Building Damage and the Canceled Lease

My landlord doesn’t want my money. 

As crazy as it may sound it could happen.  You ask how and why?  In my last blog post I mentioned I would discuss a coverage form that would cover financial losses a tenant might incur if his lease is canceled because of damage to the premises by an insured peril.

Did you read the small print?
Cancellation of a lease may cause the tenant (lessee) to suffer a financial loss in a few of the following circumstances:

1. In my prior post, I spoke of improvements and betterments.  You are a business owner and have improved your space by the tune of some $50,000 and a fire loss occurs to the strip mall you’re in that causes the landlord to cancel the lease.  Would your tenant’s use value of the improvements and betterments be a loss you want covered?  You just spent $50,000 and your landlord is canceling your lease.  I’d be pulling my hair out.
2. You are a tenant that has a rental rate much lower than the current rental value of comparable premises.  What would your loss be if the landlord canceled your lease?  Did you have a long-term lease?  The loss would be the additional cost to rent an equivalent premise for the duration of the current lease.  I might have something to say about that if my landlord canceled my lease.
3. As a tenant, you paid advance rent that is not recoverable under the terms of the lease in the event of cancellation.  What is your loss?  The loss would be the value of the advance rent.  Would you want that back?

The small print
Some leases of premises permit the landlord (lessor) to terminate the lease if  (1) the building or premises are damaged by fire or other perils to a stated percentage of value of the building or premises, or (2)  the amount of time required to repair or replace the damaged property exceeds a stipulated period in the lease.

How do you protect yourself?
You need to have leasehold interest insurance on your policy.  This covers the total amount of net leasehold interest of the insured for the unexpired period of the lease. 

Here’s an example: if you’ve paid a year’s rent in advance and have your lease canceled after two months because of damage, etc. mentioned above – the lessor must refund you the remaining 10 months of rent.

The amount of insurance is automatically reduced during the life of the lease.  If you are in a long-term lease or in an area where rents are rising sharply, the cancellation of a lease could pose a substantial threat to your business.

Sound confusing? It can be. That’s why it’s a good reason to work closely with your agent and review your lease to make sure you’re covered.