I attended the ICSC (International Conference of Shopping Centers) Law Conference last month in Orlando, Florida, along with my GSB partner, Rob Spitzer. Fortunately, Hurricane Sandy stayed off the coast of Florida during our stay, and the conference was a great success. Unfortunately, Sandy continued north, took a sharp left turn, and introduced itself to the East Coast. Perhaps it was a coincidence, but several of the presentations at the ICSC Law Conference included a discussion of damage and destruction provisions found in retail leases.
Damage and destruction provisions in retail leases are often overlooked by the parties at the time the lease is negotiated. Frequently appearing towards the end of a lengthy lease document, the damage and destruction provisions are often considered to be less important than the key business terms of the lease, such as the commencement date, base rent, rent escalations, common area maintenance expenses, parking and restrictions on assignment and subletting. However, because a disaster like Hurricane Sandy, or any other event which causes damage or destruction to a shopping center, will be a significant disruption to the tenant’s business and the parties’ relationship, it is important the damage and destruction provisions be considered at the outset of the lease negotiations.
The typical retail lease will require the landlord to restore the leased premises in the event of damage or destruction. The landlord will often condition that obligation on the receipt of insurance proceeds or provide for a right to terminate the lease if the damage is substantial or the lease is near the end of the term. However, there are several other issues that the lease should address, including (1) whether the tenant is entitled to rent abatement pending restoration, and if so, whether additional rent (pro rata share of CAM charges) is abated in addition to base rent; (2) whether the tenant will have additional time after the landlord restores the leased premises to complete tenant improvements and stock inventory before rent re-commences; and (3) whether the tenant should have a right to terminate the lease if the damage is near the end of the term or if the landlord has not restored the premises within a specified period of time. Related to these issues are the insurance provisions of the lease, which should be drafted to work in concert with the damage and destruction provisions, so that adequate insurance proceeds are available to the landlord to restore the property and to the tenant to restore the tenant’s property.
While events such as Hurricane Sandy are infrequent, parties to a lease should not wait until such an event occurs to review the damage and destruction provisions of their lease.