Commercial Lease Considerations in the Wake of Hurricane Laura
Following disasters such as Hurricane Laura, business owners have a variety of concerns when beginning the recovery process. Chief among those concerns: what to do when your place of business has been damaged or destroyed? If you lease your place of business, or if you lease out land or buildings to other people for their businesses, this concern becomes especially important when you consider the different parties with a potential interest in the recovery—the lessor (landlord), the lessor’s insurer, the lessor’s lender, the lessee (tenant), the lessee’s insurer, and the lessee’s lender. Being familiar with your lease agreement is the key to understanding the extent of your rights and responsibilities, especially as they pertain to repair obligations, obligations regarding the payment or reimbursement of insurance deductibles, insurance recovery, and rights to termination and reduction (abatement) of rent. As an initial matter, the first question you should ask yourself is: What kind of lease agreement do I have?
Types of Lease Agreements
Because your lease agreement will set forth the allocation of rights and responsibilities between lessor and lessee, you will need to determine what type of lease agreement you have. As a general matter, leases in Louisiana can either be oral or written, and, if written, can be as detailed or as undetailed as the parties decide to make them. The lessor and the lessee need only agree on three things: (1) that there is a lease, (2) the thing that is being leased, and (3) the rent to be paid.
Since a written lease agreement is the “law” between the parties, if you have a written lease agreement, you must first look to it to determine how rights and responsibilities have been allocated between lessor and lessee. To the extent your written lease agreement does not address a certain issue, or if you have an oral lease agreement, then Louisiana law supplies certain default rules to govern the lease relationship. You can find these default rules in Articles 2668 – 2729 of the Louisiana Civil Code, the beginning of which you can access here.
The extent of your obligations, if any, to repair hurricane damage will be determined by your lease agreement, or, if silent, then by default Louisiana law.
Lessors and lessees are free to allocate between themselves responsibility for repairs and maintenance of the leased premises. On the extreme ends of the spectrum, either the lessee or the lessor could be solely responsible for all repair and maintenance obligations, from the simplest (general cleaning) to the most complex (foundation and roof repair). More commonly, though, in prevailing market triple net (NNN) commercial leases, lessees will be responsible for all repair and maintenance obligations, except for those expressly made the responsibility of the lessor. Typically, lessors will only be responsible for major structural-type repairs, such as the roof, foundation, and exterior walls. Written lease agreements generally address this allocation.
To the extent your lease agreement does not address repair and maintenance obligations, the Louisiana Civil Code provides a default approach opposite from what is typically seen in triple net (NNN) leases: the lessor is responsible for all repairs that are necessary to maintain the leased thing in a condition suitable for which it was leased (Article 2691), other than any repairs caused by the lessee’s fault or excessive wear and tear (Article 2692).
No matter what rules apply, lessees should keep in mind their obligation to inform the lessor that the leased thing has been damaged and needs repair. If the lessor is responsible for such repairs, and the lessee delays in notifying the lessor, then the lessee may be liable for any damages caused by the delay.
As a casualty event, any hurricane damage to your leased premises may be covered by insurance proceeds. The responsibility of the lessor and the lessee to procure insurance, and the types and amounts of insurance, will be determined by the lease agreement, or, if silent, then by your insurance agreements and applicable loan agreements.
As a general matter, a lessee is typically required under a written lease agreement to maintain, at its expense, insurance coverage on its movable (personal) property (such as inventory and equipment) at the leased premises. Lessees should consult with their insurers regarding any recovery for movable (personal) property.
Any hurricane damage to the actual leased building and land will require recovery under real property insurance coverage. Important points to look for in your lease agreement regarding this coverage include:
- Who is responsible for obtaining this type of insurance (lessor or lessee)?
- Who is responsible for paying for this type of insurance (lessor, lessee, or reimbursement by lessee)?
- Who is named as the loss payee under the insurance policy (lessor, lessee, and/or the lenders of either)?
- What responsibilities, if any, does the loss payee have to use the insurance proceeds to restore the leased premises?
- Are there any conditions on the responsibility to restore the leased premises—such as whether the loss is total or partial, or the length of time remaining on the lease?
- Are there any notice requirements regarding the casualty event, what is the timeframe within which those notices must be delivered, and who must deliver such notices?
- Are there any provisions regarding the payment or reimbursement of insurance deductibles (perhaps considered to be additional rent)?
The payment of insurance proceeds and the responsibility for using the insurance proceeds are important points that may be addressed in your lease. If not addressed, Louisiana law does not require that either party maintain any type of insurance. Although the Louisiana default lease laws do not directly address insurance obligations, they indirectly address the underlying concerns: allocation of responsibility for repairs between lessor and lessee (see discussion above) and ability to terminate the lease and/or reduce the rent (see discussion below).
Early Lease Termination and Reductions in Rent
Hurricane damage can alter the leasing relationship between the parties, preventing the lessee’s full use of the leased premises and requiring certain actions by the lessor. With these changed circumstances, the parties may consider whether the lease can terminate early or whether the lessee is entitled to any reduction in its rent.
Since commercial lease agreements are typically for terms of one year or more, parties are generally locked into the lease agreement for a predetermined length of time. Lease agreements may, however, provide for early termination in the event of certain circumstances, such as partial or full destruction of the leased premises due to a casualty event (like a hurricane). You should consult your lease agreement to see if it addresses the following points:
- Is early termination allowed?
- If early termination is allowed, is damage by a hurricane one of the causes?
- What kind or what extent of damage is necessary for early termination (partial or full damage, physical damage, and/or only damage that renders the leased premises unusable or inaccessible)?
- Does the lease automatically terminate because of damage? Or must the parties take certain steps (such as providing certain notices)?
- Who is entitled to invoke early termination—the lessor only, the lessee only, or either party?
In addition to early termination, your lease agreement may also address whether the lessee is entitled to a reduction in rent during the period in which the leased premises is damaged and not available for full use. Lessors and lessees are able to freely negotiate and provide for early termination and rent reduction, so any applicable provisions in your lease agreement will control.
To the extent your lease agreement does not address early termination and/or rent reduction, the default lease laws in the Louisiana Civil Code address the rights and responsibilities of the parties. If the leased premises is fully destroyed, then the lease terminates automatically and does not require any further action by either party (Article 2714). Assuming neither the lessor nor the lessee caused the destruction (which should be the case with hurricane damage), then neither party will owe the other party damages for this early termination. If, however, the leased premises is only partially destroyed, then the lessee is entitled to either seek a reduction in the rent or early termination of the lease, whichever is more appropriate under the circumstances (Article 2715). If the lessor and the lessee cannot agree to such reduction or termination, then the lessee may institute an action in court to seek such remedies.
Whether your lease agreement is written or oral, detailed or undetailed, lessors and lessees are always free to negotiate any of these points—repairs, insurance, and early termination and rent reduction—between themselves. Should you engage in such negotiations and come to an agreement, any agreement should be written and signed by both the lessor and the lessee.
The commercial real estate team at Liskow & Lewis is committed to serving you in this time of hurricane recovery. Should you have any questions regarding this blog post or commercial leasing or real estate in general, please contact C.J. Miller or any of the other Liskow & Lewis real estate team members listed on our Crisis Response & Preparedness homepage.
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