Disasters from fires, floods, tornados, hurricanes, earthquakes impacting the users of commercial real estate can result in a devastating impact to both Landlords and Tenants even if they are all well insured. Landlords and Tenants obtain insurance policies, but insurance proceeds will only reduce a portion of the financial risk when faced with a significant casualty event.
Did you know that typical commercial leases have clauses that could lead to an early termination of the lease in the event of a casualty event? Typically, there are one or more thresholds that can give rise to a termination right. Trigger events are usually tied to the amount of remaining lease term, percentage of the building impacted, or amount of time required to rebuild the property. Just to be clear – when disaster strikes – even with insurance protection for all parties, unanticipated termination of the lease could result in a financial disaster to the party that faces an unexpected lease termination.
Another often overlooked financial risk factor is the issue of insurance deductibles. Often deductibles can be quite large. Tenants may or may not be responsible for paying the deductible depending upon the lease language.
In a large scale disaster, finding contractors and consultants to respond in a timely manner can be very difficult. Establishing vendor relationships and contracts well in advance of a disaster event is well advised.