Up in Flames. What happens if your commercial space burns to the ground?

In the last 25+ years, our tenant representation clients have experienced fire and smoke damage to their facilities, and we've heard stories from people who's buildings have burned to the ground, although just recently experienced first hand a total destruction.  Not just a fire, but a complete nothing-but-cinders-remain inferno that devastated the building including one of our client's delivery vehicles.

The facility was a distribution warehouse in a multi-tenant building and industrial park.

So that brings up something to perhaps consider with a bit more concern in future lease documents:  The Destruction Clause.

Whenever you are negotiating a 30-40 page commercial lease, you have to prioritize the business points most important to you.  A hard line on the Damage and Destruction clause is probably not a Top 10 issue for most businesses.  The language usually states that, in the case of destruction, something to the effect of, "If Landlord determines that the Premises can be reasonably restored within X months, this Lease shall remain in full force and effect except that rent shall be abated until the Premises are restored."  

If the premises can't be restored within that time frame, then either one or both of the parties usually has the right to terminate the lease.  Fair enough, right?  Well, maybe not.

Here's the issue:  After the destruction occurs, the tenant needs to get up and operational A.S.A.P.  That means that they'll need to rent a temporary space.  Fine, although there are a few difficulties that you might incur with a temporary lease:

• Suitable temporary space may not be available for short lease terms or, if it is, the cost may include a significant premium.
• The infrastructure investment needed to operate - cabling, technology, and improvements for office; racking, conveyors, power, HVAC for industrial - may make a "temporary" operation unfeasible.

Finding a temporary home for a few office workers or some relatively dead storage should be simple enough. The problem is that upfitting any significant operation, waiting for reconstruction of the original premises, and then relocating back to the original site can become both extremely costly and disruptive.  It's tough enough to lose everything and have to provide relatively uninterrupted service to your customers. Having to set up a new operation and then moving it all again within a year could be devastating. Your insurance likely does not fully cover all costs associated with this type of maneuver either.

The solution is to add language to the lease that says to the effect, "In the event that the Premises are damaged and Tenant is unable to reasonably operate from this location as contemplated under this Lease for a period to exceed 30 (or whatever) days, either party may terminate this lease upon written notice".  Check your current lease policies, and read your lease(s) to see where you stand now in case of such an event.

Stuff to think about.  Less is More.