When negotiating or renewing a lease for a commercial property, it’s not only prudent to have an attorney review the terms and conditions of the agreement but also wise to have an insurance broker take a close look at the contract’s insurance provisions. As the saying goes, the devil’s in the details, and the last thing you want is for the contract’s language to be vague, leaving you exposed to liabilities for which you may not be insured. An experienced insurance professional will align your commercial Property and Liability insurance to respond to your contractual obligations.
Following is a brief overview of what to look for in the fine print of commercial leases:
- A well-drafted commercial lease should spell out the insurance requirements of both the owner and tenant. Most leases detail the insurance requirements of the tenant, including the stipulation to show proof of General Liability, Property, Auto Liability, and Workers Compensation insurance. But it’s also imperative that the lease agreement includes the insurance requirements of the property owner and that a tenant ask for Certificates of Insurance to ensure that each policy includes sufficient limits. In addition, both the owner and tenant should name each other as an additional insured on their respective policies.
- A lease should clearly state who has the ultimate liability for a loss. For example, if someone is injured in the tenant’s space, a tenant’s General Liability insurance will respond in the event of litigation. The landlord typically asks to be named as an additional insured on the tenant’s General Liability policy as well as to be held harmless and indemnified should the injured party go after the owner as well. A property owner/landlord is responsible for claims that occur in the building’s common areas, such as the lobby or parking lot. The tenant should not only be added as an additional insured on the owner’s General Liability policy but also request to be held harmless and indemnified in the event he or she is named in a lawsuit by the injured party.
- The tenant should ensure he or she has enough coverage for leasehold improvements in the event of a loss. Typically with a commercial lease, if there is a loss, the tenant is responsible. Leasehold improvements or build-outs are the structural changes made to a leased space to make it suitable for a tenant’s unique business needs. Property insurance typically provides coverage for leasehold improvements as part of the policy’s personal property limit. However, businesses often only buy enough insurance for their personal property such as their stocked inventory, furniture, computer systems, etc.
- Include a waiver of subrogation clause for both landlord and tenant. A waiver of subrogation is a two-way agreement in which each party agrees to give up subrogation rights against the other in the event of some kind of loss, such as damage to a building or personal possessions from a fire. The idea behind the waiver is to prevent one person’s insurance company from taking the other person to court in a lawsuit.
- Review a lease’s abatement and condemnation provisions. Leases typically include a clause that terminates the rent payments if the building is no longer inhabitable or is condemned for more than a specific number of days. A tenant should understand this issue and review the amount of Business Interruption/Loss of income insurance to carry should the operation be disrupted, in order to have the funds necessary to look for alternate space and make any accommodations needed to run the business.
Commercial leases involve complex, lengthy, and intense negotiations. With the myriad of legal and potential insurance issues that a lease presents, it is helpful to have both an attorney and insurance professional working with you during lease negotiations. Owens Group is available to provide you with assistance with commercial lease reviews along with your insurance placement. Please call Jean Dennehy at 201-408-3506, Dorene Stockman at 201-408-3504 or Melanie Komninos at 201-408-3518.