No lease can be written that will answer every post-damage question that will arise. The “law” (whatever that is) provides some gap fillers, but not many. That’s because much of the case law concerns itself with answering epistemological questions – that is, “analyzing the nature of knowledge and how it relates to truth, belief, and justification.” Courts try to divine: “what would the parties have agreed-upon had they known this post-damage question would arise.”
The biggest single factor in determining how things will turn out after a fire, flood, explosion or some other damage-causing event is: do the landlord and tenant still love each other? Do they want to cooperate and get back in business together, or do they want to divorce. If they want to get the property restored as quickly as can happen so that the tenant’s cash register starts ringing and rent checks begin to flow again, they will make that happen and things will work out. If they each want to end the tenancy, they’ll make that happen pretty easily – the issue might be money, and if that is the case, believe it or not, money issues are the easiest to work out. Basically, if a landlord and its tenant share the same post-damage goal, they’ll work it out.
What about the third alternative − where you have a landlord who wants to get rid of a tenant that wants to stay − or you have a tenant wanting to leave while its landlord wants it (and the rent) back? What they will do is spend a lot of time trying to achieve their respective outcomes by exploiting the deficiencies in their common lease.
So, to predict whether and how quickly a property will be restored, look for the parties’ motivations and look for “trust” between the parties. Perhaps, we should say “among” the parties because if a lender’s motivation is to retire the mortgage loan, trouble looms. Yes, the commercial leasing relationship is a like a three-legged stool, one leg being the landlord, another being the tenant, and the third being the lender. If any leg is short or missing, the stool “don’t work too good, if at all.”
Let’s summarize where we’ve gotten so far. If the landlord, its lender, and its tenant don’t want to cooperate, damage becomes disaster.
Desire and willingness, however, aren’t enough. There is the little issue of “money.” The Amish may have a reputation for pitching in as a community for a “barn raising,” but that degree of outreach hasn’t been the hallmark of the shopping center community. So, to recover after debilitating damage takes money. The landlord needs to have enough to do the work and to pay its mortgage until the rent starts flowing again. The tenant needs to have enough money to survive the wait and fund a reopening. Don’t worry about most lenders, especially institutional lenders – they seem to be able to survive.
Here is our first mention of “insurance.” If you have enough money, you don’t need to carry insurance to get back in business. You might like “laying the risk on the carrier,” but the BP’s (British Petroleum’s) of this world can self-fund their own obligations – witness the damage caused by the Deepwater Horizon problem.
For the great bulk of landlords and tenants, insurance funding is either needed or is in place even if not absolutely needed. In the case of a landlord, its “need” for insurance coverage may arise out of its mortgage obligations. As a refresher for leasing professionals, here is a short summary of the kinds of insurance coverage available to get a property up and running again.
Short and simple, the form of insurance that makes funds available to pay for reconstruction, make mortgage payments, and keep businesses going until reopening time, is commercial property insurance.
Although property insurance policies can be written on a variety of forms, the most commonly used one is published by the Insurance Services Office, Inc. (ISO). The ISO property policy generally consists of the following parts: a Coverage Form; a Causes of Loss Form; Policy Declarations; and two different Conditions Forms. In addition, coverage may be expanded or reduced by use of one or more of a large number of available “form” endorsements and by “manuscript” endorsements which may say anything the applicable insurance regulators will allow.
The Policy Declaration page of the insurance policy is a terrific, if “coded” summary of the policy itself. It will tell the reader “what” property is covered, either by its address or by specific descriptions, how much coverage it afforded in total and as to some particular “sublimits” for certain types of coverage or property, and also what “options” within the coverage have been elected. Very importantly, it will list all of the various documents and forms that make up the policy itself and it will do so by use of their form numbers.
