South Florida Hospital News
Friday August 23, 2019
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December 2007 - Volume 4 - Issue 6

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Legal Update - Read Carefully: Casualty and Insurance Clauses in Medical Office Leases

After being hit by hurricanes in 2004 and 2005, commercial landlords and tenants in South Florida had to deal with the casualty and insurance clauses in their leases, which are oftentimes the more neglected lease provisions. When negotiating a medical office or health care facility lease, the casualty and insurance clauses merit careful attention in order to apportion the risks and economic burdens that a sudden and external disaster, such as a fire or hurricane, can cause. Key issues that should be considered in negotiating these clauses are as follows:

Insurance and Waiver of Subrogation

The lease should specify the types of insurance to be carried by both the landlord and tenant. Generally, both parties should be required to maintain commercial general liability and property damage coverage. The landlord should insure the building (the policy should include windstorm coverage) and the landlordís personal property, and the tenant should insure its furniture, fixtures and equipment and its personal property. Which party will obtain insurance with respect to tenant improvements is often subject to negotiation. Ultimately, the tenant pays all costs of insurance, because the cost of any insurance obtained by the landlord is passed on to the tenant as an operating expense. Other types of coverage that the parties should consider are business interruption and extra expense and rental income insurance. Consideration should also be given as to addressing workers compensation coverage in the lease.

The lease should contain a waiver of subrogation clause, whereby the landlord and tenant release each other from any claims and demands for damage, loss or injury to the leased premises and/or the building or to the other partyís property. The waiver of subrogation rarely, if ever, applies damage related to personal injury or death.

Repair, Restoration and Rights to Terminate

Although damage or destruction of property is usually covered by insurance, the parties must still negotiate and the lease should address (a) the party responsible for repairing the premises and tenant improvements, (b) the procedure for determining that partyís obligation to repair based on the extent of damage, which may be a percentage or dollar figure, (c) the timeframe for completing the repairs and restoration, (d) the timeframe within which the party making the repairs must notify the other party that it intends to complete the repairs and restoration within the agreed upon timeframe, and (e) each partyís ability to terminate the lease.

While a landlordís and tenantís reasons will differ, termination of the lease is generally tied to the extent of the damage, the amount of available insurance proceeds, the length of the remaining lease term, and the timeframe for completing the repairs and restoration. The lease should identify the party entitled to the insurance proceeds for the destroyed tenant improvements upon such a termination.

Rent Abatement

Customarily, the casualty clause will provide for the abatement of rent if the tenant cannot and does not use its premises because of damage to the building and/or its premises. The rent abatement should also apply to those pass-through expenses that are generally considered to be additional rent Ė the tenantís proportionate share of real estate taxes, common area maintenance costs, insurance expenses and similar charges. When the rent abatement commences and ends is a matter of negotiation, but it typically runs from the date of the damage or destruction to the date the restoration is complete. If the tenant is prevented from using only a portion of the premises, the rent abatement should be proportional to the percentage of lost space.

Next Step

Dealing with such issues as casualty and insurance clauses in leases is a complex topic that goes beyond the scope of this article. Please consult with an attorney experienced in handling leases to provide the appropriate counsel for your individual situation.

Linda Spaulding White is Of Counsel in the Fort Lauderdale office of the statewide law firm, Broad and Cassel. She can be reached at (954) 745-5251 or lwhite@broadandcassel.com.
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