What are we talking about in the way of “due diligence”? Our short, generic list is as follows:

• Full Size Site Plan
• Environmental Reports
• Copy of all exclusive use rights granted to existing tenants
• Copy of all permitted use clauses for tenants over a size commensurate with the size of the project itself
• Survey
• Title Work with copies of all recorded documents
• REAs, if not included with title work
• Form of SNDA being used
• Pictures of existing pylon and monument signs
• Lighting Survey
• Utilities Survey
• Physical Condition Reports
• CAM Budget
• CAM History

Why, you ask? Suppose a landlord sincerely believes that none of the existing exclusive uses would adversely affect a prospective tenant, but the prospective tenant or even the landlord’s own attorney or other representative, upon review of the actual text, thinks otherwise? Do you want a lawsuit over the “exclusives,” or do you want to be left alone and do your business? How do you know if any particular access path, even for rear door deliveries, needs to be “protected.” How about long-forgotten restrictions of record that would have an impact on a tenancy? When you negotiate for CAM “carve-outs,” wouldn’t it be helpful to see what has historically been included? You could even tailor the CAM cost definition by reviewing the property’s budget or history. Make up your own examples. We could fill pages and pages, and it wouldn’t necessarily be a hypothetical list. We’ve seen situation after situation where the parties were surprised by what a simple investigation turned up (or would have turned up).

What can you do if the principals aren’t equipped to furnish this kind of information? Scratch around yourself. Use the internet to find out about the property. Google Earth (TM) is a great tool. In most cases you can actually see the entire property, the premises, its storefront, the signage, the abutting roadways and way more. The three dimensional view can get you familiar with the elevations and identify visibility issues. You can also use the internet to find out who else may be located at the property. An increasing number of recording offices make record documents available. Look for tax records. Sometimes you will find newspaper articles that may “warn” you of possible issues related to the subject property. There is a treasure trove of information out there.

Basically, a little bit of due diligence information can turn a nondescript, generic property into the particular property you’ll be working on and, in turn, can turn a generic lease into one truly tailored to the location at hand.

This isn’t just an issue for a tenant; landlords can get kicked in the face just as well. Think about how often a landlord makes a plain vanilla, unremarkable representation about the absence of restrictions. Has it or its attorney or other representative taken a recent look at leases, mortgages or documents of record?

We’ve written about the real need to review title work when negotiating a lease. You can see our Ruminations on that subject by clicking HERE. That posting tells the story of a lease negotiated with a landlord who was in the process of losing its property by way of a mortgage foreclosure. Title work also reveals recorded restrictions, many times including exclusive use rights of other tenants, even of tenants who have retained their rights after disappearing from view at the project. Title work also includes existing mortgages, and that allows you to see if a lender’s consent is required for your lease or for a lease amendment. You can find out the actual landlord’s name and that of its lender(s). On more than a handful of occasions, we’ve found that the names we were going to put on the documents didn’t match the real “owner’s” name.

It isn’t often that a lease negotiator’s due diligence (or that done by the leasing party itself and conveyed to its negotiator) will “kill” a deal, but the results of even a basic due diligence effort will often shape some lease provisions that would have looked differently or even would have been absent without the due diligence taking place.

We recently saw a pretty insignificant case, that of Weiner v. SGI-Malden LLC, 2013 WL 1458629 [Mass.App.Ct.]. You can look at a copy by clicking HERE. In this case, the tenant made what seems to us to be a pretty weak claim, but one that could have been avoided without the cost of a trial and of an appeal. The lease had a pretty standard common area maintenance cost recovery clause and defined the common areas as the portions of the shopping center that the “tenant and its customers may use.” The lease apparently said something like “Tenant and its customers may only park in the area(s) shown by crosshatching” on an attached lease exhibit. So, for one reason or another, the tenant argued that, as to it (as contrasted with any other tenant at the shopping center), the share of common area costs should only be those related to the parts of the shopping center “it” could use, and not what was generally usable by tenants and customers of the overall shopping center.

If the tenant was “genuine” about this concern, a due diligence examination of the site plan would have triggered the issue BEFORE the lease was signed. The landlord could also have pre-empted the argument by recognizing the disparity and making the lease clearly say “it doesn’t matter” – you, the tenant, have to pay your share for the entire property. Ruminations is a strong proponent of “say what you mean, and mean what you say,” but if you didn’t look at the “picture” when writing the lease, how would you know what to say?

You might argue: “this really doesn’t implicate a failure to conduct appropriate due diligence ahead of time,” but the court, citing an earlier case between different parties, pointed out that the parties could have negotiated a reduction in “share” ahead of time. Perhaps the tenant (or the landlord) itself didn’t “see” this when it negotiated the business terms, but shouldn’t its advisor have had a “crack” at “advising” the tenant (or the landlord) of this disparity? We don’t know what the parties were looking at, but it does seem that if this tenant was being “genuine” about the issue, a pre-signing look at the overall site plan and its “common areas” could have brought this issue to the table.

We grant that the Weiner case isn’t the “best” example, especially because we are making a lot of guesses about what was really going on. But, if you accuse us of acting in that fashion, why are you making lots of guesses about the shopping center or other kind of project instead of doing your “due diligence”?

Adding your comments, especially adding to the list of due diligence type items, would help all readers. You can do so by clicking right under the title where you will find some form of the word, “comment.”

And yes, this week’s title was better than this week’s posting, but we liked it. So, we used it instead of saving it for later. Shoot us.

Trick question! You won’t find a rent insurance policy. You may find a commercial property insurance endorsement providing coverage for “rental value,” but don’t look for “rent insurance.” While you are at it, don’t call it: “rental interruption insurance,” “rent loss insurance,” or “rental income insurance.” Those are nice concepts, but lack any precise meaning. If you want to call it “use and occupancy insurance,” go ahead, but that form of policy is long, long gone.

Here are two overriding, substantive points – ones that are often ignored, with costly, unintended outcomes. First, coverage for “rental value” is part of a property insurance policy. It is available, if elected, as part of Business Income coverage. That means you first have to buy Business Income coverage. It also means that if there is no physical damage to the insured property, absent specialized additional coverage (such as Contingent Business Interruption coverage for when another property experiences physical damage or such as Utility Services Interruption coverage), you don’t get paid for “rental value.” That’s because, whatever you call it, correctly or not, this insurance coverage is not credit insurance – it is a part of a property insurance policy.

