Ediciones De La Vida

DON’T BE A CASUALTY OF YOUR TENANT’S CASUALTY!
Replacement of Custom Tenant Improvements after Loss
– Does Your Office Lease Protect You?
By: Jordan C. Frame
Every office building owner and leasing manager knows the basic tenets of leasehold-related
insurance: the landlord insures the “building”, the tenant insures its personal property, and both
sides agree to have their respectiveinsurers waive any right of subrogation against the other in
the event of a casualty loss. If the tenant’s computers are damaged due to a burst pipe, the tenant
has to go to its own insurer for coverage of the loss, and tenant’s insurer cannot then look to the
landlord or the landlord’s insurance company for reimbursement. Similarly, if a fire destroys the
premises, even if caused by the failure oftenant or its employees to turn off a coffee maker, the
landlord knows that, except under certain circumstances, it must rebuild the premises using
insurance proceeds obtained from its own insurer.
Until a casualty actually occurs though, it’s very likely that neither party has given much thought
to whose insurance covers, and who has the responsibility to restore, expensive non-buildingstandard items such as the tenant’s customized doors, flooring, wall finishes and paneling,
lighting fixtures, and hardware. These items fall within a gray area between personal property
(tenant) and real property (landlord) and, therefore, landlords often assume that insuring and
restoring such items after casualty is the responsibility of the tenant, while tenants often assume
that they are theresponsibility of the landlord.
The typical office lease casualty restoration section simply provides that landlord will restore the
premises to their condition prior to the occurrence of the casualty and, therefore, makes no
distinction between the “extra” leasehold improvements and the demising walls, partitions and
other building standard leasehold improvements that the Landlord expects tobe responsible for.
This is not necessarily an inequitable result, as in many cases the landlord may have paid for and
installed these finishes at the inception of the lease, through payment of an improvement
allowance or otherwise, giving rise to a reasonable expectation on the part of the tenant that
landlord would be responsible for restoring after casualty. Moreover, the additionalinsurance
premiums allocable to such improvements are not particularly onerous, and the premiums are
paid for by the tenants anyway.
Yet, where the leasehold improvements at issue are (i) highly customized, (ii) especially
expensive, or (iii) constructed by tenant alone at its sole cost during the lease term (for example,
installation of a full kitchen with expensive cabinetry and countertops), theremay be good
reasons for the landlord to consider trying to alter this default provision and transferring the risk
of loss with respect to such items to the tenant.
o Increased Building Insurance Premiums Post Casualty. Although the additional premiums
for coverage of tenant improvements (even expensive ones) over standard building
coverage are relatively minimal, covering claims forexpensive tenant improvements can
materially increase the size of the insurance claim to be filed by the landlord after a
casualty, thus resulting in substantial increases in future insurance premiums for the

building as a whole. While the cost of insurance is generally paid by the tenants, tenants
with leverage may seek to offset such increased insurance cost, in other ways, including
negotiatinglower rental payments, resulting in reduced rental income for the landlord.
o Delay in Restoration / Delivery. Additionally, obtaining certain customized
improvements following a casualty may take significant lead time, possibly resulting in
significant delay in the re-delivery of the premises to the tenants, and therefore the recommencement of rental payments. Although landlord’s rental...