Repair & casualty: duties of the landlord and tenant.

(The following article is the third in a 14-part series prepared by our law firm examining the standard Real Estate Board of New York form commercial lease. This series highlights particular clauses in the REBNY lease and how the courts have interpreted them.)

During the term of a lease, things happen to buildings - ranging from minor water leakage to major fire damage.

The Standard REBNY commercial office lease attempts to address the duties and obligations associated with the happening of these events in two paragraphs: Events requiring relatively minor repairs are dealt with in Article 4, the "repair" clause; while major casualties are addressed in Article 9, the "destruction. clause.

These clauses, for the most part, have been interpreted to the benefit of landlords, although there are some cases where landlords are left exposed to possible liability. For example, a tenant should be aware that (i) in cases of "repair," the tenant may have to endure substantial business disruption, and is specifically denied any rent abatement; and (ii) in cases of casualty, the tenant may find that the landlord has elected to terminate a lease of great value to the tenant.

Repairs

Article 4 provides, in brief, that:

* The landlord shall maintain the exterior;

* The tenant shall maintain the leased premises; and

* If the landlord repairs the premises, there is no rent abatement for tenant.

The no-rent-abatement clause was specifically addressed and upheld in Periphery Loungewear, Inc. v. Kantron Roofing Corporation et al. In Periphery, a sublessee brought an action against a landlord and managing agent to recover for business interruption loss in connection with the occurrence of water leakage and defective repair at the premises. The landlord argued that the sublessee's claim against the landlord for business interruption loss was barred by Article 4 of the REBNY lease.

The court held for the landlord, stating that "on its face and by its plain meaning," Article 4 of the lease "excludes liability on the part of Owner by reason of ... injury to business arising from Owner, Tenant or others making or failing to make any repairs ... to any portion of the building or the demised premises."

Landlords should take note, however, that in general, courts have narrowly interpreted "repair" for purposes of this clause. For example, following the 1985 NYC enactments concerning the removal of asbestos, one landlord argued on a variety of grounds, including REBNY Article 4, that a tenant was required to bear the cost of asbestos removal from its premises. The Court, in Wolf v. 2539 Realty Associates, however, explained that asbestos removal was not a repair. In explaining the inapplicability of Article 4 to the removal of asbestos and distinguishing between a "repair" under Article 4 and the removal of asbestos, the Court stated that "the asbestos condition in issue is one which is `reparable' (embracing the broader meaning of "to remedy or make right") by the landlord, but it may not be correctly stated that it is a condition which is `repairable' (meaning "to fix or mend") by the tenant."

The no-rent-abatement clause of Article 4 specifically cross-references the destruction clause of Article 9, under which a tenant may be eligible for an abatement of rent. In practice, it may be difficult to define the boundary between Article 4 and Article 9. Thus, in Parkchester Apartment Co. v. Metropolitan Retail Recovery, Inc., the Court held that Article 4 did not apply. In that case, as a result of severe water damage to the premises which made the premises untenantable, a tenant was entitled to an abatement and the landlord was required to repair the water leaks at its expense.

An interesting problem arises when repairs at a neighboring building require that scaffolding be erected in front of your building: Are tenants entitled to claim for business interruption or does the no-rent-abatement principle apply? This issue has not been directly addressed, as of yet, by the courts. Article 35 of the REBNY Lease, which refers to adjacent excavation, grants the party causing such excavation permission to enter the demised premises "without any claim for damages or indemnity against Owner, or diminution or abatement of rent." So as to avoid potential claims arising out of the erection of scaffolding in front of a landlord's building, Article 35 should be modified and expanded to cover this issue.

Casualty

In the event the premises are damaged and untenantable as a result of fire, flood or other accidental destruction, does the landlord have the right to terminate the lease? Is the landlord obligated to rebuild the building? The answer to these questions depends on the severity of destruction.

Under the standard Article 9(a): In the event the demised premises are partially damaged or rendered partially untenantable, a landlord is obligated to make all necessary repairs at its expense, and rent, until such repairs are substantially completed, shall be apportioned from the day of the casualty according to the part of the premises that is usable.

It is not always clear when a condition constitutes a casualty, so that tenant is entitled to a rent abatement, or when that condition is a failure to repair, for which, as noted above, there is no rent abatement. In general, untenantability connotes "damage not only of a certain magnitude but also from a specific source, i.e., the sudden and unexpected action of fire, flood and other causes of accidental destruction ... Accordingly, a landlord's covenant to restore leased property if it should become untenantable applies to damage from these causes and not to the effect of ordinary wear and tear or to the results of neglect or fault of the tenant."

In the event the demised premises are totally damaged or rendered wholly unusable, the rent shall be proportionately paid up to the time of the casualty and shall thereafter cease until the date when the premises have been repaired and restored by landlord, according to Article 9(b). However, the landlord retains the right to elect to not restore the premises, if the building is so seriously damaged that the owner decides to demolish it or rebuild it, and the lease is thereby terminated. To terminate the lease, the landlord must provide written notice to the tenant, provided such notice is Riven within 90 days of the casualty and specifies the date of expiration of the lease.

Accordingly, from a tenant's perspective, the tenant may lose a valuable leasehold interest if the landlord elects to terminate and comply with the notice provision of Article 9(d). Courts have held that if the landlord complies with the notice provision, then Article 9(d) is enforceable, even if it is inequitable to tenant. For example, in Schwarz, Karlan & Gutstein v. 271 Venture, the Court held that "in case of total unusability, the landlord, at its sole option, may elect not to restore the premises and to terminate the lease." Also, in Mawardi v. Purple Potato, Ltd., the landlord's decision to demolish the building destroyed by fire and wholly unusable was ruled reasonable and appropriate under the terms of the destruction clause of the lease.

Unless the landlord provides a timely written notice of termination, he has an obligation to make all necessary repairs and restorations to the premises, and the tenant is obligated to cooperate with the landlord's restorations by removing all salvageable and movable inventory from the premises. Tenant's liability for rent resumes five days after written notice from the landlord that the premises are substantially ready for occupancy.

Consideration of the no-rent-abatement and the destruction issues also raises the issue of insurance and waiver of subrogation. The applicability of the waiver of subrogation clause (contained in Article 9(e) of the REBNY lease) is an important element in determining a tenant's right to claim business interruption as a result of repair or destruction to the premises. (If the lease does not contain a waiver of subrogation provision, the tenant's insurer, after paying the tenant's claim for business interruption resulting from repair or damage at the premises, may sue the landlord to recover the amount of the claim paid to tenant.)

In general, New York courts have consistently held that a waiver of subrogation provision contained in a lease negotiated between two sophisticated parties in an arm's length transaction is valid and enforceable, provided the intention of the parties is clearly and unequivocally expressed. Courts have expressly restricted the Article 9(e) waiver of subrogation clause to claims of destruction to the demised premises, and have further held that the waiver of subrogation did not apply to a claim based on damage to the tenant's property caused by the owner's negligence.

One partial solution to this problem is for the lease to provide that the tenant must obtain and pay for rent interruption insurance.

Conclusion

Articles 4 and 9 of the REBNY form thus address many - but not all - of the issues that arise in connection with damage or destruction to a premises. As always, both landlord and tenant should review the adequacy of the REBNY form's resolution of these issues to their particular circumstances.