Colorado-Real-Estate-Journal_316364

Page 22 - December 7-20, 2022 www.crej.com Law & Accounting L easing lawyers fight tooth and nail about the extent to which landlords can pass through management fees as an “operating expense,” will redline back and forth wheth- er a tenant should remove its cabling upon surrender of a premises, and will go to bat over the number of business days reserved for a tenant to cure a default – but when it comes to one of the most important provisions in a leas- ing relationship, lawyers often punt. It’s important for leasing lawyers to understand the required coverages and ram- ifications of those coverages on the rest of the lease terms. While it’s important to consult with your client’s risk manage- ment team, relying solely on its expertise ignores important nuances that leasing lawyers can catch and can potentially lead to a misallocation of risk in the agreement. n Policy availability. Com- mercial leases often require landlords and tenants to carry a variety of insurance coverag- es, but the coverages generally fall into classifications of either liability insurance, which provides coverage for losses incurred by third parties, or property i n s u r a n c e , which pro- vides cover- age for dam- age to real or personal p r o p e r t y owned by the policyholder. • Liability. Basic cover- ages afforded by commer- cial general liability policies include coverage for damage or loss resulting from bodi- ly injury and property dam- age, with coverage available for personal and advertising injuries, and medical payments under an “umbrella” policy. Limits for commercial general liability policies are typically from $1 million to $10 million, with excess coverage available to insure larger claims. • Property. Property insur- ance is offered in Basic Form coverage, Broad Form cover- age or Special Form coverage. Unlike Basic Form and Broad Form coverage, which only insure losses resulting from specific perils, Special Form coverage, which is most com- mon in commercial leasing, cov- ers losses i n c u r r e d in connec- tion with all causes except those that are specifi- cally exclud- ed. Exclud- ed losses are those incurred in connection with boiler and machinery, earthquake and flooding. Additional coverages are available to complement Specialty Form coverage – a policy known as “difference in condition” offers coverage for earthquake and flooding, but is typically very expensive; a policy known as “builder’s risk” offers coverage during construction and repair; and a policy known as “mechanical breakdown” offers coverage for the policyholder’s main- tenance and repair obliga- tions under a lease, including heating, ventilation, air con- ditioning, transformers and other mechanical equipment. Endorsements are available to provide coverage for business interruption for tenants and rental loss for landlords. Cov- erage under property insur- ance policies offers are avail- able as: (i) “actual cash value,” which provides coverage based on the value of the property at the time of the loss, determined based on the replacement cost, less depreciation, calculated over the useful life of the prop- erty; (ii) “replacement cost,” which provides coverage with- out reduction for depreciation (but does not cover excava- tion, foundation or footings); or (iii) “functional replacement cost,” which provides cover- age for a functional-equivalent improvement that can be built for less. Replacement cost cov- erage is the most common cov- erage required in commercial leasing, but functional replace- ment cost coverage may offer significant cost savings to the policyholder. n Application in commer- cial leasing. With respect to both liability insurance and property insurance, leasing lawyers should consider with their clients which party will carry coverage with respect to the premises and with respect to any common areas benefit- ting the premises. Often, leases will require tenants to maintain liability coverage with respect to the premises and landlords to maintain such coverage with respect to the common areas, but that’s certainly not always the case. Lawyers should nego- tiate insurance obligations appropriately considering the negotiated maintenance obli- gations, casualty and condem- nation provisions and indem- nities under the lease. For example, if a tenant receives an indemnity from a landlord with respect to losses incurred by third parties in the common areas, then the landlord should carry liability insurance with respect to the common areas. Or, if a landlord proposes that a tenant accept responsibility for reconstruction following a casualty, then the tenant should carry property insurance for the premises’ full replacement cost, or the landlord should be required to transfer proceeds from its policy to the tenant for such purpose. And if a tenant requests a rent abatement dur- ing the repair of its premises following a casualty, then the landlord should obtain rental loss insurance to protect its Lease insurance provisions: The law behind the clause Our Real Estate Group Serving the Commercial Real Estate Community Leasing Real Estate Development Real Estate Acquisition Environmental Private Equity Commercial Lending, Workouts and Foreclosure Real Estate and Commercial Litigation Construction Contracts and Litigation Corporate 1700 Lincoln Street, Suite 4300 | Denver, Colorado 80203 Phone 303-298-1122 | Fax 303-296-9101 www.SennLaw.com Our clients rely on our experienced team of lawyers to guide them through all of their legal needs, from significant business decisions to the most complex global deals and litigation. Our breadth and depth of practice enable us to handle the most complex matters and solve our clients' problems seamlessly. Tal Diamant Shareholder, Brownstein Hyatt Farber Schreck LLP Miranda Norfleet Associate, Brownstein Hyatt Farber Schreck LLP Please see Diamant, Page 25