The following questions are designed to provide general information for small businesses that rent their space from a landlord and for landlords who rent space to small businesses. Generally, the rights of both the tenant and the landlord will be determined by the provisions of your lease. There is no one single “standard” form of lease, even though many leases are based on preprinted lease forms. The provisions of a lease that covers these matters can vary significantly, even for different leases in the same building.
A legal professional will need to check the provisions of your lease carefully to answer these questions for your particular case. The following is only general advice for tenants and landlords regarding property that is damaged or unusable as a result of destruction relating to the disaster. The advice is based on general principles of state law in Oklahoma and some of the form leases commonly used in Oklahoma and should not be relied upon without first consulting an attorney.
What happens if the building or property that is leased is destroyed? Does the lease automatically terminate? Does the tenant have to pay rent?
To answer these questions, you will need to first check your lease to see if there is a specific written provision setting forth what happens if the leased premises are totally destroyed or partially destroyed. Most business leases include this type of provision, and these provisions may include definitions that will help you to determine whether your building has been totally destroyed or partially destroyed. If your lease contains such written provisions, those written provisions will govern and should provide the answer to your question.
If your lease does not contain specific provisions setting forth what happens when the leased premises are totally or partially destroyed, or if you do not have a written lease, then this question will be answered based on general provisions of state law.
Generally, unless a lease contains specific provisions to the contrary, a lease automatically terminates only when the leased premises are “totally destroyed.” The critical factor is whether the leased premises are “totally destroyed” or only “partially destroyed.” Determining whether the premises are totally or partially destroyed is a fact determination made on a case-by-case basis. In most situations, the lease will terminate only if the premises are “totally unfit for use.”
Whether the property is totally unfit for use will depend on several factors. The primary factor is the extent of damage. For example, a building that burns to the ground or is completely submerged by floodwaters would likely be considered totally destroyed. But if the damage is limited (for example, if only the roof is damaged or floodwater only damaged the floor or carpet of a leased building), then the tenant probably cannot terminate the lease on the basis of that damage.
Another factor is the landlord’s ability to repair the premises. If the landlord can repair the damage in a reasonable period of time, then the tenant may not be able to terminate the lease. The length of time that a landlord has to make repairs will depend on the circumstances and may hinge on the term of the lease. If a lease is for a term of 10 years and there are still eight years remaining on the lease, it might be reasonable for the landlord to take 30 or 60 days to make repairs. But if the lease is for a shorter term or if there are only several months left on the lease, then 30 or 60 days would not be reasonable and the tenant should be entitled to terminate the lease.
In some cases, it is necessary for the tenant to provide notice before terminating the lease. Once the lease is terminated, the tenant is relieved of any obligation to pay rent. But until the lease is terminated, the tenant must continue to pay rent according to the terms of the lease. In some cases, the tenant may be able to pay an adjusted rent until necessary repairs are made, but the need for repairs does not automatically release the tenant from its obligation to pay rent.
Is the landlord obligated to rebuild the building?
Again, it is important to refer to your lease, as commercial leases generally have provisions dealing with the landlord’s obligations to rebuild. Absent an express provision in the lease, the answer generally depends on the severity of the damage. If the leased premises are partially damaged or rendered partially unusable for the purpose for which it was leased, then the landlord is obligated to make all necessary repairs at its expense.
If the building is so seriously damaged that the landlord decides to demolish or rebuild it, or in the event the premises are totally damaged or rendered wholly unusable, the landlord may terminate the lease rather than rebuilding.
Does the tenant have the right to terminate the lease if the landlord plans to rebuild the building?
Although law provides the tenant with a right to terminate the lease if the premises are partially destroyed, commercial leases almost always have specific provisions which supersede the statute. Tenants should consult their own lease.
Can the landlord terminate the lease if the premises are partially destroyed?
A landlord can terminate a lease when (1) the lease itself gives the landlord a right to terminate when a disaster renders the premises partially unusable, or (2) the landlord and tenant mutually agree to terminate the lease.
If the landlord terminates the lease, is the tenant entitled to receive its security deposit?
Details regarding the refund of the security deposit will be controlled by the terms of the lease.
Is the landlord required to repair and restore the tenant’s furniture and equipment?
Generally, the landlord is not required to repair any damage to the tenant’s furniture and/or furnishings or any fixtures, equipment, improvements or appurtenances that are removable. This damage should be covered by the tenant’s insurance company.
Is the tenant obligated to pay rent during the time that the landlord makes repairs on the building?
Again, this depends on the severity of the damage. Determining whether premises are totally or partially destroyed is a fact determination made on a case-by-case basis. To be considered “totally destroyed,” the premises must cease to be fit for use. Extreme flood or storm damage is likely to be considered “total destruction,” while minor flood or storm damage is most likely only a partial destruction.
Rent reductions will be governed by the terms of the lease. In any case, before paying less than full rent, the tenant should always talk to the landlord to reach a mutual agreement on any rent reduction. If the landlord and the tenant cannot agree on the appropriate amount of the reduction, then the tenant must sue and have a court decide the amount.
In the event the premises are totally damaged or rendered wholly unusable, the lease terminates with no further liability on the part of the tenant or the landlord. The tenant does not have to continue rent payments from the time of the destruction.
Once the landlord completes the restoration of the premises, the tenant may still have work to do to repair installations, phones, office equipment, etc. The tenant will be obligated to pay rent during this time period, but may be able to cover the cost of that rent from proceeds of the tenant’s business interruption insurance policy.
Note: commercial leases have specific provisions governing rent abatement in the event of destruction of the premises, and these provisions dictate the rights of the landlord or tenant. Refer to your lease for the terms that apply to your situation.
How long can the landlord take to repair the premises?
If the landlord elects or is required to repair the premises, the landlord must do so reasonably expeditiously, subject to delays due to adjustment of insurance claims, labor troubles and causes beyond the landlord’s control.
Can the tenant withhold rent if the landlord has failed to repair the premises in a timely manner after the disaster?
Generally, a tenant remains obligated to pay rent if the premises are usable and are not totally destroyed or made unusable, as discussed above. Thus the requirement to pay rent is not generally dependent on whether the landlord makes timely repairs, unless the tenant decides to terminate the lease on this basis. The tenant may terminate the lease, if the landlord fails to timely repair the premises in a timely manner. In that case, once the lease is terminated, the tenant is no longer required to pay rent.
If the landlord elects to terminate the lease, is the landlord obligated to help the tenant find alternative space or reimburse the tenant for related costs?
No, unless the lease contains a specific provision that provides for this.
Can the landlord rent the premises to someone else while the tenant is gone?
No, a landlord cannot rent the premises to another party unless the lease has been terminated. The landlord has an obligation to make the leased space available to the tenant as long as the lease is in effect. The landlord cannot impair the tenant’s “peaceful possession” of the property unless there has been a default by the tenant and the lease has been terminated.
Can the building be condemned?
Yes. Governmental agencies that have jurisdiction over a building may order it to be condemned if the building is not suitable for safe occupancy. Generally, either FEMA or the local building inspection department is the agency that has jurisdiction to determine that a building cannot safely be occupied.
If the building is condemned, will the property owner be paid for the loss?
When the government condemns property based on a finding that it is no longer habitable or safe for occupancy, the government is not responsible for paying for the loss of the property. Generally, the government is only required to pay for the loss of the property when the property is taken by the government for a public use.
Condemnation of property as unsafe generally is not a “taking” for public use. To the extent the owner can recover the lost value of the condemned property, the property owner might be able to recover all or part of the value of the property from the owner’s insurance (depending on the terms of that insurance) or from FEMA or other relief agencies.