Damage and Destruction Clause in Commercial Leases
A damage and destruction clause in a commercial lease outlines the rights and
obligations of both the landlord and the tenant in the event that the leased premises are damaged or destroyed during the lease term or any extension or renewal thereof. The following duties and obligations are typically addressed in the damage and destruction section of the lease:
- Tenant’s Notice Obligations: Tenant should be obligated to promptly notify
the landlord if the leased premises are damaged by fire or other casualty.
- Repairs: Typically, a lease will require the landlord to repair and restore improvements on or about the leased premises to the extent that proceeds of casualty insurance are available to make repairs (unless the lease is terminated as described below).
- Termination in the Event of Casualty: The lease may provide both tenant and landlord with the right to terminate the lease by giving the other party notice of its intent to terminate within a prescribed number of days after the occurrence of the casualty if:
- landlord determines that the premises are so materially damaged by the casualty that substantial restoration is required;
- the premises are damaged by fire or other casualty near the end of the term of the lease (the lease would specify within the last X months of the lease term); or
- at any time the premises are rendered substantially untenantable by the casualty.
- Casualty Caused by Tenant: In the event the casualty is caused by Tenant’s gross negligence or intentional conduct, the tenant typically does not have the right to terminate the lease. In addition, the lease should require the tenant to promptly repair the damage while it continues to pay rent and all sums due under the lease.
- Abatement of Rent: Except for any casualty caused by tenant’s gross negligence or intentional misconduct, to the extent that the premises cannot be occupied due to the damage, tenant’s rent should be abated by the landlord until the repairs and restoration have been completed.
Tenant should also consider obtaining and maintaining business interruption insurance to mitigate its losses in the event of damage or destruction to the leased premises in which it conducts its business.
“Materiality” is also a term to be closely examined in damage and destruction clauses in commercial leases. The term “materiality” should take into consideration the specific property, the square footage of the buildings or other improvements located on or about the leased premises and the value of the real property and the improvements. For example, the term “materially damage” will have much different definitions when the project has a value of $100,000, as opposed to $50,000,000.
Many landlord and tenants overlook damage and destruction provisions in both commercial leases and real estate purchase and sale agreements. In the event of a casualty, fire or other damage, these provisions can have significant operational and financial impact on the parties to the lease agreement. These provisions should not be overlooked and carefully considered before executing any legally-binding agreement.