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Look Before You Lease

You can save your company a lot of grief by taking a second look at the fine print of your lease.
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With the surplus of office space in many American cities, a lot of companies are considering moves to new quarters. And because it is a renters' market, tales abound of the good deals that can be negotiated -- free parking, renovations, and the like (see "Now's the Time to Consider a Move," INC., April, page 107). There is, however, an area that businesses often neglect when it comes to leasing space, and one that can cost them dearly -- even the company itself. That is the failure to spell out clearly who is liable for property damage. Unless you can afford the rent on unusable space, massive inventory loss, or a sudden halt in business operations, you would do well to pay close attention to the fine print in your lease. Many a business has discovered too late that it, rather than its insurance company or landlord, must pay to repair or replace damaged property.

In fact, more leases than not contain mines waiting to be triggered by carelessness or bad luck. As one example, a Chicago client wanted to lease just 300 square feet in a large complex of offices and shops to store equipment. Tucked away on the sixth page of the landlord's standard lease was language that could have made the tenant responsible for the whole 30,000-square-foot complex if it burned down, regardless of blame. This sort of stipulation in a lease is not unusual, especially when you deal with an institutional landlord or managing agent. If you are aware of the common pitfalls in commercial leases, you can protect yourself from unexpected liabilities by negotiating safer alternatives.

* Watch for a "hold-harmless" clause. It could make you liable for damage your landlord causes.

In the hold-harmless clauses of many commercial leases, the tenant promises it will be responsible for the damage it causes, will reimburse the landlord for resulting costs, and won't sue the landlord for accidents. This seems fair. After all, if you leave faucets running and ruin the downstairs tenants' wallpaper, it's reasonable for you to pay the bills your neighbor is sure to send the landlord.And if lightning strikes, why should your landlord pay? But beware. Courts in some states have interpreted such hold-harmless clauses to mean that tenants agree to reimburse landlords even for damage the landlord causes.

Your best protection from such holdharmless clauses is to agree to indemnify the landlord only for harm you cause within the space you lease.

* Check to see if your landlord has casualty insurance. If he doesn't, you'll need to add some provions to your lease.

Most landlords carry casualty insurance as a way to protect their investment -- or because their mortgage lender requires it. But some landlords self-insure, and they are more likely to sue a tenant for damages no matter the cause. And an uninsured landlord may have no money to rebuild, which could leave you without a place to do business.

If you rent space from an uninsured landlord, make sure your lease provides that he will look to you only for damage you cause through gross negligence. Your lease should also provide that if there is a major accident, he will let you know within a specified short time, say 30 days, whether he plans to rebuild. If your landlord is uninsured, you should negotiate the right to terminate your lease after any major accident.

* If your landlord carries casualty insurance, find out the terms. They may not be adequate.

Have your landlord's insurance company send you a certificate showing the policy dates and coverage, and get a new certificate before each anniversary of your lease. (Citing substantial 1984 and '85 losses from casualty claims, insurance companies are cutting back on the kinds of hazards they'll insure against, and are changing eligibility standards. Your landlord's policy may cover less when it comes up for renewal.)

Take special note if your landlord has "all-risk" coverage. These policies cover only risks that aren't specifically excluded, and exclusions vary from policy to policy. Get a list of your landlord's exclusions. Some so-called all-risk policies, for instance, won't reimburse your landlord for sprinkler damage, but defective sprinklers can drench your offices and damage wiring, walls, ceilings, or floors. If your landlord won't insure against such risks, consider paying for such coverage for the space you lease.

In some states, insurance companies can require co-insurance: if your landlord insures his property for substantially less than its market value, the insurance company will pay for only a percentage of any loss. This can hurt you if your landlord underinsures and doesn't have enough money to rebuild.

One way to be reasonably sure that your landlord's coverage is adequate is to ask him to guarantee that he'll always carry enough to satisfy his mortgage lender. Relying on such a promise is usually a safe bet, since the lender is apt to have more money at stake than either you or the landlord. Landlords who have no mortgage can promise you that they'll carry the kind of insurance an institutional lender would require.

* Make sure your landlord's insurance policy includes a waiver of subrogation. Otherwise, you are at risk.

Even though you and the landlord both carry insurance, if the building is damaged because of something that can be traced to you or your employees -- a cigarette tossed in a trashcan, a coffeepot left on after a late meeting -- you could be liable for whatever damage the landlord suffers.

