2A — October 28 - November 10, 2016 — M id A tlantic
Real Estate Journal
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M id A tlantic Real Estate Journal
M id A tlantic R eal E state J ournal Publisher .................................................................Linda Christman Publisher ....................................................................Joe Christman Senior Editor/Graphic Artist ..................................... Karen Vachon Production Assistant/Graphic Artist ............................... Julie King Associate Publisher ....................................................... Kim Brunet Associate Publisher .............................................. Barbara Holyoke Associate Publisher .....................................................Steve Kelley Office Manager .........................................................Joanne Gavaza Contributing Columnist . ................................. Jessica T. Zolotorofe Mid Atlantic R eal E state J ournal ~ Published Semi-Monthly Periodicals postage paid at Rockland, Massachusetts and additional mailing offices Postmaster send address change to: Mid Atlantic Real Estate Journal, 312 Market St. Rockand, MA 02370 USPS #22-358 | Vol. 28 Issue 20 Subscription rates: $99 - one year, $198 - two years, $4 - single copy REPORT AN ERROR IMMEDIATELY MARE Journal will not be responsible for more than one incorrect insertion Toll-Free: (800) 584-1062 | MA: (781) 871-5298 | Fax: (781) 871-5299 www.marejournal.com The views expressed by contributing columnists are not necessarily representative of the Mid Atlantic Real Estate Journal
Jessica T. Zolotorofe, Esq.
Insurance Lease Provisions
W
hen drafting insur- ance lease provi- sions, consistency
with loan documents, other leases at the property, any easement agreements, and the insurance that the landlord maintains must all be carefully considered to avoid potential gaps in coverage. Commercial landlords and their counsel should also take the following into account: (1) Business Interruption/ Rental Insurance After a casualty, a tenant may be unable to conduct business at the property until restoration is complete. Be- cause lack of business income may result in the tenant’s in- ability to make monthly rent payments, landlords should re- quire tenants to purchase busi- ness interruption insurance or rental insurance. Many lenders require 18 to 24 months-worth of coverage, but because of as- sociated costs, tenants often try to negotiate that time frame down. If there is an existing mortgage on the property, or future financing that requires coverage for a longer time frame, the landlord must keep in mind that it will have to purchase an additional policy, at its expense, to insure the gap and satisfy loan conditions. Thus, the more coverage a landlord can require its tenants to maintain, the better. It is also important to note that most rental insurance policies require that the lease actually provide for rent abate- ment in the event of casualty, not that the landlord has the option to allow for abatement. Similarly, if the lease is silent, the landlord cannot voluntarily abate rent and then collect pro- ceeds of a rental policy. (2) Tenant’s Personal Property Each tenant should be re- quired to maintain insurance coverage for the full replace- ment cost of its leasehold im- provements and other personal property. To fully protect a landlord, leases should ex- pressly provide that the land- lord is not liable for any loss or damage to tenants’ personal property, and that each ten- ant must replace the damaged property to the same condition
as existed prior to the loss, re- gardless of whether insurance proceeds are sufficient to cover those costs. (3) Primary Policies and Waiver of Subrogation A landlord should require that each tenant’s insurance be “primary”, so that even if the landlord carries similar or overlapping coverage, the ten- ant cannot look to landlord’s insurer for payment. A waiver of subrogation is also favorable, which prohibits a tenant’s in- surer from attempting to seek reimbursement from landlord or its insurer after a claim is paid under the tenant’s policy. (4) Self Insurance Depending on the size and value of the property being leased, a tenant that wishes to self-insure should be required to maintain a minimum net worth, which should be tested at least annually. Landlords should also have the right in each lease to require a self- insuring tenant to purchase standard insurance if its net worth, at any time during the term, drops below the estab- lished threshold. (5) Other Types of Coverage to Consider In addition to standard li- ability and property insurance policies, lenders today are more frequently requiring terrorism coverage, which landlords will want to pass through to their tenants. Also, additional insur- ance may be necessary or desir- able depending on the nature of a tenant’s business at the prop- erty. For example, a landlord may want a gas station tenant or dry cleaner to carry environ- mental or pollution coverage, or a tenant operating a bar to purchase dram shop coverage. (6) Rights of Tenants Subject or Subordinate to Lender’s Rights. Even if a lease is in place before a landlord seeks financ- ing, often lenders will demand
insurance provisions in their loan documents that contradict the provisions in the existing leases, especially as they per- tain to use of proceeds after a loss. In order to avoid conflict- ing provisions, or having to go back to the tenant to negotiate a lease amendment in order to satisfy loan requirements, landlords should try to include in their leases that the rights and remedies of the tenants in connection with casualty, con- demnation and insurance are subject and subordinate to the rights of any present or future mortgagee. (7) Rebuilding Especially if the tenant will not agree to have its rights subject to mortgagees’ rights, it is essential to set forth in the lease that so long as land- lord maintains commercially reasonable insurance coverage, the landlord’s obligation to re- build or restore the premises is only triggered upon its actual receipt of insurance proceeds. This way, if a mortgagee elects to retain and apply insurance proceeds from the casualty to the outstanding debt, the land- lord will not nonetheless have a costly obligation to rebuild. Landlords will also want to have the option, but not the obligation to rebuild a dam- aged property when there is only a short period of time left in the lease term. In such case, landlords should have the right to terminate the lease so that insurance proceeds can be used to fit out a space for a new ten- ant, not for the current tenant that would be vacating shortly thereafter anyway. Finally, leases should re- quire that tenants maintain “full replacement coverage”, not “actual cash value cover- age”, as the former insures the actual sum that will be needed to repair, replace or restore the insured property. Actual cash continued on page 3A
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