Taking into Account the Unexpected when Negotiating your Commercial Lease

by CoyDavidson on January 27, 2010

iStock_HurricaneOffice
Natural disasters such as Hurricane Ike or Tropical Storm Allison that damaged many buildings in the Houston area can interrupt operations at hundreds of businesses. But even, inoperable or faulty building equipment, a sudden freeze that causes pipes to burst or a summer thunderstorm that cuts electrical power can bring a business to a halt.

Most standard office leases in the Landlord’s original form states that if essential building services (electricity, HVAC, etc.) are interrupted for any reason that the rent and the lease continues.

The services a Tenant gets are as essential to the lease as the four walls and roof. Since this risk should be the Landlord’s or at least shared, it is important for the Tenant to obtain some relief, such as abatement of rent for any interruption of essential services ( such as electricity, air conditioning or heating) lasting more than 3-5 days and cancellation if the interruption last more than 60-180 days. This remedy is similar to Tenant’s relief if the premises are damaged on account of a casualty.  Most Landlords are amenable to such language in the lease provided it gives the landlord a reasonable time to restore essential services before rent abatement begins. However, if you skip over this issue during lease negotiations, it is safe to say the Landlord will be just fine with the typical language contained in the lease that provides the Tenant no remedy.

Like other aspects of lease negotiations, the negotiation of the interruption of services provision is subject to many factors, including prevailing business customs, the relative bargaining power of Landlord and Tenant, Lender requirements, and the availability of insurance.

Lender’s Perspective: Any abatement of rent and Tenant termination provision may adversely affect the Landlord’s ability to fulfill the mortgage obligations of the lease. The Lender would much rather limit the Tenant’s remedy to an action against the Landlord for damages. However, abatement of rent and lease termination for lengthy interruptions are fairly common and generally acceptable to most Lenders.

In the event, a natural disaster should occur or any event that prevents the Landlord from providing essential building services, rent abatement alone may not be sufficient to mitigage the business losses that may occur as a result of the interruption. Some tenants with mission critical operational or communication requirements should take the preventative measure one step further and negotiate the right to install a stand-by generator on the property premises so the Tenant may continue critical operations until services are restored.

An experienced tenant representative and real estate attorney should bring these issues up during lease review and negotiations.  Many larger tenants and corporations have a formal disaster recovery plan in place but often smaller businesses don’t weigh these issues during lease negotiations. The unexpected does happen, so it is prudent to mitigate your risk both financially and operationally as much as possible when negotiating your office lease.

  • Another tip — Landlords many times have the right to cancel the lease in the event of a major casualty. The tenant should also have this right, particularly in the final year or two of the lease. If the property is so damaged that it will take 6-8 months to repair, the tenant should be able to leave — by its own choice.

  • Craig Clemmer

    These are all excellent points, and should never be dismissed during a negotiation. If there is a long lasting period where essential services cannot be provided, there is very little chance of a productive discussion between the parties on what to do at that time.

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