Schear

Landlord's Perspective

Landlords often fail to focus upon three key elements of the lease:

• First — The landlord should, on a scheduled basis, take the time to review the insurance requirements in its lease forms. Is the tenant required to carry the correct types of insurance? Should the limits be increased? Should the landlord specifically change the requirements from project to project based on the quality and characteristics of each? Further, not all tenant uses present the same risks. Are lease requirements being adapted to particular uses, such as food service? If alcohol is being served, is liability coverage being required for that use?

Issues as simple as deductibles are often overlooked. Those applicable to the landlord's coverage will be established by the landlord without the tenant's input, often as part of portfolio coverage and dictated by lender requirements. When a deductible is incurred by the landlord, how is it passed through to tenants? If it is small, the difference between expensing same and amortizing same is insignificant, but if the deductible is significant, such as in the case of a material property loss, what happens?   Is it amortized like other repair costs or included painfully in that year's CAM? Lastly, today's leases almost universally require a mutual waiver of subrogation, but do the parties truly understand the impact of those provisions?

• Second — The landlord often finds itself without the ability to require tenants to carry adequate insurance. This might not be critical for a 5-year franchise lease on the landlord's form, but what if the lease has a series of options and the tenant has the right to change its use? What if the tenant has the right to sublet a portion of its space for "any retail use?" What if the tenant files for bankruptcy and the resultant assignee has a different use and a different financial situation? Shouldn't the landlord have the right to require the tenant to carry "such other coverage as landlord might require from time to time," even subject to some reasonableness standard?

• Third — The landlord should have the right to require (or the lease should automatically provide for) increases in coverage requirements from time to time. This can be done by requiring: (i) the tenant to increase its minimum limits as the landlord requests; (ii) the tenant to increase its coverage each year or other number of years (by a set percentage or by CPI); or (iii) that the coverage be increased in the first year of any option term. In leases allowing an element of self insurance based on a minimum net worth, that minimum needs to be increased periodically as well.

The landlord needs to be aware of the insurance alternatives in its own lease form but will have to be even more attentive when negotiating the lease on the tenant's form, which will likely be shorter, less inclusive and much less landlord friendly.

Tenant's Perspective

From the tenant's perspective, there are a number of issues that should be considered as part of the lease review:

• First — Many leases with substantial terms (i.e., 10 to 20 years) fail to take into account that the tenant's ability to fully self-insure or handle larger deductibles will increase as the tenant becomes larger and will be important elements in the tenant's financial planning. Many tenants who agreed to a $5,000 to $10,000 deductible should now be discussing deductibles of $50,000 or more. Futuristic planning is important, particularly as insurance premiums escalate.

• Second — Some leases may require the tenant to carry insurance that is cost-prohibitive or in excess of the realistic exposure borne by its use. This needs to be reviewed and negotiated so that the lease reflects the tenant's need to carry adequate, commercially available insurance but not incur costs that will unduly impair its business.

• Third — Many landlord leases protect the landlord's insurance interests (i.e., what insurance is required of the tenant), and omit setting forth any landlord requirements. The tenant has a right to know what coverage the landlord will keep in place for the protection of the center and common areas and how those costs will be allocated to the tenants.

What is adequate coverage? It is coverage that addresses the current needs of the project and each tenant's use and exposure. It is coverage that is well defined, predictable and flexible. It is coverage that may need to change as the tenant's use or financial ability changes, which provides reasonable coverage for the tenant and landlord without impairing the tenant's ability to grow and improve its business operations. Insurance is an area of increasing complexity, and each party will benefit from review and input from its insurance agent or other expert.

— Schear is a partner with Atlanta-based law firm Arnall Golden Gregory.