Tips

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Look before you lease – 9 safety tips

-- Watch for a "hold-harmless" clause. It could make you liable for damage your landlord causes. In the hold-harmless clauses of many commercial leases, the tenant promises it will be responsible for the damage it causes, will reimburse the landlord for resulting costs, and won’t sue the landlord for accidents. This seems fair. After all, if you leave faucets running and ruin the downstairs tenants’ wallpaper, it’s reasonable for you to pay the bills your neighbor is sure to send the landlord. And if lightning strikes, why should your landlord pay? But beware. Courts in some states have interpreted such hold-harmless clauses to mean that tenants agree to reimburse landlords even for damage the landlord causes.

Your best protection from such hold-harmless clauses is to agree to indemnify the landlord only for harm you cause within the space you lease.

-- Check to see if your landlord has casualty insurance. Most landlords carry casualty insurance as a way to protect their investment – or because their mortgage lender requires it. But some landlords self-insure, and they are more likely to sue a tenant for damages no matter the cause. And an uninsured landlord may have no money to rebuild, which could leave you without a place to do business.

-- If you rent space from an uninsured landlord, make sure your lease provided that he will look to you only for damage you cause through gross negligence. Your lease should also provide that if there is a major accident, he will let you know within a specified short time, say 30 days, whether he plans to rebuild. If your landlord is uninsured, you should negotiate he right to terminate your lease after any major accident.

--If your landlord carries casualty insurance, find out the terms. This might not be adequate. Have your landlord’s insurance company send you a certificate showing the policy dates and coverage, and get a new certificate before each anniversary of your lease. Take special note if your landlord has "all-risk" coverage. These policies cover only risks that aren't specifically excluded, and exclusions vary from policy to policy. Get a list of your landlord’s exclusions. Some so-called all-risk policies, for instance, won’t reimburse your landlord for sprinkler damage, but defective sprinklers can drench your offices and damage wiring, walls, ceiling, or floors. If your landlord won’t insure against such risks, consider getting such coverage for the space you lease.

In some states, insurance companies can require co-insurance: if your landlord insures his property for substantially less than its market value, the insurance company will pay for only a percentage of any loss. This can hurt you if your landlord underinsures and doesn’t have enough money to rebuild.

One way to be reasonably sure that your landlord’s coverage is adequate is to ask him to guarantee that he’ll always carry enough to satisfy his mortgage lender. Relying on such a promise is usually a safe bet, since the lender is apt to have more money at stake than either you or the landlord. Landlords who have no mortgage can promise you that they’ll carry the kind of insurance an institutional lender would require.

--Make sure your landlord’s insurance policy includes a waiver of subrogation. Otherwise, you are at risk. Even though you and the landlord both carry insurance, if the building is damaged because of something that can be traced to you or your employees – a cigarette tossed in a trashcan, a coffeepot left on after a late meeting – you could be liable for whatever damage the landlord suffers.

If the landlord is paid by his insurance company but doesn’t get enough to rebuild, he may sue you for the rest, and the landlord’s insurance company may sue you for everything it paid the landlord. A waiver of subrogation guarantees that if your landlord’s insurance company reimburses him for damage you might have caused, the insurance company won’t sue you.

--Be on guard against conflicting provisions in your lease. They can kill protections you think you have. With leases as complex as they are these days, provisions conflict more often than you’d expect. They are most likely to involve clauses that deal with similar issues, such as insurance and maintenance or insurance and indemnities. The experience of a Florida entity shows the sort of trouble you can get into. The organization leased a warehouse to store its inventory, and the landlord was responsible for general maintenance, including roof repairs. The building owner didn’t do her job, however, and the roof leaked. The tenant, which lost its furniture to water damage, sued the landlord, but lost. Even though the landlord was responsible for maintenance of the roof, the tenant had agreed in the lease to carry insurance protecting itself against any loss, including water damage. The judge who decided the case interpreted the tenant’s promise, in essence, as a promise to protect the landlord – if the tenant wanted the insurance just for its own benefit, the judge reasoned, there would have been no reason to obligate itself in the lease.

--Have the lease spell out how the premises will be restored after a casualty. Don’t assume things will be the same. Negotiate a lease that requires your landlord to restore your building to substantially the same condition it was in just before the accident. Changing conditions may prevent him from doing that when the time comes, however. New laws may require more expensive safety features, or zoning changes may prohibit him from rebuilding as large a building as before or even from continuing certain uses in the rebuilt structure. Therefore, you should reserve the right to cancel your lease if new laws prevent your landlord from restoring your premises to what you had before – and at the same rent.

--Negotiate the right to terminate your lease after a major casualty. Otherwise, you might find yourself paying rent on two places, the one you’re forced to move out of and the one you’re forced to move into. The general rule is that once you have signed a lease, you’re liable until the end of the term – no matter if the building should burn down, blow away, or be flooded out. If you haven’t negotiated the right to terminate, you risk a serious cash drain should an accident destroy your offices. You should also negotiate the right to terminate your entire lease if damage to part of your space makes it impractical to conduct business in the rest. Similarly, you should be able to terminate if damage to other parts of the building – the parking lot, for instance – reduces services or the quality of your working environment.

Landlords and tenants generally agree on one of two measures for terminating a lease: when rebuilding will take too long, or when it will cost too much. As a tenant you will probably prefer to have a time limit. If you negotiate a lease that uses time as the trigger for your cancellation, don’t feel you have to settle for your landlord’s "standard" period for rebuilding – often 180 days –- if that length of time could jeopardize your practice.

Your landlord might prefer to link his obligation to the cost of rebuilding so he won’t have to spend more than he can reasonably expect to recovery. If you agree to that route, make sure the damage clause in your lease requires your landlord to begin rebuilding within a reasonable time after the accident, to pursue repairs continuously, and to complete the work in a timely way.

Whether you choose days or dollars as the test of termination, it’s critical to have a final date when you can walk away form the lease if, for whatever reason, your landlord hasn’t finished repairs. Without this clear-cut deadline, you could be required to wait for the space to be repaired no matter how long it takes or how much the delay hurts your business. If you’ve expanded into offices covered by different leases, protect yourself by providing in advance that termination of one lease triggers termination of all others.

The damage you face might be substantial enough to make parts of your space unusable, but not so serious that you want to move out. Anticipating this possibility, make sure the lease stipulates that you won’t have to pay rent on portions of space you can’t use or get to. Tenants whose own space is untouched by a fire, but who can’t get to it because the main lobby and elevators have been destroyed, can find themselves paying rent on unusable space because the damage clause in their lease doesn’t provide for this situation.

--Finally, if you share space with other tenants, make sure their carelessness won’t leave you liable. And before you agree to take space as a subtenant, read the master lease – you’ll be vulnerable if the tenant hasn’t negotiated the kinds of protection suggested here. If you don’t already have it, you might want to consider getting business-interruption insurance. That way, if you’re hit by a casualty, you’ll have the money to find other quarters immediately.