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Recent hurricanes deliver leasing troubles for tenants
Roy Oppennheim
From the November 2005 print edition
After Hurricane Wilma disrupted South Florida, business owners
are dusting off their office leases to determine what their obligations
were to their landlords.
Most local commercial buildings were without power for at least
a week, which virtually forced tenants to cease business operations
temporarily.
Most leases deal with the issue of physical damage, resulting
in an unusable building. However, an issue that hasn't been addressed
with leases in Florida is when you're out, but not down.
If your space was damaged, most leases address the damage through
provisions concerning rent abatement for that portion of the space.
The issue gets tricky if not all the space was damaged. If the
space is unusable, then leases generally provide for temporary
tenant relocation, during which time no rent is paid. If, after
a specified period of time, say 90 or 120 days, depending on the
lease, the space can't be repaired, the lease terminates.
It gets tricky if the landlord thinks he can make the repairs
in the allotted time, even when the tenant thinks he can't.
Regardless, the tenant will have to move, at least on a temporary
basis, to another location. Sometimes, the landlord can move the
tenant to another part of the same building or to another building
the landlord owns. Other times, the tenant is on his own to find
another suitable location.
If the landlord can't repair the premises in a timely fashion,
the tenant will be able to break the lease and permanently move
on. If the landlord does repair the premises, he may expect the
existing tenant to return based on lease obligations.
In some instances, landlords may believe the value of their square
footage has outpaced a current tenant's terms. The landlord may
be willing to let the old tenant go, then renovate and find a
higher-paying tenant. It may be in the landlord's interest to
cut the tenant loose.
Another dynamic involved here is insurance. Landlords usually
have rental interruption insurance, which reimburses them for
lost rent due to hurricane damage. Tenants pay for that insurance
through their billed common expenses.
The aftermath of Wilma suggests that new lease provisions be
considered concerning power and communication service losses,
even if it is not the landlord's fault. Because many buildings
were shut for a week or two, even though there was little damage,
the question is whether rent is due for that period when the building
was inoperable. The answer is basically what the parties agreed
to in the lease.
On the one hand, it could be argued the landlord's covenant of
quiet enjoyment requires the landlord provide certain essential
services to its tenants - such as water, elevator service, electric
- particularly to the common areas.
Since most leases are silent as to interruptions in essential
services without accompanying damage, landlords have generally
taken the position that tenants could have insured that risk through
business interruption insurance. This policy may be wrapped up
with a liability and contents policy.
With such business interruption insurance, the tenant can pay
the landlord and the landlord can meet his mortgage obligations.
Insurance companies will usually calculate the number of days
that a business is closed and divide that into the number of working
days a year.
For example, if a business was closed for one week due to a storm
and the business is also closed two weeks a year for holidays,
the business was closed for one out of 50 weeks, or 2 percent
of the year. Then, a review will be made of the gross income for
the preceding 12 months. Two percent of the gross income will
be the claim amount, less certain adjustments for expenses that
were saved for the week.
If your lease states that the rent abates if essential services
are unavailable, regardless of whether it is the landlord's fault,
then no rent would be due and the business interruption claim
would be discounted by the rent saved, as well.
But what if you don't have business interruption insurance?
The best thing to do is to talk to your landlord and work out
a solution. Short-term loans or tacking the missed rent onto subsequent
months is one answer.
Provisions concerning acts of God in leases, particularly concerning
the loss of essential services, will likely be scrutinized a lot
more in the coming years.
In the future, just be prepared and know what to expect when
you're down and out of business.
Roy Oppenheim is founder and senior partner of Oppenheim Pilelsky,
P.A., the oldest law firm in Weston, where he practices real estate
law, among other areas.
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