If the landlord is paid by his insurance company but doesn't get enough to rebuild, he may sue you for the rest, and the landlord's insurance company may sue you for everything it paid the landlord. A waiver of subrogation guarantees that if your landlord's insurance company reimburses him for damage you may have caused, the insurance company won't sue you.

* Be on guard against conflicting provisions in your lease. They can kill protections you think you have.

With leases as complex as they are these days, provisions conflict more often than you'd expect. They are most likely to involve clauses that deal with similar issues, such as insurance and maintenance or insurance and indemnities. The experience of Caribbean Interiors Inc., a Florida firm, shows the sort of trouble you can get into. The company leased a warehouse to store its inventory, and the landlord was responsible for general maintenance, including roof repairs. She didn't do her job, however, and the roof leaked. Caribbean Interiors, which lost its wicker furniture to water damage, sued the landlord, but lost. Even though the landlord was responsible for maintenance of the roof, Caribbean had agreed in the lease to carry insurance protecting itself against any loss, including water damage. The judge who decided the case interpreted Caribbean's promise, in essence, as a promise to protect the landlord -- if Caribbean wanted the insurance just for its own benefit, the judge reasoned, there would have been no reason to obligate itself in the lease.

* Have the lease spell out how the premises will be restored after a casualty. Don't assume things will be the same.

Negotiate a lease that requires your landlord to restore your building to substantially the same condition it was in just before the accident. Changing conditions may prevent him from doing that when the time comes, however. New laws may require more expensive safety features, or zoning changes may prohibit him from rebuilding as large a building as before or even from continuing certain uses in the rebuilt structure. Therefore, you should reserve the right to cancel your lease if new laws prevent your landlord from restoring your premises to what you had before -- and at the same rent.

* Negotiate the right to terminate your lease after a major casualty. Otherwise, you may find yourself paying rent on two places, the one you're forced to move out of and the one you're forced to move into.

The general rule is that once you have signed a lease, you're liable until the end of the term -- no matter if the building should burn down, blow away, or be flooded out. If you haven't negotiated the right to terminate, you risk a serious cash drain should an accident destroy your offices. You should also negotiate the right to terminate your entire lease if damage to part of your space makes it impractical to conduct business in the rest. Similarly, you should be able to terminate if damage to other parts of the building -- the parking lot, for instance -- reduces services or the quality of your working environment.

Landlords and tenants generally agree on one of two merasures for terminating a lease: when rebuilding will take too long, or when it will cost too much. As a tenant you will probably prefer to have a time limit. If you negotiate a lease that uses time as the trigger for your cancellation, don't feel you have to settle for your landlord's "standard" period for rebuilding -- often 180 days -- if that length of time could jeopardize your firm.

Your landlord may prefer to link his obligation to the cost of rebuilding so he won't have to spend more than he can reasonably expect to recover. If you agree to that route, make sure the damage clause in your lease requires your landlord to begin rebuilding within a reasonable time after the accident, to pursue repairs continuously, and to complete the work in a timely way.

Whether you choose days or dollars as the test of termination, it's critical to have a final date when you can walk away from the lease if, for whatever reason, your landlord hasn't finished repairs. Without this clear-cut deadline, you could be required to wait for the space to be repaired no matter how long it takes or how much the delay hurts your business. If you've expanded into offices covered by different leases, protect yourself by providing in advance that termination of one lease triggers termination of all others.

The damage you face may be substantial enough to make parts of your space unusable, but not so serious that you want to move out. Anticipating this possibility, make sure the lease stipulates that you won't have to pay rent on portions of space you can't use or can't get to. Tenants whose own space is untouched by a fire, but who can't get to it because the main lobby and elevators have been destroyed, can find themselves paying rent on unusable space because the damage clause in their lease doesn't provide for this situation.

* Finally, if you share space with other tenants, make sure their carelessness won't leave you liable. And before you agree to take space as a subtenant, read the master lease -- you'll be vulnerable if the tenant hasn't negotiated the kinds of protection suggested here. If you don't already have it, you might want to consider getting business-interruption insurance. That way, if you're hit by a casualty, you'll have the money to find other quarters immediately.

Last updated: Aug 1, 1986




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