Negotiating Insurance Arrangements for Commercial Landlords | Notice

When commercial landlords negotiate leases with potential tenants, they naturally focus on key commercial terms, such as rental rate and renewal options. While this priority is warranted, landlords should never neglect the “boilerplate” language of the lease, particularly insurance provisions. To protect the property assets of owners, carefully designed insurance arrangements are essential. Some key considerations for landlords drafting insurance provisions for commercial leases are outlined below.

In the event of damage to the property, the parties should first review the lease to determine who bears responsibility for repairs. The division of responsibilities is negotiable and the details vary depending on whether it is a single-tenant or multi-tenant structure. However, the tenant is generally responsible for repairing the interior, non-structural parts of the leased premises, while the landlord must repair the structural elements of the building, such as the roof, exterior walls, and common areas.

Commercial leases are often silent on landlord insurance requirements. However, landlords can extend an olive branch to tenants during lease negotiations by agreeing, at a minimum, to maintain all insurance policies required by their mortgage lender. Additionally, homeowners may consider having the following additional insurance policies in place:

Loss of rent insurance

Landlords may consider loss of rent insurance to protect their cash flow in a situation where the leased premises are unavailable due to a disaster and the landlord agrees to reduce the tenant’s rental obligations during this period. Conversely, landlords may require tenants to carry business interruption insurance to cover loss of income during such an incident.

Improvements and Improvements

Landlords should consider additional insurance coverage for improvements made through Tenant Improvement Allowances. When tenants construct the leased premises with tenant improvement allowances, those improvements generally become the property of the landlord when the lease expires. Landlords should either increase the amount of coverage on their property insurance to account for the increase in value or require the tenant to insure the improvements for the life of the property.

Code-mandated changes

Property owners should consider obtaining an endorsement to cover costs associated with improvements required under municipal code amendments or other applicable laws.

When it comes to tenant insurance requirements, landlords should first consider how the tenant intends to use the leased premises. Depending on the risks presented by the tenant’s intended use, the landlord must negotiate to ensure that the tenant is adequately insured to repair and maintain the leased premises. Landlords should require tenants to provide insurance certificates evidencing coverage amounts, and they should carefully review the certificates upon receipt. At a minimum, landlords should require tenants to maintain the following policies during the lease term:

Commercial Civil Liability (RCG)

Landlords should be named as “additional insureds” on the policy and ensure that the CGL policy includes endorsements that cover risks posed by the renter’s intended use, such as alcohol liability or alcohol coverage. mobile equipment.

Property Insurance

Tenants must insure their personal property with: (i) a named perils insurance policy, or (ii) an all-risks policy. A named perils insurance policy only insures certain types of risks, while a comprehensive policy covers all risks but specifically excludes certain items.

Worker’s compensation

State law often requires business tenants to maintain certain minimum coverage amounts.

Beyond the specific insurance policies to be taken out by each party, owners must pay attention to the following general principles:

Mutual waiver of subrogation

Landlords must ensure that tenants waive their subrogation rights against the landlord. Tenants often require a reciprocal waiver, which landlords should be prepared to grant.

Replacement versus actual cash value

Insurance policies will cover either the full replacement value of the property or the actual cash value, which accounts for depreciation over time. The replacement value is generally more expensive but offers better protection in the event of a loss.

Risk Management Review

Landlords should have an in-house risk management professional or insurance broker review the insurance provisions of the lease to ensure that coverage is adequate to cover the risks posed by the operation of the lease. property.

While the details of the insurance policy can make even the most well-meaning homeowners sleepy, they can have a profound impact on a homeowner’s business in the event of a loss. Synchronizing the requirements of the owner as a mortgagor under a commercial mortgage with the provisions of commercial leases on their property requires careful consideration. Landlords should not only negotiate these provisions when entering into a new lease, but they should also review existing policies from time to time to ensure that coverage amounts are sufficient to protect their interests.

Patrick Abell is a partner of Stoel Rives LLP and a member of its real estate group. Contact him at 503-294-9472 or (email protected).

Elizabeth Clampitt is a partner of Stoel Rives LLP and a member of its real estate group. Contact her at 206-386-7645 or (email protected).

The opinions, beliefs and views expressed in the foregoing commentary are those of the authors and do not necessarily reflect the opinions, beliefs and views of the Daily Journal of Commerce or its editors. Neither the author nor the DJC guarantees the accuracy or completeness of the information published here.