Second, and very, very important, if the rent isn’t abated upon the happening of insured property damage, the premium a landlord has paid to cover “rental value” is “down the gutter” because the landlord’s insurance company never has to pay. If rent does abate, the premium a tenant paid to cover “rental value” is, likewise, “down the gutter” because the tenant’s insurance company never has to pay. More about that later.

As noted earlier, to get “rental value” coverage (which we’ll define in a little while), you need to have “Business Income” coverage. Most commercial property insurance policies are written on forms promulgated by the Insurance Services Office (ISO), an insurance industry trade group, and many that are not on those forms are based on them anyway. The ISO has two relevant forms: its “Business Income (And Extra Expense)” Coverage Form CP 00 30; and its “Business Income (Without Extra Expense)” Coverage Form CP 00 32.

Coverage for “rental value” does not come automatically; it must be elected. That makes the “Declaration” page of an insurance policy pretty important. The Declaration page is like a checklist. It shows what coverage forms (such as the Business Income forms) are part of the policy (remember, if it’s not listed on the Declaration page, it isn’t a part of the policy even if you are holding the form in your hands); it shows coverage limits; and, it shows certain “elections,” such as whether the policy includes “rental value” coverage at all. So, if you want to know if you (or your landlord or tenant or borrower) have “rental value” or any other particular coverage, you’ll want to read the policy’s Declaration page.

Here’s a little bit more information before we get to the practical side of negotiating for “rental value” coverage.

“Rental value” has a slightly different definition when used in a tenant’s insurance policy than when used in a landlord’s insurance policy, but gets you to the same point. In each case, “rental value” coverage encompasses both the basic rent as well as whatever amounts a tenant would have paid on account of operating expenses, taxes, and the like. In addition, the term includes payment for other items a tenant would have been paying had it not been for damage from an insured peril. That means, by way of example, it covers utility bills the tenant would have been paying. The landlord’s policy would also cover the fair rental value of its self-occupied premises (such as for a leasing office) on the theory that the landlord would be taking temporary, replacement space elsewhere. That’s one small reason a landlord should prefer to be the one holding the policy with “rental value” coverage.

Basically, “rental value” coverage kicks in when the rent stops by reason of the casualty and ends when the rent begins again, subject to some nuances. There are some differences between how this works for a landlord’s policy and how it works for a tenant’s policy. One nuance is that the insurance carrier is going to stop paying when the rent “should have restarted.” So, for a landlord, if it drags its feet, the policy will stop paying at the point the restoration would have been completed had the landlord been diligent. A tenant’s policy, on the other hand, should not penalize the tenant for its landlord’s foot dragging. Keep in mind, however, if the rent hasn’t abated upon the occurrence of damage, then the tenant has to keep paying rent. So, if the landlord drags its feet or interferes with its tenant’s restoration, the tenant may have a “delay” claim against its landlord. In such a case, the tenant’s insurance company, upon reimbursing the tenant for the rent, would be able to step into its insured’s shoes and take the claim over. How this plays out in a lease with a provision calling for a waiver of claims for property damage is too much for this Ruminator to figure out.

Another nuance is that one has to choose coverage limits for “rental value,” typically by stating the number of months of coverage – 12 or 18 being pretty common – or by stating a dollar limit. One last nuance is that a standard policy would for allow 30 extra days of “rent” abatement payments beyond re-delivery of the restored premises so that the tenant can re-fixture its premises. If one elected for a given number of months of coverage, then the 30 days is above and beyond that time limit if the time limit has been reached. If one elected a dollar limit, the “extra” 30 days is within the limit.

You can “buy” more than 30 days “extra.” Also, there is a short period following the damage before coverage starts.

We won’t introduce “extra expense” concepts because those aren’t really lease related, but when you speak with someone who really, really understands all of this (and that’s not us), you can find out about the concept of “suspension of operations” and how the insured (almost always, for such coverage, a tenant) can get insurance to compensate itself while it ramps up its business to pre-damage levels.

Now, to the practical. First, this is complicated (read that – tricky) coverage. So, ask a truly competent insurance professional to “teach you” about it. If you don’t understand how “rental value” coverage works, you’ll be wasting your team’s time (and money) and the other team’s time (and money) in negotiations by making up “stories” about how you can’t do this or that and about how the other side shouldn’t worry because “insurance covers that.” You may also damage your own credibility, and that shouldn’t be taken lightly.

Next, remember that if the rent abates and you, as a landlord, insist that the tenant have “rental value” coverage, then you’ve negotiated for “nothing” because if your tenant experiences no loss – the rent stopped – its carrier never has to pay. The flip side is that if the rent doesn’t abate, and the landlord has “rental value coverage,” its carrier won’t have to pay because the tenant has to pay.

If the tenant has to obtain and maintain “rental value” coverage (and, as we now know, the rent doesn’t abate), its landlord will want to be an “Additional Insured” as to the “rental value” coverage. By the way, that isn’t the same as being a “loss payee.” Get a copy of the endorsement and a copy of the tenant’s policy Declaration page to make sure the endorsement is listed on it. Look for the specific Landlord as Additional Insured (Rental Value) endorsement [form CP 03 15].

Now, for the most important tip. Landlords should maintain this coverage, not leave it to their tenants to have it. Then, as a landlord, you get to choose and control the coverage. And, don’t forget, tenants directly or implicitly reimburse their landlords for this part of the property insurance premium. Next, don’t forget, the rent should abate. If not, a landlord’s insurance policy will not cover the rent – you’ll be depending on an out-of-business tenant to continuing paying for useless premises. What is more, almost all landlords already have “rental value” coverage because most lenders require that it be carried. That being the case, why should two companies collect a premium (the landlord’s and the tenant’s) if only one of them will ever have to pay? Also, from a landlord’s perspective, why take the risk that the tenant didn’t get the right coverage? You can get the right coverage and the tenant is going to pay anyway. As to the mistaken notion that “our insurance costs will go up,” drop that thought. Even if that were the way the insurance market worked (and, it really doesn’t), you already had “the fire.”

