to the tenant.

If the tenant has not settled with its insurance company, the tenant will need to perform its construction work without the benefit of receiving its insurance proceeds. Depending on the type of business conducted by the tenant and the number of store locations it operates, a tenant may need to incorporate into its reconstruction obligations the same rights as the landlord has with regard to settlement with its insurance company. A tenant needs to provide specifically in its lease that it will not be required to rebuild the premises until it has received the insurance proceeds from its insurance company. Even if the tenant is successful in obtaining this language, however, the landlord will typically still want an outside date by which the tenant will commence its rebuilding of the premises, whether or not the tenant has received its insurance proceeds from the casualty.

In addition, a tenant needs to be careful in its drafting of the lease so that the premises that the landlord turns back over following the casualty is in the same condition as it was when the tenant accepted possession from the landlord at the inception of the lease. Frequently, a casualty provision in a lease will indicate that the landlord must return to the tenant a “vanilla box” or a “warm vanilla box” in order to satisfy the landlord's construction obligations. A savvy tenant should ensure that all items relating to utility facilities, mechanical facilities, structural elements, flooring, conduit and other necessary elements of the premises are reconstructed by the landlord before the landlord is deemed to have completed its work. The difference in cost to the tenant for its reconstruction and the time period necessary in order to reconstruct will be substantially different if these elements are not included in the landlord's reconstruction obligations.

Please note: Be very careful when the lease is executed prior to the premises being constructed by the landlord. Often, in the form lease, the landlord's reconstruction obligations will be limited to the condition of the premises as of the date of the lease. If such is the case, the tenant could wind up expending far more in the construction of the premises than it otherwise believed was its responsibility, since as of the date of the lease, no improvements were in place at the premises.

Timeframe for Reconstruction of The Premises

In an existing project, a tenant may have a standard timeframe in which to construct its improvements to the premises (e.g., 90, 110 or 120 days). The thought process is that in the event of a casualty, it will take the tenant the same period of time to complete improvements in and to the premises. However, in the event of a major casualty that not only encompasses the premises but the building of which the premises forms a part (for instance, an enclosed regional mall), several factors may serve to elongate the tenant's construction timeframe. Those factors may include: 1) a longer time to obtain approval from the local building department (since the local building department will need to approve plans for all of the tenants located in the large retail facility); 2) procuring the necessary contractors to perform the work (since virtually all of the tenants at the retail facility will need to obtain the services of such contractors in order to rebuild their premises; and 3) the timing utilized by the tenant to reconstruct the premises (since the original construction was planned a substantial period of time in advance of the tenant's obligation, whereas the construction following a casualty ' which was not planned and which was not included in the construction budget or the construction timeline for projects that the tenant was expecting to undertake at the start of the year ' will all serve to elongate the construction process).

As a result, it is wise to provide for additional time for performance of the tenant's reconstruction work (perhaps an additional 60 days or more, in order to make sure that the tenant can satisfy its reconstruction obligations in a timely manner). While typically landlords are resistant to extending the construction timeline, a discussion of these time delay issues will often lead to the landlord's agreeing to extend these timeframes.

Abatement of Rent

A tenant should make sure that in the event of a casualty, and in the event the tenant cannot reasonably operate from the premises, either because the premises is substantially damaged or destroyed or because there is no reasonable access to the premises, the tenant's rent will abate from the date of the casualty until the date the tenant reopens the premises for business. This time period for abatement of rent would include not only the time period for the landlord's work to be performed, but also the time period within which the tenant will perform its work. A tenant should be certain that all of its rent will abate, including its base rent, as well as all “extra” charges that are payable by the tenant under the lease ' including operating costs, taxes, insurance and marketing costs.

A landlord may want to limit the time period for the abatement of the tenant's rent and be certain that after a certain period of time the rent will recommence, whether or not the tenant has completed its work and reopened for business in the premises. A tenant, however, should be certain that there is a sufficient period of time for both the landlord to complete its work and then a sufficient period of time following the completion of landlord's work for the tenant to complete its work (as addressed earlier in this article) before the tenant's rent will recommence.

Termination of Lease

While the form lease will typically provide the landlord with the ability to terminate the lease in the event of a casualty, a tenant needs to be certain that it has incorporated certain termination rights for the tenant and certain limitations on the landlord's termination rights in the event of a casualty. These rights would include the following:

• The right for the tenant to terminate the lease in the event the premises is damaged or destroyed during the last two years of the term; and
• The right to terminate the lease if the landlord has not completed its construction within a certain number of days following the date of the casualty (e.g., 270 days following the date of the casualty).

The first of the above termination rights will protect the tenant from having to rebuild a location that it was going to vacate at the termination of the lease. The second termination right protects the tenant from having no outside date by which the retail facility (and the premises) will be reopened for business. This is especially important because the tenant may start to lose its labor force if the premises is closed for a substantial period of time with no reopening date known to the tenant's employees.

A tenant should also be certain that in the event the landlord wants the right to terminate the lease in the event of a casualty, the landlord is obligated to terminate all of the leases of all of the tenants that are similarly situated as the tenant. Moreover, the term of the lease should be tolled during any period that the premises is closed for business so that valuable term is not lost during any period of closure.

By carefully negotiating the language in the lease, a tenant can avoid the pitfalls that often result following a casualty situation.

Glenn Browne is a partner in Braun, Browne & Associates, P.C., Riverwoods, IL.