As the troubles with underground flooding in the Loop dragged into a third week, tenants began seeking more than relocation advice from their commercial real estate brokers.
”In the first week, everybody was pulling together. In the second week, people were trying to get back in business and, from the legal end, position themselves to see what steps have to be taken,” said Steve Stratton, principal in Tanguay-Burke-Stratton Comprehensive Real Estate Services.
So while workers continued to pump out the millions of gallons of Chicago River water that flooded the Loop`s underground tunnel system April 13, crippling the central business district, merchants and others who rent space downtown turned their attention to their leases.
Most office leases have built-in protections for tenants and landlords in different situations, and commercial brokers say negotiations on the various issues rarely leave two leases alike.
”We`re not lawyers here. We just try to negotiate these things so the tenants have something when things like this happen,” said Stephanie Weeks, a vice president in Rubloff Inc.`s transaction management division.
Weeks, Stratton and Robert Splendoria, president of U.S. Realty Advisors Inc., outlined five broad areas commonly found in office leases that could come into play in the flood aftermath.
– Interruption of services. Leases spell out how long a premises can be without services such as gas or electricity before a tenant is entitled to a rent abatement. The period typically is 48 to 72 hours.
If service isn`t restored within a negotiated time, which can run from 30 to 270 days, the tenant is given the right to terminate the lease.
”There are all kinds of different combinations of how long service must be interrupted for the clauses to kick in,” Splendoria said.
Tenants at the Board of Trade or financial trading firms in other buildings face significant losses every day they are out of business, Splendoria said. They are more likely to look for help in interruption clauses than firms that face smaller losses, he said.
Some tenants trying to get rid of excess space in the affected buildings will be hurt, too, Stratton said, because they and their brokers will be unable to market the space for some time. Such a disruption is not accounted for in leases, he said, but may be a point of contention.
– Operating expenses. There is a question as to whether landlords will be able to pass on repair costs to tenants as part of a building`s operating expenses.
Almost all downtown office leases are written as net leases, meaning the costs of items such as utilities, garbage collection, security and maintenance are passed on to the tenant. But major capital expenses, such as new boilers or air conditioners, generally cannot be considered operating expenses.
– Insurance. Most leases specify what insurance the tenant must carry and what insurance the landlord must carry, especially in the area of business-interruption coverage.
”Sometimes landlords will insist the tenants carry business-interruption insurance. The owner may only carry enough to fix the building and not enough to give anything back to the tenants,” Weeks said.
These clauses even make it clear in which instances each party must look to its own insurance exclusively for reimbursement.
”It would say that the tenant can`t pursue anybody else`s insurance and must pursue theirs. And likewise, from the building`s side, it would have to be pursuing only its own insurance,” Splendoria said.
Landlords also have protection under force majeure clauses, meaning that they may not be responsible for costs or abatements in events ”that cannot reasonably be anticipated or controlled.” In those cases, owners may not have any obligations to tenants for business interruptions.
The subterranean flood would seem to qualify as a force majeure, but the idea may have to be tested in court, Splendoria said. There also is a possibility building owners might be considered negligent for not doing something to seal off their buildings from the tunnel system.
– Repair rights reserved to landlords. In some instances, generally those that do not involve building- or health-code issues, landlords are given the option of making repairs or not.
Weeks said it appears most of the flood damage would not fall in this category; building owners say they are doing everything they can to get their buildings up and running as quickly as possible.
”Building owners have prioritized things. First is tenant safety, then comes getting the building back in operation,” said Llani O`Connor, executive director of the Building Owners and Managers Association of Chicago.
”All these questions of insurance and who owes who what and what did what to whom have been a bottom priority in a lot of cases,” she said.
– Waiver of certain tenant rights. Tenants give up some rights in many leases, Weeks said, although if those rights are ones granted to tenants under Illinois law, they cannot be waived even if the lease says so.
Although Weeks said she cannot think of a current instance in which this provision would come into play, it might become important if tenants get embroiled with landlords in lawsuits over the flooding at a later date.
”Some people are taking a quiet position and others are ready to take it to the fullest extent possible,” Stratton said. ”I think we`ve yet to see the litigiousness of our society come out.”
The flood is certain to have an impact on the way leases are written in the future as brokers and owners alike try to insulate themselves from equally unanticipated risks.
”We`re negotiating a couple of leases now, and when we got to the interruption-of-services clause, both sides began digging their heels in,”
Stratton said.
Weeks said Rubloff is recommending changes in negotiating stances for tenants so the kinds of questions that are arising over the flood are answered the next time.
She said tenants should seek coverage for relocation expenses, absolute guarantees of rent abatements and more forceful right-of-termination clauses. ”Knowing the city of Chicago and knowing how old it is, there will be something else,” she said. ”It may not be water, but the tenant should be ready.”