Last week, I had the great pleasure, once again, to attend a Spring CLE Symposia of the Real Property, Trusts and Estate Section of the American Bar Association. If you aren’t a member, and there are memberships for attorneys and associate memberships for non-attorneys in allied fields, you really ought to look at this: http://tinyurl.com/cl2vwdg. If you are a member of the ABA, consider joining the Section. If are a Section member, consider coming to Chicago next Spring for the 2104 Symposia. This is an unpaid endorsement.

We then realized that “Rent Insurance” is only one of the many insurance terms that we all copy from the last document, which terms were copied from the prior document, which were copied from the one before that – and, so forth. You get the idea. Our scant and inadequate research leads us to believe that the merchants of Rhodes, in about 750 BCE, may have been the first to use “pooled funds” as a means of compensating a contributing merchant for a cargo loss. Some of the terms used by those who write leases and other agreements today may come from the documents first used in Rhodes to create what they called a “general average.”

So, that’s what we’ll write about today – obsolete insurance terms. We’ll try to be short about it. Next week, if our Ruminating doesn’t again lead us astray, we’ll return to the ins and outs of the colloquial term, “Rent Insurance.”

Using an obsolete insurance term is not a capital offense. It isn’t even a misdemeanor. It, however, raises a question as to whether the draftsperson actually understands what he or she is writing. Substantively, it creates unenforceable contract provisions. After all, if a contract, such as a lease or mortgage, requires one party or the other to carry “All-Risk” insurance, and there is no such thing, will “impossibility of performance” be a defense? If not, in a dispute over whether proper insurance is (or was) being carried, will one party or the other be forced to seek reformation? Most of all, if the requiring party expects a particular benefit by calling for “All Risk” insurance, will it be getting the benefit it sought?

We start with “All Risk” insurance coverage because it is probably the number one offender. The “All Risk” policy has been “history” since 1983 (that’s three decades ago!). The reason for its elimination is instructive. When you ask for an “All Risk” policy, you probably think you’ll see insurance that protects against all risks. That’s just the reason the “All Risk” policy form was discontinued in 1983. Court after court had been ruling that an insured was entitled to coverage against “all risks” even if the fine print in the policy said otherwise. After all, what wouldn’t a policy that insures against “All Risks” include?

What is today’s terminology? Here’s a short lesson. We are talking about property insurance, specifically “commercial property insurance.” The most common policy form is promulgated by the Insurance Services Office, Inc., an insurance industry trade group. Its property insurance policy is commonly made up of four parts. The critical part for the purpose of today’s discussion is its “causes of loss” part. It describes the perils for which there will be coverage. There are three such levels of coverage, they are: special, basic, and broad. It isn’t intuitive that the greatest coverage comes with the “special” form. So, if you want a party to carry the greatest level of commercial property insurance protection, ask it to carry “commercial property insurance with a special causes of loss coverage part (or the then insurance industry replacement therefor).” [To get greater coverage, you’ll then want to add one or more endorsements. We’re sure to cover that in a future Ruminations posting.]

When the “All Risk” policy went bye-bye, so did “Fire and Extended Coverage” and the “Extended Coverage Endorsement.” These “forms” had supplemented the “All Risk” policy and are now built into the “Special Causes of Loss Coverage Part.” So, stop asking for them. “Use and Occupancy” insurance is an obsolete term for Boiler and Machinery Business Interruption coverage. No one sells “Mercantile Open Stock” coverage, a now obsolete crime coverage form, as are “Money and Securities Broad Form” policies, “Mercantile Safe Burglary” coverage, and “Mercantile Robbery” coverage.

Property insurance isn’t the only area that harbors the use of obsolete terms. Those who like to ask for “All Risk” commercial property insurance invariably also ask for “Comprehensive Liability” (sometimes “Comprehensive General Liability”) insurance. We don’t know why we keep calling for “Comprehensive Liability” policies when the industry dropped that form in 1968, forty-five years ago. Likewise, if you are calling it “Public Liability” insurance, please stop. Today, the commercial liability insurance policy you are looking for is called “Commercial General Liability,” commonly referred to as “CGL” coverage. Yes, “Commercial,” not “Comprehensive.” Oh yes, as you imagine, the old form wasn’t “comprehensive” and that’s likely why its name was changed.

While we’re at it, don’t look for “Contractual Liability Insurance.” That coverage is actually built into the standard CGL policy and changeable through the use of endorsements to the CGL policy. Don’t use “co-insured” because it doesn’t mean what you think it means. Don’t look for a “cross-liability” endorsement. Manufacturers and Contractors insurance policies went bye-bye in 1968; now the coverage comes with the CGL policy. The same is true for “Owners, Landlords, and Tenants” liability policies. The “Broad Form Comprehensive General Liability” endorsement may be more than hard to find. It doesn’t exist any longer.

When it comes to insuring for “personal injury,” we don’t think drafters, on the one hand, and the insurance industry, on the other hand, use those words in the same way. When you require coverage for “personal Injury” in your contract, you probably meant to ask for “bodily injury” coverage because that’s what the insurance industry calls it.

There are many other insurance terms from our youth that we are still enshrining today. More than Ruminations knows about. That’s why we return to a frequent reprise: when it comes to insurance provisions, get some “real” insurance people on your “Rolodex” and call them often. Show them what you’ve written. Learn from them. Do it right! [Rolodex isn’t a generic term. Ask the Newell Rubbermaid, the people who own the mark. It isn’t an obsolete term, even if you haven’t seen one in a long time.]

Here’s our parting shot for today: the term, “Combined Single Limit” is obsolete. Take that!

And, in modern America, it seems as if someone else is always at fault, not me. [If you take no blame, it must be them; Who must then pay my fines. It's really is quite the cleverest ploy; By which illogic shines. – Gary Bachlund.]

Actually, there are times when bad things happen and the landlord and its tenant are each “good people.” Here are some examples:

Access is lost because the road serving the property (call it a shopping center) is temporarily or permanently closed by the government

A nearby bridge leading to the shopping center is closed and the alternative access route is undesirable to customers

A fuel delivery truck spills its load when parked on the shopping center so that its driver could run across the street (meaning that the driver wasn’t using or serving the shopping center)

The entire area is closed for a week as a crime scene

The arena across the street from the shopping center has been closed and the businesses at the shopping center relied on business from the arena

Power from the utility company directly to the tenant is interrupted

Power from the utility company directly to the landlord is interrupted and the tenant gets its power through a submeter

The shopping center is closed by reason of flood, famine, locusts, etc.

