By Robert Steeg
Those of us in southeast Louisiana are well able to empathize and understand what Houston is going through after Hurricane Harvey. Our own near miss with Hurricane Nate this year reminds us of the perils and pitfalls of tropical storms (as if we really need a reminder).
There are lessons for business people handling commercial real estate, too. The recent hurricanes serve as a reminder to check and make sure that your documents are completely up-to-date with various measures that anticipate the possibility of storms like these.
Here are some of the more important provisions.
Purchase and Sale Agreements
In purchase and sale agreements, it is very important to decide whether you want to include provisions that allow for an automatic extension of the closing date (or the due diligence deadline, or both) in the event of a storm. A hurricane or other tropical event may make it impossible for the buyer to complete due diligence, or may make it impossible for the buyer to close. If the contract does not cover this possibility, a buyer can find himself nevertheless facing the possibility of default if he does not close by the scheduled date.
If there will be an automatic extension of time, the parties need to specifically define the event that will trigger the extension. Will it be the declaration of a state of emergency? Will it be the mere presence of a tropical system in the Gulf of Mexico?
A related issue is whether there will be an automatic extension of the closing if the buyer is prevented from obtaining property/casualty insurance because of the presence of a tropical system. The traditional point at which insurance becomes unavailable is when a storm enters the Gulf, but some insurers actually anticipate that event and stop issuing coverage a day or two earlier. The contract needs to state exactly when the buyer is entitled to delay the closing under these circumstances.
In leases, there are several traditional provisions under which a lease anticipates the possibility of a storm. First and foremost are the provisions concerning insurance. Make sure that your lease specifies who must procure and maintain the property/casualty insurance; the required limits of the insurance (full replacement value or some lesser amount?); and the specifics aspects of the coverages to be provided.
Next, the lease must carefully describe what happens in the case of damage from a storm. These are the provisions concerning casualty. Under what circumstances is the damage so extensive that one party or the other, or both, will have the right to terminate the lease? Will that be defined by the dollar amount required for restoration, or the length of time that the restoration will take? Most importantly, who will have the right to terminate? If termination is not exercised or is not available, what are the requirements for the restoration of the leased property? Who will perform the restoration? How quickly must it be completed? Will the rent abate during the period of rebuilding?
Often, in the process of lease review and negotiations, the parties gloss quickly over the insurance/casualty provisions. Harvey and Nate stand as reminders to give these provisions more careful attention.
There are other, less traditional leasing issues that are raised by the possibility of tropical systems. Perhaps the most important of these issues are those relating to access to the leased property. Under what circumstances may the landlord close the building and prevent the tenants from entering it? What special measures may the tenants take to be able to enter their premises?
Tropical systems can affect the utilities available to the leased property. Electricity may be unavailable or severely limited. Water and/or water pressure may be severely compromised. Life safety systems like fire alarms and fire suppression systems may be off-line. The landlord will want to prevent tenants from entering the building under these circumstances, in order to avoid potential liability. Tenants, on the other hand, will want to gain access.
The same considerations apply in cases in which some governmental action prevents or affects access to the building. What if the local jurisdiction issues a mandatory evacuation order? What if, as occurred after Hurricane Katrina, the local jurisdiction issues an order preventing re-entry into the area? All of this should be carefully spelled out in terms of what measures the landlord may take, and what limited access the tenant might still be able to have.
In one lease handled by the Steeg Law Firm, we even drafted a Release form to be signed by all persons desiring re-entry into their leased premises under certain carefully defined circumstances.
What Happens in the Absence of a Specific Written Lease Provision?
One subject that is not often discussed, but that should be noted, is the legal result that will occur under Louisiana law in the absence of a specific written lease provision. If the lease doesn’t cover it, what does the underlying law provide?
The answer may surprise you. In the case of total destruction of the leased property, in the absence of a written lease provision, the lease terminates by operation of law, without any election by either party. However, if the leased property is only partially destroyed, the tenant (and not the landlord) is given the exclusive right to elect to terminate the lease.
Of course, there are numerous court cases in Louisiana on this subject, many of them centering around the issue of what constitutes “total” versus “partial” destruction. These cases demonstrate the advisability of negotiating and agreeing upon written lease provisions that provide clear and objective standards. But, in the absence of written lease provisions, the underlying legal rules are as stated above.
Hurricane season is almost over. You now have six months to consider these issues and to bring your documents up to date.