The overwhelming number of policies issued utilize the ISO Building and Personal Property Coverage Form [CP 00 10] combined with a Causes of Loss – Special Form coverage part [CP 10 30]. The Causes of Loss – Special Form coverage part is the broadest coverage available under the ISO property insurance policy, much broader than the Causes of Loss – Broad Form coverage part. That may not be intuitive, but there is no argument that it isn’t true.
Now, a digression. What does the code “CP AA BB,” as in CP 00 10, mean? First, the real “code” is “CP AA BB CC DD.” CP means “Commercial Property.” AA is the category of insurance form. For example, if AA were 00, you’d know you were looking at a “Coverage Form.” If AA were 14, you’d be looking at an additional property covered (or not covered) endorsement. BB stands for the form number within the type of form you are looking at. So, a CP 00 80 form would be a coverage form for Tobacco Warehouses. CC and DD tell you the date the form was issued, CC being the month and DD being the year. This is important because the “details” of each form change when a later one is issued. That is, the ISO doesn’t just change the dates for nuttin’.
The defining characteristic of a “Causes of Loss – Special Form” type of policy is that it insures the covered property for loss resulting from damage caused by anything that isn’t called an excluded peril. This is key. The policy covers all manner of causes of loss other than what it expressly says it won’t cover.
Some other commonly seen, currently available Coverage Forms are:
Commercial Condominium Unit –Owners Coverage Form
Builder’s Risk Coverage Form
Building and Personal Property Coverage Form
Legal Liability Coverage Form
Mortgage Holder’s Errors and Omissions Coverage Form
Leasehold Interest Coverage Form
Business Income (and Extra Expense) Coverage Form
Business Income (Without Extra Expense) Coverage Form
Extra Expense Coverage Form
Equipment Breakdown (new for 2012)
Another key thing to keep in mind is that a property insurance policy doesn’t cover everything the insured owns or has carries an interest in, but only what the policy lists as a covered property. The “Coverage Form,” as informed by the Declaration (page) and as modified by possible Endorsements defines “covered property” for any particular policy.
All of the preceding insurance information is by way of background, allowing us to return to the question of why I would care about how much and what kind of insurance you carry? Here are some of the possible reasons.
The most obvious answer to the question about a lender’s interest in its borrower’s insurance is that it wants to be comfortable that its borrower is adequately insured. We won’t even touch that, suggesting the question is close to being rhetorical. A close second regards a tenant’s concern about its landlord’s coverage. While a small number of tenants, such as those who can’t pay the rent or no longer need the space, might welcome loss of a building and their landlord’s subsequent inability to restore it, most tenants, especially retail stores, want to do business right there where they have built good will or have gathered loyal, local employees. Further, if market rents have risen, getting back into the damaged building after repair or restoration could continue the benefit of a bargain rent.
Least obvious, though not mysterious, is a landlord’s concern that its tenant won’t adequately insure its own property. Here, let’s understand we are beginning with the assumption that we’re not talking about the building itself; we’re talking about the tenant’s personal property – its desks, machinery, cash registers, display fixtures, inventory, and the like. We might also be talking about how a tenant might be hurt by loss of its landlord’s property, even though the tenant lacks an ownership interest in that property. After a fire or similar occurrence, it isn’t enough comfort that a tenant, under the terms of its lease, has to start paying rent again or, if there is a continuous operation provision in the lease, has to reopen for business. If the tenant has lost its key assets and doesn’t have the money to replace them, try as it may, it won’t reopen and the landlord will have a rent claim against an asset-less tenant. While we’re at it, the same concern is true if the tenant loses a personal injury suit; it could be out of business if liability insurance isn’t available. Liability insurance issues, however, are for another day.
[Yes, today’s blog posting is pure plagiary. We were going to write on this topic from scratch, but we had already done so in 2013 for a program in San Diego. So, an extremely tight schedule over the past few weeks (and for the next couple as well) encouraged us to reproduce part of that material. We figured that few readers had yet seen this material and, so, as they say, “It may be second hand to us, but it’s new to you.”]