Make up your own examples

In each case, neither the landlord nor the tenant can point its finger at the other. They may be able to find someone else at fault, but it won’t be either of the two of them. In some cases, the risk of loss can be placed on an insurance company, if that were thought-of, and the premium charged made sense. But, again, that doesn’t tell us who, as between a landlord and its tenant, “should” bear the risk of loss (and, therefore, which one of them should bear the expense of an insurance premium where that is an option).

Well, there is no answer other than: “it depends.” And, what does it depend upon? Answer: mostly, it depends on two factors, the relative bargaining power of the parties (a recurrent Ruminations theme), and whether any party thought of the issue in the first place.

To us, those are both “practical” responses, but not very satisfying on an intellectual plane. So, we began to Ruminate, and thought this would be a good time in our relationship with our pretty impressive collection of loyal followers, to start a discussion.

The main approach coming to mind is to ask yourself: to what degree does the disabling event affect the value of the property and to what degree does it affect the value of the tenant’s business” Here, the key word is “value.”

After struggling with a simple way to explain this “thought,” and finding our skills inadequate to the task, we decided to do so by way of an example. Here we go. We think the value of a shopping center is a function of how much money its owner can make. For a shopping center (or any other income generating property), that depends on “how much rent can be charged and what the occupancy rate will be at that amount.” Yes, property prices are based on the present value of the projected stream of net income. [We know there are some situations where factors beyond rent for the existing configuration are in play, such as for a property with additional development potential, but that still goes to working with the “projected stream of net income."]

So, how does this apply to the “harm without fault scenario”? Ask yourself, given two otherwise identical shopping centers (as we say in Latin, ceteris paribus), one with direct, all-direction access to an interstate highway intersection, and the other visible from the same highway, but four miles in either direction from two such interchanges, which property will garner higher rents? We think placing a shopping center at an interstate highway exit is the better bet.

Now, if you have a shopping center at such an interchange and the interchange is permanently closed, the shopping center becomes less valuable because the rents obtainable will be less after the closing than beforehand. We also think that the landlord impliedly promised its tenants that they would enjoy (and be paying for) a shopping center with the higher level of customer traffic expected from an easily reachable shopping center. Our conclusion – if a critical highway exit is permanently closed such that the fair market value of the rent chargeable (and, by extension, the price of the property) were to fall, then, as between a landlord and its tenant, the landlord should take the risk. If the rent would not fall (say, the closing was temporary – whatever that means in the context of our example), the tenant should bear the loss. How that translates into “dollars” doesn’t lead to a fixed answer. Perhaps it means that the rent should be reset to the “new” market, but if the rent would then fall by more than a certain percentage (implying that the location would not have been considered by the tenant in the first place), the tenant should have the right to terminate the lease.

“Wait a minute, you say” – “why shouldn’t the chips fall where they landed?” Why is the landlord taking the hose in such a situation?” Our admittedly less that powerful response comes in the form of another example. What would the rent have been had the parties known, at the time of lease negotiation, of a 50-50 chance the exit would be permanently closed? If the tenant was still willing to take the space, would it have paid the same rent as if there was no chance of closure? Could the landlord have gotten the same rent? In each case, we think not.

What event, occurring without fault, would be a business risk for the tenant and not its landlord? How about its strongest competitor opening a superstore directly across the street? That could certainly have a negative impact on the tenant’s location, but wouldn’t reduce the value of the shopping center, only the value of the tenant’s business there.

What about the crime scene, a temporary situation having no measurable effect on the “value” of the property or the prospective rents for space there? By extension, our thinking is that the tenant should bear that risk. That’s the same as an interruption in electric service (without landlord’s or tenant’s fault), whether the power comes directly to the tenant or if passes through the landlord’s meter. We know that’s a departure from the common negotiated outcome, but that’s the way the our analysis comes out.

We invite, indeed encourage, our readers to play with this question and our approach in their heads. Apply this approach and your own approach to various examples. Tell us, the other (about) fifteen hundred other weekly Ruminators, what you think. Just click on some form of the word “comment” just below the headline to this posting and join the conversation.

What about events for which insurance can offer protection? Yes, some of these “no fault” events can trigger insurance coverage (such as the closing of the sports arena – look at contingent business interruption coverage). As an extension of our working theory, we think that the party who should take the hit should bear the expense of the insurance coverage, but we also understand that the market might price that premium cost into the rent or otherwise into a tenant’s occupancy cost.

Brother Ali, in his “Say Amen,” might claim that the “last thing I do is overstate the obvious,” but Ruminations isn’t a rap performer. So, we’ll tell readers that a lease has four basic kinds of provisions: (a) rent and rent-like provisions that require the tenant to pay money to the landlord (and sometimes the reverse – landlords paying money to tenants in the form of allowances and the like); (b) ones that require one party or the other to perform duties, either to actually do things or to buy outside services, such as insurance; (c) ones that make one party or the other pay for the consequences of its own acts (or omissions where it had a duty to act); and (d) ones that allocate the risk of bad stuff happening.

We’re going to Ruminate about item (d), allocation of risk. Basically, what’s involved when negotiating, as between a landlord and tenant, is the question of who should take the risk of bad things that happen when those bad things were in no way caused or aggravated by either one of them. The example we will use this week comes from Hurricane Sandy, but it could have arisen from last week’s incomprehensible events in Boston or in West, Texas.

Today’s topic had been on our “list” for quite some time, but it wasn’t until we saw this (http://tinyurl.com/c28df5o) unpublished “Informal Opinion and Decision” in a humdrum (no, not the animated short) residential eviction case, that we knew the “time was ripe.”

Basically, a landlord went to a New Jersey landlord-tenant court to get an order of eviction against a residential tenant for non-payment of rent, specifically for half of November, 2012. The tenant, represented by counsel, raised a number of defenses, all associated with Hurricane Sandy. You could sum them up as saying that the landlord should have borne the risk that Hurricane Sandy knocked out the power for two weeks, thereby making the apartment “uninhabitable.” Phrased more “legally,” the argument was that the landlord, because of this hurricane-caused loss of power, had breached the (residential only) “implied covenant of habitability.” Simply put, the tenant argued he “shouldn’t have to pay for something he did not receive.”

