Damage and Destruction Provision in a Commercial Lease

Damage

Damages clauses generally assign responsibility to the tenant for small damages to the premises. The landlord will typically assume responsibility for damages to anywhere else in the complex unless those damages are caused by the tenant or by anybody that the tenant invites onto the premises. However, this allocation of risk for damages is not a required practice, and you want to make sure that you examine the damages clause in your lease carefully.

The landlord will often be responsible for damages to the property that are outside the premises, but only if the tenant is not at fault (and if the tenant’s invitees are not at fault) for that damage. The landlord should also be responsible for damages it causes regardless of whether the damages are in the tenant’s premises (but generally the landlord is not liable unless the tenant negotiates for it). You will also want to ensure that you detail in the lease what defines the “premises” and how to account for damages to things like exterior walls and glass, as those areas are often a “gray area” in terms of who is responsible for damages.   

Destruction

Destruction is generally those damages that are so major that they make the premises entirely or partially “uninhabitable” by the tenant. Destruction clauses (sometimes referred to as “casualty clauses”) describe what happens if something serious damages the building—for example, a fire, an earthquake, or similar event.

Often, destruction clauses provide that the landlord will have some discretion in deciding what to do if the building is seriously damaged (even if the tenant’s specific premises may not be damaged at all). The lease should include a distinction between partial and complete destruction of the premises.

There will often be an abatement of rent, meaning rent will not be due, in proportion to the amount of premises that the tenant is not able to use. For many businesses, this will be an important term to negotiate because the landlord’s idea of usable space may be different from the tenant’s idea, and some tenant’s may not be able or willing to operate unless they have full use of the entire space.

Total Destruction

If there is total destruction of the building, the landlord will generally have the option of replacing the premises within a certain period of time or terminating the lease. Often, the landlord use insurance proceeds that would pay for the repairs or rebuild. For total destruction, the tenant will ideally have an option to terminate the lease.

Partial Destruction

If there is partial destruction of the building, the landlord will generally be obligated to fix the damage, subject to certain exceptions. The tenant will generally be obligated to continue with the lease and wait out the repairs regardless of whether the tenant might want to terminate the lease.

Business Interruption

Business interruption issues often arise when the landlord needs to make a repair to the common areas near the premises and because of access issues or because of where the repair needs to be made, the landlord’s work interrupts the tenant’s business. Generally, the tenant is responsible for any business interruption unless it is specifically negotiated otherwise in the lease. And generally the tenant is required to carry business interruption insurance. If there is an issue with the tenant’s access to its space, the tenant would look to that business interruption insurance to make the tenant whole for the business interruption. Often, that’s the tenant’s only option for dealing with damages for business interruption.

Final Thoughts

Special care in drafting lease language is crucial where the economic impact is most felt. So both the landlord and the tenant need to specify in the lease not only that is responsible for repairs and alterations in the leased space.This is another area with tremendous latitude for bargaining and potentially involving large costs, particularly if the exterior of the building and its roof are concerned.

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