As those in Western North Carolina recover from Hurricane Helene's horrible devastation, many commercial tenants are undoubtedly left wondering what their rights and obligations are if the property they have leased is destroyed or in disrepair. While each circumstance will differ depending on the commercial lease terms, this article explores language commonly included in commercial leases and how a prudent commercial tenant responds after a casualty event. What are your rights and obligations if the worst should happen to your leased premises, and what should you ensure is included in your commercial lease to protect yourself and your business?
What is the Casualty Provision in a Commercial Lease?
Commercial leases often address how the parties should respond if a casualty (such as a fire, flood, or other natural disaster) destroys the premises. Typically, the lease should specify different rights and obligations depending on the extent of the damage. Often, if the casualty destroys the leased premises or has caused significant destruction (which is often further defined in the lease through a percentage of the leased premises and/or if restoration or repairs cannot be completed within a certain period), then the landlord, and preferably also the tenant, will have the right to terminate the lease.
If the damage does not rise to these levels, or if the parties do not elect to terminate the lease, the landlord must commonly restore and repair the leased premises to its condition immediately before the casualty. Importantly, it is rare for a commercial lease to provide that the landlord’s obligation to repair will extend to the tenant’s personal property, furnishings, fixtures, equipment, or other property or effects that the tenant has placed on the leased premises, meaning that the replacements and repairs to this property will be the responsibility of the tenant. Another important consideration is that the landlord’s obligation to restore and repair the leased premises will often be limited to the insurance proceeds the landlord can receive because of such casualty.
Assuming neither party terminates the lease, and the casualty damage prevents the tenant from wholly occupying the leased premises, the commercial lease should explicitly provide that the rent due from the tenant will be abated in proportion to the amount of the unusable leased premises.
How a Prudent Commercial Tenant Responds to a Casualty
First, the tenant should immediately provide written notice to the landlord. This notice should follow the lease’s instructions on the form and delivery method of notices, and it should fully describe the extent of the damage to the leased premises and state that the cause of the damage was a casualty. The latter is significant, as most commercial leases will provide that the landlord will not be obligated to repair the leased premises if the damage was caused by the tenant (i.e., a fire that the tenant’s negligent employee started).
Second, the tenant should review the casualty provision of its commercial lease to understand their rights and obligations fully. Suppose the lease allows for the tenant to terminate. In that case, a prudent tenant fully explores whether this is the best option, considering (i) the extent of the damage, (ii) the estimated length of time that the restoration/rebuild will take compared to the length of time left under the term of the lease; (iii) the right to rent abatement and any limitations on such right; (iv) the cost and availability of insurance proceeds for the restoration and rebuild of the leased premises; and (v) the cost and availability of insurance proceeds for the replacement and repair of tenant’s personal property.
Third, as a part of the above, the tenant should communicate with the landlord. Beyond the written notices that are typically required by the lease, it is prudent for the tenant after a casualty to be in consistent communication with the landlord to understand the status and availability of insurance proceeds, the timeline for the restoration of the leased premises, and the potential for a mutual agreement to assist the tenant, either through modification of the terms of the lease or a mutual termination. However, since the lease concerns real property, to be enforceable under North Carolina law, any amendments or modifications to such must be in writing and signed by the parties.[1]
Finally, suppose the parties decide not to exercise their termination rights after a casualty event. In that case, the tenant should, in conjunction with the landlord’s restoration and repair of the leased premises, promptly endeavor to replace and repair the tenant’s personal property and any other portions of the leased premises that is their responsibility under the lease terms. Commercial leases typically require the tenant to maintain property damage insurance, so the tenant’s insurance policy should cover these endeavors. Accordingly, the tenant should notify their insurance carrier of the casualty event as soon as possible to recover insurance proceeds.
Conclusion
The casualty provisions of a commercial lease rarely, if ever, become relevant during the lease term. Still, when a casualty event triggers such a situation, they will control how the landlord and tenant respond. A prudent tenant understands their rights and obligations under the casualty provisions of their commercial lease, takes prompt action to ensure these rights and obligations are enforced and complied with, and seeks all possible avenues to mitigate the losses sustained from a casualty event. A great way to do this is by retaining an experienced attorney who understands the importance of these provisions and diligently fights for the commercial tenant’s rights.
DYE CULIK is a corporate law firm located in Charlotte and Huntersville, NC, that represents business clients in North Carolina, South Carolina, and Massachusetts. Our attorneys work with business clients to negotiate commercial lease terms. Connect with us and mention this post for your complimentary consultation with Attorney Bradley Harrah.
[1] N.C.G.S. § 22-2. See also Plasma Ctrs. of Am., LLC v. Talecris Plasma Res., Inc., 222 N.C. App. 83, 89 (2012) (“If a contract falls within the statute of frauds, the party against whom enforcement is sought may generally void enforcement if there is no written memorandum of that party’s assent to the contract. This rule also applies to the modification of contracts that must be in writing.”); Concrete Mach. Co. v. City of Hickory, 134 N.C. App. 91, 95 (1999) (holding that the oral modification of a contract that was required to be in writing was unenforceable).
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