In New Jersey, a breach of that covenant, where the facts don’t support a valid “constructive eviction” claim, gives a residential tenant the right to “repair and deduct” As more commonly applied, it allows a residential tenant to take a partial rent abatement based on the degree of impairment.

That’s the background. What intrigued us was: (a) the judge, a jurist we know (by reason of his prominence), is very smart and also very wise; (b) New Jersey courts lean over backwards to help residential tenants, but this one didn’t; and (c) here, a landlord-tenant judge actually cited law (beyond the same old formulistic pronouncements) in a residential matter.

So, why is this relevant to commercial real property leases? Our take is that if a very talented and experienced landlord-tenant court judge is going to tell us why a residential landlord isn’t going to assume the risk of an event over which it had no control to stop or (reasonably) to mitigate, no judge would do so when the combatants are a commercial landlord and its commercial tenant.

The court began by citing from New Jersey’s seminal “remedies for breach of a residential implied covenant of habitability” case, known as Marini. Since not all of Ruminations’ readers have the same understanding as to what this implied covenant means, we’ll start with the quoted explanation. It is:

a covenant that, at the inception of the lease, there are no latent defects in facilities vital to the use of the premises for residential purposes because of faulty original construction or deterioration from age or normal usage. And further it is a covenant that these facilities will remain in usable condition during the entire term of the lease. In performance of this covenant the landlord is required to maintain those facilities in a condition which renders the property livable.

This actual covenant doesn’t apply to commercial tenancies in New Jersey or, to our understanding, anywhere in the United States. We are reproducing it as an example of an entire class of possible “implied covenants.” [By the way, a bare bones equivalent of “covenant” is, “promise.” Thus, an “implied promise.”]

At this point, most readers could reasonably ask – where is Ruminations going? Well, this was exactly the point in our rambling where we were going to tell you. Basically, parties to a contract are bound by what they promise to each other (“express covenants”) and the promises that the law implies as having been made by them (“implied covenants”). So, if the parties don’t say “who is responsible for what” in their contract (and, a lease is a type of contract), the law might answer the question for them. By way of example, if the lease doesn’t say who has what duties when the electric company’s power lines are cut down the street, they law might say: “the landlord has to pay this and do this; and the tenant might have to do this and pay this.” How would the court know? It would see what the situation and the relationship “implied.”

How does a lease covenant get “implied”? Here is what the New Jersey court said:

A covenant in a lease can arise only by necessary implication from specific language of the lease or because it is indispensable to carry into effect the purpose of the lease. In determining, under contract law, what covenants are implied, the object which the parties had in view and intended to be accomplished is of primary importance. The subject matter and circumstances of the letting give at least as clear a clue to the natural intentions of the parties as do the written words. … Terms are to be implied not because ‘they are just or reasonable, but rather for the reason that the parties must have intended them and have only failed to express them * * * or because they are necessary to give business efficacy to the contract as written, or to give the contract the effect which the parties, as fair and reasonable men, presumably would have agreed on if, having in mind the possibility of the situation which has arisen, they contracted expressly in reference thereto. [Emphasis ours.]

Pay attention to the bold, underlined text above. Basically, it says that if you don’t write the rules down for yourself in a lease (or other contract – which could be a mortgage, purchase agreement or one of a lot of other kinds of agreements), then the courts will GUESS what you had in mind or, more often, what it thinks you would have had in mind had you taken the time to think about it.

In the case as hand, the court ruled that the landlord had done nothing, affirmatively or by omission, that would have entitled its tenant to rent relief. Basically, it felt that had the parties thought about it, they wouldn’t have negotiated any rent relief for the tenant, thereby placing the risk of a hurricane-caused power loss on the tenant. That’s not to say that this New Jersey court would absolve a landlord in every situation where the landlord was not the cause of the problem. This particular court understood that there are circumstances where it would be implied that a landlord has a duty to ameliorate the situation – call that, act to mitigate its tenant’s damages – just not here. In that regard, the court said:

I can easily conceive of conditions that would justify an abatement because the conditions would substantially and negatively affect the reasonable use and enjoyment of an apartment and because elimination of those conditions would be within the reasonable control of the landlord. Examples would be a consistent foul odor or unreasonable, excessive and continued noise from another apartment (when the landlord might be able to have the tenant creating the consistent foul odor or noise evicted based on disorderly conduct) or an animal in the attic.

So, what is the point of today’s message. It is a simple one: if you don’t want a court guessing what you would have agreed-to, had you thought about a potential “neither party caused the problem” situation, put your own agreement in the lease (or other kind of contract).

We’ve overstayed our visit this week. So, if you return to Ruminations next week, you’ll see what we think the appropriate resolutions for common “nobody’s fault” risks might be.

If you’ve gotten this far in today’s Ruminations, you are probably a loyal enough Ruminator to be interested in the following. Howard Kline, host of CRERadio, has invited us to join him and David Ezra in a discussion of insurance issues in commercial leases. The show, about an hour or a little more, will be broadcast in real time on Friday, April 26 starting at 3 pm EST (which is noon PST, and you can figure out the rest yourself). It is at www.CRERadio.com and podcasts will be available shortly after the show’s conclusion. David Ezra is a California attorney with enormous experience in insurance issues. Join us, if you can.

What is not in doubt is that the question’s answer is important, for both leases and mortgages (and for taxation and some other kinds of issues).

Why wait to get to the end of this piece? We’ll give you our conclusion right now. (1) A fixture is what the document says it is; (2) it matters less as to “what” a fixture might be, then as to who gets to keep it, who maintains it, and who has to remove it. So – craft your lease, mortgage, or other agreement such that it answers those questions. In a lease, for example, define the term “Tenant Fixture” and spell out the tenant’s rights and responsibilities as to a “Tenant Fixture.” Not all “Tenant Fixtures” are personal property. Some are personal property for one purpose and not for another. You can define the supplemental air conditioner placed on the roof by the tenant as the tenant’s personal property but, as between the property owner (as mortgagor) and its lender (as mortgagee), that air conditioner is almost certainly going to be part of the real property. The tax assessor will probably see the rooftop unit as taxable real property (assuming the assessment is not solely based on income potential).

