Mitigating Losses When Disaster Strikes: How Casualty Provisions Help Protect Tenants and Landlords
Published: February 13, 2025
It has now been just over a month since multiple wildfires erupted throughout the Greater Los Angeles area, bringing widespread devastation to the highly populated area in an event that could end up being the costliest disaster in U.S. history. For Californians, it was yet another example of the growing threat of fire destruction throughout the State. Almost all of us seem to know someone who has directly suffered damage from fires – one of our partners lost her home in the Palisades fire – and we will all bear the cost, from higher insurance premiums, increased construction costs for material shortages and/or new fire-safe building materials, and growing frustration at our apparent inability to properly confront the recurring danger. New approaches are needed to contain the spread of fire risk (pun intended).
Commercial landlords and tenants returning to their LA properties after the fires were extinguished are faced with a critical question: now what? Will they rebuild? Can they rebuild? And who will pay for it?
There are few provisions in lease negotiations that draw more ire from my clients than casualty. Black’s Law Dictionary defines “casualty” as “inevitable accident; an event not to lie foreseen or guarded against. A loss from such an event or cause; as by fire, shipwreck, lightning, etc.” Few people want to consider the potential effects of an unpredictable casualty event; most prefer to assume that whatever is drafted in the lease is fair, that California will provide adequate protection in any major event, or that because the risk of a casualty is low, it is not important enough to negotiate. But for those landlords and tenants in the LA area now evaluating what to do with their fire-damaged properties, the effects of these provisions are real and, in many cases, inadequate.
Most leases address casualty in some manner. Unfortunately, lease provisions often do not account for the practical realities of a post-casualty environment, installing unrealistic time expectations that may not properly function for either landlord or tenant. For example, in the AIR CRE standard form leases, if casualty damage cannot be repaired within 3 months or at a cost less than 6 months’ rent, the lease will automatically terminate 60 days following the casualty event. As the recent fires have highlighted, though, it is rarely possible to fully assess the damage within a few months, let alone fully restore the premises within that time. Indeed, even the most proactive owner will have difficulty locating a contractor or obtaining a permit in a few months, which process becomes even more challenging when thousands of other owners are simultaneously trying to do the same thing. In some cases, termination may make sense, but for an enterprising landlord who wants to increase rents, or a struggling tenant who will gladly accept an excuse from its rent obligations, an unintended lease termination creates the opportunity to change the parties’ previously agreed arrangement to one party’s benefit.
As painful as it may be when optimism is high in lease negotiations, parties should carefully consider the ramifications of a casualty event. A well-crafted casualty provision will address, at a minimum, (i) what events constitute casualty (a hot topic during the COVID-19 pandemic), (ii) whether either or both parties are required to restore their premises, (iii) under what conditions either or both parties can terminate the lease, and (iv) whether rent should abate following the casualty event. While rent abatement for the tenant may make sense in some leases, it may be inappropriate in others such as a ground lease where the tenant should bear the risk of damage and can obtain business interruption insurance. Similarly, it may not make sense to install a termination right for either party, as a landlord’s rent roll may be key to obtaining necessary funding to rebuild their building or a tenant may want the right to retain control over its premises. The parties may also want to consider whether the casualty provision should apply to areas outside of the premises, such as common areas, and which party should control insurance proceeds. Finally, parties negotiating casualty provisions should consider waiving California Civil Code sections 1932 and 1933, which install a different approach to addressing casualty rights and could override the parties’ intent in their lease.
The unfortunate reality in California is that casualty events will continue to happen. For landlords and tenants, though, the lasting impacts of these events don’t have to torpedo the parties’ future business interests if these provisions are fully vetted during lease negotiations. While parties cannot account for every potential outcome and machination of a post-casualty world, sophisticated leases can assign the risk according to the parties’ intent in a manner with which both parties are comfortable.