Recent hurricanes
deliver leasing troubles for tenants
Roy Oppennheim
From the November 18, 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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