We don’t intend to set forth a firm rule usable to definitively determine what is or is not a real property fixture. The furthest we will go is to share some text from Sutton v. Frost, a 1981 decision from the Supreme Judicial Court of Maine. As you read the following excerpts, keep the context in mind – whether a fixture remains a tenant’s property turns on the “intent” behind bringing the fixture to the leased property in the first place. Here we go:

“Where the parties are related as landlord and tenant, the law tends to infer that annexations made by the tenant are intended to be temporary, since it is unlikely that the tenant meant to deprive himself of his property. … This inference is especially strong where the annexation is a trade fixture, i.e., property which the tenant has placed on the rented real estate to advance the business for which the realty is leased. … The value of this rule is its bearing upon the question of intention — it is unlikely that the parties would have intended for the removal of additions where removal would materially damage the remaining estate.”

So, what do we learn from the Maine court? Simply speaking, unless the lease or other “proof” defines each party’s rights in a “possible” fixture, a court will try to read the minds of the landlord and its tenant. In doing so, it will apply “presumptions” that just may not have been in those “minds.”

Let’s look at some stark examples to illustrate the conundrum of “intent.”. You can have two identical steam boilers in a building, each connected to the same source of fuel; each located in the same room; and each serving a network of pipes attached to columns, joists, and so forth. If they are both used to heat the “joint,” they are probably (by default) part of the real property. But, if one was used to furnish low pressure steam to a piece of production equipment, such as a sterilizer, it would probably not be part of the real property; instead, it would probably be seen as personal property. Yes, identical pieces of equipment – opposite results. So, if the tenant installed both, and the lease was silent, that would probably be the result because the “production” boiler was not intended to “add” to the building; it was intended to be part of the tenant’s manufacturing equipment, no matter how well it may be glued to the floor.

Our second example comes from the Tennessee Court of Appeals case of Hubbard v. Hardeman County Bank, 868 S.W.2d 656 (1993). The question involved three buildings and whether they were personal property that a ground tenant could pick up and “take home” or whether they became part of the real property once completed. The buildings were 14 feet wide and 30 or 40 feet long. The trick was that they were “modular” in that they had been completely manufactured as self-contained bank branch buildings, complete with wiring, plumbing, lighting, rest rooms, etc. They sat on footings under their own weight. Utility services, such as for sanitary sewers, were furnished though hook-ups to the land. Were these buildings “personal property”? To Hubbard’s relief, they were. It wasn’t just that you could use a crane to pick up the 60-80,000 pound buildings; it was the tenant’s intent in placing them on the land. It specifically had them designed for removability. Oh yes, there were losers – the party that bought the property from the original landlord, thinking it was getting some buildings, and Hardeman County Bank, the mortgagee. What did the tax assessor think? [We don’t know.]

These examples reveal a big problem with the way most lease and mortgage negotiators think, that being: “once you identify (or define) something as a ‘trade fixture’ or a ‘personal property fixture,’ the resulting rights and obligations flow out of such a designation.” This isn’t true. The law’s general understanding of a trade fixture is that the item is “property which a tenant has placed on rented real estate to advance the business for which the property is leased.” But that doesn’t automatically mean that a tenant can remove its “trade fixtures” if doing so would materially harm the real estate. Basically, the parties need to express their “intent.” Yes, “intent” is what controls. And, the best way to let people know what might have been your “intent,” is to say so right there in the agreement.

Here is a piece of less than useful information, of interest mostly to true Ruminators. The biggest reason there is no accepted agreement, in the abstract, as to what does or does not constitute a “fixture,” is because the answer has changed many times over the course of time. Case law is burdened with historical concepts as to “what people must have intended” to remain a mortgagor’s or a tenant’s property when either of them relinquishes its interest in the real property. More simply put, “it takes forever to learn the rules and once you’ve learned them they change again.” [That’s a corollary to Murphy’s Law.]

How do you deal with this uncertainty? That’s easy – make your own rules. Here’s a checklist in progress:

• Define exactly what items, though attached to the real property, will be treated as the tenant’s own property. Basically, this means – what can the tenant take with it when it leaves. You can call it “Tenant Owned Fixtures.” Remember that if an item isn’t attached at all, like a floor lamp or inventory, no one will be calling it a real property fixture. We’re not concerned with that kind of personal property.
• Of the Tenant Owned Fixtures, write down what the tenant must take with it when it leaves.
• Set the time limit for when the tenant must get its “stuff” out.
• Say that the tenant has the obligation to repair all damage caused by the initial installation, presence or removal of Tenant Owned Fixtures.
• Say that the tenant bears the risk of loss for Tenant Owned Fixtures and that the landlord will not be insuring them.
• If you are the landlord, require your tenant to insure the Tenant Owned Fixtures (if you are concerned that the tenant may not be able to cover the loss and thus be unable to get up and running again after the fire or other peril causes damage).
• Decide, together, what other items the tenant attaches to the real property (“Remaining Fixtures”) must go or stay when the tenant leaves.
• As to any of the Remaining Fixtures that the tenant will be required to remove, say that the tenant has the obligation to repair all damage caused by their initial installation, presence or removal.
• As to Remaining Fixtures, make sure they are included in the landlord’s insurance policies and that the lease requires the landlord to restore them after a fire, etc.

Here is an opening premise: the normal (ISO) coverage form for “Building and Personal Property Coverage” does not pertain to buildings under construction. [The ISO, or Insurance Services Office, is an association of insurance companies and it promulgates commonly used insurance forms. Many, but not all carriers use these forms. So, people who really want to know what is or is not covered always need to look at the policy itself. Those who draft leases might want to requires insurance policies to be on ISO forms or be on the functional equivalent of those forms.]

Here is a second premise: The ISO form for “Builders Risk” uses values based on the completed building, inclusive (yes, inclusive) of foundations, paving, and similar items that are not covered in the usual form for “Building and Property Coverage.” If less than the completed value is declared, the insured will be subject to co-insurance limitations. For example, if the actual completed value is twice the declared amount, the insured will only get paid for half of any otherwise valid claim.

