Because of Hurricane Harvey, oil and gas production company Gonzales Energy and its owner Paunscho are treading water. Rising hurricane flood waters destroyed his files, water-logged his computers and ruined office equipment in their downtown leased offices preventing Gonzales Energy from servicing its wells, pipelines and royalty owners. As flood waters recede, Paunscho wants to know what rent relief he gets for premises so severely damaged he can’t use them. Landlord Lester “Les” Orr is trying to figure out if he can collect rent anyway and, if not, how he will make his mortgage payments. Who has the upper hand?
Read your lease
Commercial leases customarily provide that, even if there is a “cessation of services” (like electricity and air conditioning), Paunscho is not relieved from paying rent – Les must act diligently to repair, generally depending upon certain data points such as the extent of the damages and the projected time required for repair. For example, if damages are greater than 25 percent of the premises or will take longer than six months to repair, perhaps either Paunscho or the landlord may terminate. Given the scope of the disaster, the limited supply of workers and materials will likely extend the repair time. Likewise, predictable “force majeure” or “Act of God” provisions often excuse the landlord from performing under the lease so long as the other cause is not reasonably under landlord’s control.
Communicate with your Landlord and your Insurance Company
See if an understanding can be reached about the likelihood of timely remediation to your leased space – permitting Paunscho to re-open for business and Les to collect rent. Keep in mind that the property will still need to meet the lender’s requirements, including both Les’ mortgage payments and his use of his own insurance funds to rebuild both Paunscho’s space and the building. By timely communicating with your own insurance company, you can assess their responsiveness, flexibility and availability of funds to alleviate your situation, and perhaps get you back into business.
If you have a residential lease, know that the Texas Property Code Section 92.054 provides that, if after a casualty loss the rental premises are partially unusable for residential purposes and if the casualty loss is not caused by the negligence or fault of the tenant, the tenant may reduce rent proportionally to the unusability of the premises because of the casualty. A landlord and tenant may agree otherwise in a written lease.
Tilting the Scales in Your Favor
If you are still reeling from Hurricane Harvey – or any other recent disaster – consider the following suggestions:
- Read your lease and your insurance policy. Know them as well as you can.
- Thoroughly examine and document all physical damage. Document and photograph any damage in detail before commencing any repairs. Many times, the damage may be greater than the untrained eye can detect; a construction expert can be helpful in assessing and documenting damage.
- Rely on a team approach. Communicate with your landlord and your insurance agent / adjuster. Your project my best be tackled by a team of experienced professionals with different skill sets – including accounting, legal, insurance, and possibly construction.
- Do your homework before finalizing your position – both with your landlord and your insurance company. Identify your strongest arguments – and theirs – before beginning any negotiations. Poorly prepared or incomplete claims with either can damage your credibility, and potentially damage your relationship.
- Act as though you have no agreement with your landlord or your insurance company. Do what’s best for your business, your employees and your customers. It’s your business.