REVIEW YOUR LEASES IN ANTICIPATION OF TERROR
by Richard B. Chess*
CASUALTY LOSS
Long an unappreciated section of a lease, casualty loss has risen to "top issue" status as a result of September 11, 2001.
A. Insurance costs have gone through the roof, yet most leases limit the amount of increase which can be passed through to a tenant.
B. Insurance coverage for casualty loss has been restricted in most newly issued policies so that both tenant and landlord may have uncovered exposure.
C. New insurance coverage, sometimes referred to as terrorism coverage, is often not available or at prohibitive pricing. Lenders, though, are now requiring this level of coverage (see Mall of Americas in Minnesota) for certain properties with unlimited public access.
D. Little of the uncertainty in the insurance arena, as a result of September 11, 2001, has wound its way to a resolution in the courts.
E. The industry "norms" referenced in lease documents have changed - but to what? For instance, what is "reasonable security" for a building and its tenants? What is 'reliable" access to utilities (e.g., water, power, or telephonic communications)?
F. Property management and leasing companies are using the perception of improved security and access to utilities to recruit leasing prospects in a soft office market - which may further escalate the "norms" for industry practice.
G. Vendors can be eliminated by terror. Most vendor contracts lack a provision for an immediate back up in case the vendor no longer exists or can no longer function. September 11 also showed that even when one's building is not physically impacted by an act of terror, access to it might become impossible due to damage to roads and adjacent buildings or to keep open access routes for police and fire.
NEXT STEP
So what steps are landlord or tenant to take in these times of uncertainty?
A. What If?
Review the lease with your best "what if" eyeshades on. Assume that the impossible is probable and walk through how both parties would resolve their respective needs. This game of "what if" played with your counterpart (tenant, landlord, leasing agent, vendor, etc.) will accomplish several goals. They include:
1. A clearer understanding by all parties as to what is possible in a time of terror;
2. A written summary of the discussion which will give some protection to the parties if and when there is ever a question of what was meant by the "norm" referenced in the lease document;
3. Development of a written policy to guide all parties in their day-to-day security and responsibilities in time of crisis; and
4. Implementation of the written policy, including education of all parties with follow up inspections to insure that all parties are following the rules.
B. Onsite Loss
Your current lease documents require repairs to be made in a timely fashion. But as we learned in New York City, there are circumstances where those in the market capable of making the repairs are either unavailable (due to the large volume of work available) or they cannot access your site due to other security reasons. To borrow a phrase from the book ANIMAL FARM, "all tenants are equal but some may be more equal than others." Anticipate a situation where there is a lack of available service providers in the market to address all the needs (due to a hurricane). Resolve how you protect your interests so that they get priority from the limited repair resources available.
C. Impact Off Site
What happens when the disaster doesn't touch your building but impacts service providers? What if your property management firm is destroyed by some casualty loss, who then services your building? Do you have a right to immediately replace a "damaged but not dead" service provider? During the height of the technology boom, some landlords were required in negotiations to make available multiple telecommunication providers to a building. The situation in New York City showed us that telecommunications to buildings could be disrupted for over a month. At what point should the landlord be required to pony up their own money to help bring in telecommunications through alternative means (e.g., fixed wireless from the roof top)?
CONCLUSION
It is a brand new world in the world of casualty loss. It is time for us to review all our positions. Certain basics have already become "norms" in most major markets:
A. Security, once primarily passive systems (e.g., exterior lighting at night), is now some combination of active protection options (e.g., guard at the entrance, pass cards for entrance and access).
B. A detailed security and casualty plan, communicated to all parties, of who is to do what, when, where and how.
C. Regular rehearsal of fire and other drills.
D. Coordination of the security/casualty plan with fire, police and other emergency services provided by the municipality (typically documented with correspondence).
E. Review of new insurance coverage by legal counsel.
A REQUEST
If you have seen these types of provisions or insurance clauses and would like to pass on these new lease realities to the author or to the Editors of THE FEE SIMPLE, they will publish them in the next issue.
*Richard B. Chess is an attorney at Hirschler & Fleischer in Richmond, Virginia. He serves as an Area Representative and a Chairperson of the Housing Subcommittee of the Real Property Section of the Virginia State Bar.