What Happens if You Can’t Work…Some Tenants Need Additional Protection in Office Leases
I just this past week finished a transaction for a small law firm who was renewing their office lease and one of the final lease provisions that was negotiated was a death and disability termination option for the tenant. This was important in the event one of the two principals becomes deceased or disabled making it difficult or perhaps impossible for the tenant to continue to operate or meet its rental obligations.
While Landlords would not necessarily grant this option to just any tenant but they are generally amenable for smaller or closely held firms whereby the principal owner or owners are the primary or sole reason the tenant has the ability to generate revenues. Some examples would include physicians, dentists, attorneys and other professional services providers. In an unfortunate situation whereby a death or debilitating event occurs to the principal or key employee without this provision the tenant entity remains obligated for performance of the lease agreement which would fall into the hands of the guarantors or estate of the tenant.
The financial terms of the lease can have an impact on the structuring of the death and disability termination option. In cases whereby significant tenant improvement funded by the landlord as part of the transaction, then the building owner is likely to require a termination fee in the form of predetermined amount of rental payments or some calculation of unamortized transaction costs funded by the landlord. I should note the amount of the termination fee is a negotiable item and in the case of disability there will likely be language regarding what defines a qualified disability and who or what party typically a licensed medical doctor verifies the disability.
In circumstances whereby the Landlord is unable or unwilling to provide a death and disability termination option then tenant should investigate additional insurance policy options to perform its financial obligations under the lease in the event a death or debilitating event should occur.
A commercial lease agreement is a complex contract with numerous financial and legal nuances for each and every tenant. This is just one of many examples of why it is important for commercial tenants to have both legal counsel as well as an experienced real estate professional that specializes in representing tenants assisting you in lease negotiations.