Legal Briefs

Reexamine Leases in Light of Heightened Security Concerns

The criteria for leasing suitable office space used to be straightforward and well understood: location, location, location. However, concerns raised by last year's terrorist attacks may affect numerous aspects of the leasing process. Allocations of risk and responsibility between landlords and tenants for routine lease transactions should be reconsidered, and previously settled issues should be reexamined.

Lease Considerations Many lease terms and provisions that previously were not considered particularly difficult or controversial now should be rethought in light of recent developments.

Insurance. Congress failed to act on insurance issues before it adjourned in 2001, leaving insurers to decide whether or not to provide terrorism coverage and at what price. Most insurance policies renew on a calendar-year basis. In 2002, some insurers have opted out; others are charging dramatically increased premiums for reduced coverage. The long-term consequences of the insurance situation remain unknown.

Many landlords and tenants with leases currently in place may have never considered terrorism coverage. All parties should review existing leases to determine if a tenant can be required to provide coverage for acts of terrorism. If not, prudent landlords may want to add this provision to future lease documents, with the requirement to apply only if such coverage is generally available in the marketplace. Thoughtful tenants may want to apply the same requirement to their landlords.

Some landlords are rethinking waivers of subrogation in light of recent events. A waiver of subrogation is giving up the right to recover after paying a liability or claim on behalf of the liable or responsible party. Mutual waivers of subrogation have been fairly commonplace between landlords' and tenants' insurance carriers. In the face of substantial increases in insurance premiums, landlords are less willing to exempt tenants from liability and risk further increases. They may be concerned about damage that occurs during the final years of a lease, when higher premiums will be passed on to later tenants and not the tenants responsible for the damage.

Building Structure and Systems. Previously, tenants looking for space mainly were concerned with the cost of tenant improvements and ultimate use of the space. In this new environment, tenants also may need to evaluate the basic building structure. Some structures are sturdier than others, and some code-compliant buildings may be more vulnerable than others.

Another consideration is a building's emergency protocol for elevators and stairwells. For example, if a building's fire alarm were triggered during business hours, would the elevators automatically descend to the ground floor or would they stop on all intermediate floors? Evacuation procedures should be scrutinized closely.

Tenants also should take into account the vulnerability of heating, ventilation, and air conditioning systems. For example, tenants should know if the air intake is in a protected area or if it is accessible to anyone in the building, or worse, to persons outside of the building. Existing tenants should contact their property managers for information on emergency procedures and building systems.

Other Tenants. In the past, tenants paid little attention to the identity of other tenants in their building or in surrounding buildings, with the possible exception of avoiding buildings that prominently featured a competitor's signage. Now, however, tenants looking for space should determine how other tenants' security needs could impact their own operations. In addition to the worst-case scenario of becoming the target of a terrorist attack, a tenant's business may be disrupted due to false alarms, closure of the property or the building's parking facility, or lack of access to streets and alleys surrounding the building.

Security. After taking into account the location of the building, its structure, and the identity of the relevant neighbors, tenants should re-evaluate a building's security. Does the property require keycard access or does it have on-site security personnel? Does the building have metal detectors? Is photo identification required for entrance? How is access gained to the parking garage?

Tenants also may want to consider increasing security for their own space and may want some assurances in the lease that certain building and garage security measures will continue during the remainder of the lease. Landlords may resist making any commitments to provide security and will not want to assume liability for any harm to persons or property. Landlords and tenants should negotiate these lease terms carefully and both sides should understand which losses will be covered by insurance.

Common Areas and Parking. In some respects, office tenants now must think like retail tenants and identify which features add value to the space, such as parking. If a building's parking facilities are closed due to a security concern, what are the tenant's rights? Can the tenant abate rent and eventually terminate the lease? In the event that delivery docks are blocked, does the tenant have the right to use other building entrances for deliveries?

Damage and Destruction. The language used in most damage and destruction clauses may not cover attacks that cause no physical damage. For example, a contaminated building that is closed for fumigation may not be covered in the standard clause. Tenants should consider whether rent abatement or termination is appropriate.

Operating Expenses. Tenants should inquire about any new security measures that may be implemented in the building and how the costs of these new measures will be allocated among the landlord and tenants. Timing of the security upgrades is important — especially in leases where a tenant's operating cost is determined by reference to a base year.

This is another area where the identity of other tenants in the building could be a factor. The cost to respond to an attack on one tenant may be allocated among all tenants in the building. Insurance costs and their allocation between landlord and tenants also will be significant. Some existing leases may have a cap or restriction on increases in operating expenses that can be passed through to tenants.

Carol C. Honigberg, JD, and Karen C. Fagelson, JD

Carol C. Honigberg, JD, is a partner in the real estate group at Reed Smith LLP in Falls Church, Va. Contact her at (703) 641-4220 or chonigberg @reedsmith.com. Karen C. Fagelson, JD, is a partner in the real estate group in the Leesburg, Va., office of Reed Smith LLP. Contact her at (703) 729-8539 or kfagelson@reedsmith.com.

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