There is a third premise: A Builders Risk policy, like the Building and Property Coverage Policy, can be endorsed for debris removal, pollution cleanup, and some other things. Additional coverage for building supplies or landscaping can be obtained. There are some other kinds of coverable risks, such as tools and construction equipment, but a discussion of those items is best had with an insurance expert, not with us at Ruminations.

Now, for the CRITICAL fourth premise: It is probably stupid to use an unmodified Builders Risk policy when, as is most often the case in lease negotiations, you are really talking about alterations or renovations. In those cases, there is, or certainly should be, a property insurance policy already in place, one that will stay in place, Typically, that will be the ISO Building and Property Coverage Form (and usually with a Special Form coverage part).

So, in the case of renovations to an existing building, there will already be property insurance in place, almost certainly obtained and maintained by the landlord. All that needs be done is to buy an endorsement – it is called (in ISO parlance), “Builders Risk Renovations.” It adds coverage for the improvements, alterations, and repairs being made. Basically, aside from not covering foundations (because they are already completed), this endorsement extends the underlying property insurance to the improvements being done, and does so in a way that co-insurance concerns are eliminated.

So, what does this add up to? By having the landlord add the builders risk coverage to its existing policy (at the tenant’s expense if the tenant is doing the renovations), you get: (a) a landlord who controls the coverage and doesn’t have to monitor its tenant; (b) the right party, i.e., the tenant, paying for the extra cost of such coverage; (c) no gap in coverage; (d) no battles between different insurance companies; and (e) no throwing premium money down the sewer.

What this also translates to is getting lease writers to understand how builders risk insurance really works and getting them to write “smart” lease provisions instead of insisting that a tenant “obtain” builders risk insurance, something we see far, far too often. Having the landlord obtain the insurance coverage at its tenant’s cost is the “smart” way to handle builders risk coverage when it is meant to cover alterations or renovations. If you start out with this concept, the lease should take less time to negotiate, you can reduce the “distrust” element between negotiators where each thinks the other is jockeying for advantage, and the interests of each of landlord and tenant are better served.

As to when a tenant is building from scratch, Ruminations, once again, strongly suggests that landlords control the insurance by getting it themselves and having their tenants pay the premiums.

By the way, those who write loan documents might also pick up a few hints by reading this posting and applying its concepts.

We know from long experience and from a whole bunch of comments to previous postings that there is the following negotiation philosophy: “We really don’t need it; we’ll give it up just for the asking; we’ll ask for it anyway; and, sometimes we get it.” In most cases, that applies to tenant-form leases that include a right of first refusal to buy the property or to expand into adjacent (and sometime non-adjacent) space. Yes, generic provisions that have nothing to do with the “deal” and weren’t part of the letter of intent, even though quite material. Landlord forms often do the same thing when it comes to tenant relocation provisions. We’re not going to address those relocation provisions today. That’s for down the road.

Before the “flamers” fuel up their comments, please assume that Ruminations knows that purchase and expansion rights can be a legitimate part of a deal. Our skepticism is directed to their inclusion in form leases as if they were “boilerplate.” To us, our skepticism is validated by how frequently tenants collapse on this issue in the first round. That means they were “fishing.”

Why does this matter? After all, isn’t it harmless to throw a whole bunch of requests against the wall to see what sticks? Maybe, but we don’t think so. We think it goes to credibility – the credibility of the parties and their negotiators.

Here’s what we mean, and this is not an “oddball” example. Why would a 2,000 square foot tenant in a 400,000 square foot shopping center even ask for a right of first refusal to buy the entire shopping center if the owner were to get an offer? If your answer is because the owner might not realize its implications, then there is no reason to read on. You would be right.

Why should an owner care? After all, it would still be selling the property for the price it was willing to take, only to a different buyer (its tenant with the option). It cares because: (a) the tenant isn’t likely to buy the property for the tenant’s business, but if it exercised the option at all (likelihood, slim to none), it would be for a “flip”; and (b) rights of first refusal are like throwing ice water on a deal. Prospective buyers don’t like to be stalking horses for others; lenders won’t lend if the property is subject to a purchase right; waiting out the notice period out kills deals; responsible brokers lose interest. And, that’s all assuming that the purchase option right is drafted in a way that allows for transfers that really don’t change the “ownership interests” in the property.

The same is true when it comes to expansion rights. They really put a damper on a landlord’s ability to market empty space or space that will become empty.

None of this is to say that a deal can’t or shouldn’t include a purchase right (outright or by way of some form of option) or an expansion right, only to say that these things have important business consequences and should be in or out of the deal on day one, not slipped into the back of a lease form. Also, none of this is to say that there aren’t ways to balance the legitimate rights of a landlord and its tenant, whether by use of a right of first offer or a right of first negotiation or by the careful use of time limitations or otherwise. Experienced leasecrafters know how to make the “deal” work, but the deal they set out to “work” should be agreed-upon before the craftspeople do their magic.

Please file this with Rumination’s other thoughts on how to make the negotiating process more effective, more efficient, and less combative. Maintaining credibility is important. It engenders trust.

Ruminations sees two changes of interest to the leasing industry and they affect: (a) additional insureds; and (b) those who serve liquor or allow its on-premises consumption. We also see some ways to change our documents to counteract the effect of some of these changes.

Additional insureds become such when covered by one of a whole bunch of possible endorsements, each one designed for a particular class of additional insureds. For example, ISO form CG 20 11 is for Managers or Lessors/Landlords of Premises and form CG 20 26 is for a Designated Person or Organization. The rights of an additional insured (and any limitations) are set forth on the selected endorsement. [Before anyone gangs up on us, some carriers use non-standard forms and include additional insured provisions in the underlying policy form itself. That’s why everyone should rely on insurance professionals to review insurance policies – it isn’t intuitive, it requires experience and training.]

Beginning April 1, three changes will take effect and each will limit coverage:

• only to the extent provided by law

• to be no broader than what the contract (e.g., the lease or mortgage) between the named insured and the additional insured requires

• to the lesser of the policy limit or what the contract (e.g., the lease or mortgage) requires

By saying that the coverage afforded to an additional insured is “only to the extent provided by law,” the new endorsement is addressing an “anti-indemnity” trend developing in state law, such as in California (by recent Statute), Texas, and Louisiana. The effect of some statutes is to limit an additional insured’s coverage to “vicarious liability,” and thus the new endorsements will not cover “shared liability.” While this mostly affects the construction industry because of the way the statutes are drafted, think about the trend and also realize that from April, 2013 on, an additional insured will get “less” not “more” from the other party’s insurance coverage.

