UNFAIR DAMAGE AND DESTRUCTION CLAUSES IN COMMERCIAL LEASES

Commercial Contracts

Don’t get ambushed by the small print in Landlord leases of commercial premises. Although you may consider the risk of your premises being damaged or destroyed to be remote, the consequences could be potentially devastating to you as a Tenant. In fact, the risk is not so remote. Consider for example recent Queensland floods, the typhoon in Hong Kong, natural disasters which occur with increased frequency – fire, arson and terrorism.

Unfair Provisions Favour Landlord

Damage and destruction clauses are invariably included in commercial leases and, for the most part are highly “Landlord centric”, with almost no regard for the position of the Tenant. This is not surprising as commercial leases are usually standard form, “off the shelf” documents prepared by lawyers regularly representing property owners and developers.
The purpose of this note is to focus on the interests of Tenants with a view to suggesting some balance as between the parties.

Typical Provisions

There is no “standard” version of this clause. However typically, these clauses provide for the following:

  • the risk of damage or destruction occurring and rendering your premises wholly or partially unusable or inaccessible;
  • a total or partial rent abatement, depending on the degree of damage or destruction;
  • the Landlord has the right to decide, over a period of three to six months, whether to repair or restore the premises, with the Tenant only having the right to terminate if the Landlord does nothing;
  • if the Landlord elects to restore the premises then the Landlord has a lengthy restoration period of up to two years, and it is only if the landlord fails to carry out this work, that the Tenant has a right to terminate. (Frequently the restoration clause allows the Landlord a high degree of flexibility as to the nature of the work to be undertaken so that even on completion of this work, the Tenant may not end up with an equivalent quality of accommodation);
  • a dispute resolution provision to deal with arguments between the parties as to the scale of the damage or destruction, the extent of the rent rebate and the scope of the work to be undertaken;
  • if the Tenant or any of its employees cause any of the damage or destruction then there is no rebate and the Tenant has absolutely no right to terminate.

No regard is had to the impact on the Tenant’s business whilst the Tenant is obliged to wait, for an extended period of time for the Landlord’s decision whether to restore the premises, and then for the Landlord to complete the work.

The Position of the Tenant

Negotiations by Tenants to modify these unfair provisions are frequently met by the response “these are standard provisions”. Is this the last refuge – when there is really is no available argument to justify these unreasonable provisions! The only thing that is standard is the existence of these clauses, but there is nothing standard about the language used or the variety of possibilities. Tenants are usually in a weaker bargaining position than the Landlord and this often results in their foregoing the opportunity to negotiate a fair outcome.

From a practical point of view, it is simply not realistic for a Tenant’s business to be shut down indefinitely while waiting, for the Landlord’s decision, and then, if the decision is to restore, again waiting for the Landlord to complete the works. In these circumstances the Tenant should be given the right to terminate the Lease and to get back into business elsewhere at the earliest opportunity.

These leases seldom address the possibility that the disaster might occur during the last 12 to 18 months of the lease when the tenant might in any event be considering a move to different premises. Forcing the Tenant in those circumstances to “wait and see” only exacerbates the problem.

Consider this hypothetical example: A six year lease. A major fire occurs after three years and six months, rendering the premises unusable. Landlord takes 2 moths to decide what to do, and then spends 10 months undertaking the works. By the time access is again available to the Tenant, there are only 18 months of the lease remaining. This situation is intolerable and these clauses are badly in need of a reassessment.

Insurance

The Tenant’s right to terminate and to receive rental relief is usually excluded where the Tenant causes or contributes to the damage or destruction. However accidents can happen and this alone should not justify this exclusion of the Tenant’s rights, unless the Tenant has acted deliberately.

Landlords should always hold insurance against the risk of damage or destruction as well as the risk of a loss of rental. That being the case, there can be no unfairness to the Landlord if the Tenant is given the right to terminate or to receive a rent rebate. Indeed, in most if not all commercial tenancies, the cost of this insurance is included in the outgoings which the Tenant is required to pay, so the Tenant is effectively paying for the Landlord’s insurance. For that reason alone it seems only reasonable that the Tenant should be entitled to terminate the Lease and/or receive a rent rebate in case of damage or destruction of the premises leased.