16 Nov Commercial Leases and Low-Probability Events
One of the purposes of a contract is to plan out what the parties will do if certain potential events happen. This way, the parties can determine between themselves how to note an event has happened, what the parties will do if an event happens, what they parties may need to discuss, and who is financial responsible for the burdens of the event, along with many other terms in the contract.
But contracts often fail when dealing with potential event purpose because many contract drafters and parties have difficulty distinguishing between possibility and probability. In other words, just because an event can happen does not mean that it is likely to happen. When probability and possible collide, the contract often puts inordinate attention on unlikely events while appearing to give little attention to likely-to-happen events.
I’ve been working on commercial leases as of late and often times those leases contain provisions about what happens if the space that is being rented is unable to be used. For example, there could be a natural disaster, fire, or the government can seize the property in an eminent domain condemnation. Any of these events could make the tenant’s space, or the whole building, unusable.
In all three cases mentioned, the chances of a fire happening is probably less than one or two percent. But if a person were to look at a typical commercial lease, and the sheer number of words spent on events that render a space unusable, you would think these events are so common that they deserve 1,000+ words to deal with the event.
For example, an eminent domain condemnation proceeding takes some time. Courts are involved. Eminent domain seizures often take months or years to resolve. It is better to keep it simple and say something like “if the government decides it needs to seize this building by eminent domain, we, the landlord and the tenant, will have a discussion about the best path forward where we can examine all of the options,” rather than spending 1,000+ words on a single clause in a contract. This way, the contract acknowledges a risk as a possibility, but a low probability event, and spends an appropriate amount of verbiage on the matter.
The other factor that worries me is that many of these loss of space provisions have a punitive tone, as if the tenant is responsible for eminent domain action or tornado that destroys the part of the building. I will grant the possibility that a fire in the tenant’s space might be the result of negligence by the tenant. But if you read a typical commercial lease, you see terms and language that are punitive on the tenant. That is not the best way to look at the relationship, because the landlord-tenant relationship is one of mutual advantage with just a dash of business adversaries. A landlord who cannot rent premises is not making money.
A well-written lease will acknowledge that a loss of the building or part of the building financially affects both landlord and tenant. In such circumstances, without negligence by either party, a well-written lease will acknowledge the risk to all parties and treat the tenant as an important party to the landlord. In situations where the building is unusable, the parties are in a similar position. A well-written lease will embrace the mutual nature of the relationship and treat low probability events from a standpoint of mutual advantage rather than as strictly adversaries.
A fire, natural disaster, or eminent domain condemnation could happen, but it is a very low-probability event. When dealing with low probability events, why waste time, effort, and verbiage to describe a process and the consequences on the tenant that fails to acknowledge the low risk of the potential event. Too often, too many discussions about risks that might happen get treated as if they were the end all be all, biggest thing that could ever happen, despite that they are very low probability events.
If you want to review your contracts to better address low probability but high-cost risks, reach out to us or schedule a consult with the MattTheLawyer Calendar Tool.