Consider this lesson on commercial leases

For commercial leases, one area that parties have confusion about are provisions that relate to property insurance, mutual waiver and waiver of subrogation.

Those provisions in a commercial lease are designed to avoid the need for tenants to carry property insurance on their landlord’s building, which could be destroyed through the act or negligence of the tenant. Likewise, it lets landlords avoid carrying property damage insurance on their tenant’s personal property and tenant improvements that a landlord could damage. These provisions are different from indemnity provisions, which involve claims of third parties.

All provisions of a lease must work together. Very often, lease agreements have been modified over the years and may result in agreements that have conflicting provisions. Any commercial lease must be reviewed as a whole.

Commercial leases should have these three provisions working together. There should be a requirement that landlord and tenant each insure their own property against damage or loss by fire or other casualty. The coverage should be full replacement value.

Second, there should be a mutual waiver. Under this provision, the landlord and tenant each release the other for damages to their respective property caused by the other. That waiver should be to the extent of the amount of insurance required to be carried on the property under the lease, whether through a policy or self-insurance.

Third, there should be a requirement that the mutual waiver extend to those parties who, by law, would step into the shoes of the damaged party by what is called subrogation. If there is an insured loss, this means the insurance company pays on that loss, then steps into the shoes of the damaged party and can make a claim against the party responsible for the damage. The “mutual waiver of subrogation” is done by including a provision in the lease that the landlord and tenant will each obtain from their insurance companies a waiver of that insurance company’s right of subrogation against the other. In many cases, the policy requires the insurance company to approve this waiver.

It is important to look at other lease provisions for consistency. There typically are provisions addressing repairs and the surrender of the premises, as well as disclaimers for the landlord concerning injury or damage from structural causes. For example, there could be a typical provision requiring the landlord to make necessary repairs to the roof, foundation and exterior walls. If that provision also provided that the landlord was not required to repair any damage caused by any act or negligence of the tenant, then that implies that the tenant would be responsible for any such damage. However, such a provision would be inconsistent with a mutual waiver.

Another example is where the tenant must surrender the leased premises “in good condition and repair” when the lease ends. To make things consistent, that should say except for ordinary wear and tear and damage caused by third-party casualty, or damages that are covered under the mutual waiver.

One solution to inconsistent provisions is to simply state that with respect to the mutual waiver provision of the lease, it applies “notwithstanding any other provision of the lease to the contrary.”

Note that the mutual waiver does not address claims of third parties. These are covered in indemnification provisions where one party agrees to pay the other party for any losses it causes and to take responsibility for any claims of a third party. For example, if the tenant’s operations include storing goods of third parties and the goods are damaged through no act of the landlord, the tenant would indemnify the landlord with respect to any claims made by the owners of those goods.

Any lease should require that each party fully insure its own property; there should be a mutual waiver of claims against each other to the extent of insurance required; and each party should agree to obtain a waiver by their respective insurance companies of the rights of subrogation against the party causing the damage.

This article is based, with permission, on an article published by ALI-ABA in the March 2001 edition of The Practical Real Estate Lawyer by Myles Hannan.

Patrick Hussey is a partner at the Anderson Hunter Law Firm, P.S., in Everett practicing in the areas of commercial transactions and business insolvency. The discussion in this column is not intended to be a substitute for specific legal advice in this area of the law. The law firm provides representation in all civil matters. He may be reached at 425-252-5161 or phussey@andersonhunterlaw.com.