More limiting, in the leasing – loan context, is the cap on the scope of coverage by reference to the party’s underlying agreement. For example, if a lease says that the tenant must name its landlord as an additional insured with respect to tenant’s negligence, then the additional insured’s coverage, though it could be much broader under the tenant’s policy itself, will only answer for claims based on the tenant’s negligence. In addition, there is case law in some jurisdictions that the scope of insurance is measured by the policyholding party’s lease obligations. That appears to rear its head most often with respect to “how far out in the parking lot” does additional insured coverage extend, but with the new endorsement form, this court-made limitation could be the basis for denial of coverage to an additional insured. It would seem that leases and other contracts could be re-written to require that one be named as an additional insured with coverage for every event and condition that the policy could possible cover and to say that every insurable event and condition coverable by the policy is included, by reference, as part of the insuring party’s obligation to the additional insured. Everyone will have their own formulation for such a provision, but you get the point – turn the endorsement restriction on its head.

Lastly, when the coverage cap is based on the “lesser” of the policy limits or what the contract requires, you’re going to see additional insured’s being limited to the amount of insurance they have required of the other party and no longer being protected to the full policy limit in the other party’s policy. One would think the real estate industry’s response would be to redraft agreements using the concepts that the policyholding party must name the additional insured with coverage limits equal to the full amount of each policy, but for no less than $X in coverage.

THERE IS A BOTTOM LINE HERE, one that has been said over and over by many, many who have looked at “insurance” concerns, and one that has been ignored over and over. You should update your contract (e.g., lease) forms to work around the new limitations but, if you really, really want to be covered, carry your own insurance. Fortunately or not, depending on your point of view, tenants pay for their own insurance and for their landlord’s policies as well. Lender all have adequate insurance. So, they’ve learned the lesson already.

As to locations where one can grab a drink or a bottle, the carriers are giving with one hand and taking away with the other. That’s what the insurance industry is doing when it comes to “Liquor Liability.” The new ISO coverage forms that become effective on April 1, 2013 will clearly cover claims related to BYOB, even if the insured establishment imposes a corkage fee. But, the new Liquor Liability Exclusion Endorsement, commonly made a part of a Commercial General Liability policy (not a “comprehensive general liability” or “public liability” or “general liability”), removes all such coverage. So, if you are a tenant who serves liquor or allows liquor to be brought onto your premises, watch for the new forms and talk with your broker or risk manager or consultant. Likewise, landlords and those negotiating for landlords, review your leases’ insurance provisions and make sure your administration team knows what to look for when reviewing a tenant’s insurance coverage.

Barring another intervening thought, next week, we’ll try to stir up some trouble when we discuss purchase and expansion options. Until then, keep Ruminating.

A number of work-arounds have been used. My favorite useless provision in an agreement is that the party who is required to carry the insurance must give notice to the “concerned” party that the reporting party’s own policy has been cancelled. So, when it doesn’t do so, is it guilty of a “double default” – first for losing the insurance and then for failing to turn itself in?? That’s kind of like this dialog: [Dean Wormer's plotting to get rid of Delta House in the movie Animal House]: Greg Marmalard: “But Delta’s already on probation.” Dean Vernon Wormer: “They are? Well, as of this moment, they’re on DOUBLE SECRET PROBATION!”

Some have suggested that a “manuscript” (i.e., custom drawn) endorsement be used. Well, there is such a process, but only the biggest of insureds can get such endorsements. And, if you are big enough to get a manuscript endorsement, you don’t really need to carry the paltry insurance called for in your typical lease and real estate loan agreements.

Some ask that the “broker” be responsible for telling the requesting party (who is most often an additional insured) if and when a policy has been cancelled. Almost always, the broker will know. But, the broker isn’t a party to the lease or loan and isn’t going to expose itself to the liability associated with an uncovered loss.

So, “What’s a girl to do?” (Bat For Lashes) or “What’s a guy to do?” (Usher).

First and foremost – CARRY YOUR OWN INSURANCE. If you own a property, carry the property insurance and get the premium reimbursed to you by your tenants, even if you are dealing with a single-tenant property. If you don’t think your tenant, from its own pocket, can pay to replace the building, then why take the risk that the same tenant won’t let the building’s insurance lapse? Lenders carry back-up insurance for that purpose and it is priced into the loan. As to liability insurance, landlords, tenants, and lenders should rely on their own insurance to cover their own deeds. In almost every case, tenants are paying for their landlord’s liability insurance already.

This isn’t to say that one party doesn’t have a legitimate interest in seeing that the other party is adequately insured. At a minimum, you want to see that the other party can survive a lawsuit or fire. In that regard, those interests are aligned, the injured party wants to recover from the loss and stay in business. In prior postings, we’ve already posited that some parties don’t need to carry insurance because they can well bear the risk of loss. We’ve also opined that insurance is merely a “credit enhancement” and therefore some parties have good enough credit to meet their own needs. By example, a 500 store chain shouldn’t need to insure its store inventory or store fixtures. Those items are easily replaceable from “stock,” representing 0.2% of the chain’s goods and fixtures.

Second, if you want to know whether the other party is carrying agreed-upon insurance, you have to monitor that insurance yourself. If more lease negotiators realized that the last time anyone paid attention to certificates of insurance and similar lease requirements was when they, the negotiators, finished the documents, they would wonder: “why did I spend my energy and lease negotiating capital” on the subject. Basically, if a party (landlord, tenant or lender) truly cares about whether its counterparty is “insured,” it needs to spend the money to find out. It needs to “administer” the agreement. It needs to ask for proof of insurance before the existing policy terms run out.

This task can be done internally or through an outside service. Parties should ask themselves – “is this important or will I be satisfied to find out only after the fire or accident?” If it is important, and you want the job done right: (a) do it yourself; (b) give it to a professional; or (c) give it to the busiest person you know. There are monitoring services, the cost for which should be recoverable as part of operating expenses. Every true commercial real estate broker can point you in the right direction.