Operating Cost Pass-Thrus relating to disasters

Suppose your office building or shopping center were struck by a disaster, such as a hurricane, earthquake, fire, and the landlord chose to restore the destroyed building or center.


from Commercial Lease Law Insider, September 2006


"Which costs associated with restoration can the landlord pass-thru to tenants?


Most standard leases include reference to passing-thru CAM and operating expenses for the landlord's cost of making repairs. The cost of replacing destroyed property is not treated as a repair. It's usually treated as a capital improvement.


Tenants frequent try to exclude capital improvements when negotiating their leases. Most leases state that specific capital improvements may be amortized, and the amortization (and sometimes interest) may be included in Operating Costs/CAM, if installed:


a. To reduce the costs of operating, maintaining or
repairing the building or center (known as cost-saving capital improvements);


b. To comply with any law enacted after the lease is
signed; and


c. For life, health and safety.


Landlords want restoration work costs to be categorized as repair costs.
Tenants may demand that the landlord exclude any repair costs that would have been covered by insurance. At the very lease, tenants might demand that the landlord amortize restoration costs over their useful life.


During the restoration work, any upgrades made, required to comply with building codes enacted after the property was constructed, are generally not considered repairs. Nor will those upgrades be covered by property insurance, unless there is a building ordinance endorsement.


The cost of cleanup and the disposal of debris are together considered a repair. A property insurance policy may specifically exclude certain costs related to the removal of hazardous materials, such as asbestos.


CAM cost and operating expense clauses usually allow the landlord to pass through insurance deductibles to tenants. Tenants will try to negotiate for reasonable limits on those deductibles, even though reducing the amount of a deductible increases the insurance premiums."

For more information see; www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com