Guest Author Brian Clement: Don’t sign that lease agreement until you read this

leaseI’ve done it. You’ve done it. We’ve all done it. All that legalese, really? Let’s just sign and get it over with. Well if you are leasing space in a building don’t ever do it again without a thorough review from both your insurance advisor and legal counsel.

I’ve been running into lease agreements that shift repairs of certain building costs on to tenants. The surprise to the tenant is that these costs may not be covered by a tenant’s insurance policy, forcing the tenant to pay thousands if not tens of thousands of dollars.

Here is an example of what to look for in a lease agreement that could cost a building tenant an exorbitant amount of money.

Lease Example: You are a tenant in a multi-tenant retail space. The air conditioning stops working in your suite. After a call to the landlord and diagnosis by Bob’s Pretty Good Heating and Cooling Company it is discovered that the roof top unit is no longer working. The cause? An in-take valve failed which caused the unit to shut down, then freeze.

Your landlord informs you they are not responsible given the following clause in the lease agreement:

“To the extent the leased premises shall be serviced by a central air conditioning or condenser water system, Tenant’s obligations for connecting to, and all charges for, the Central system as well as the Tenant’s installation, operation and maintenance of its heating and ventilating and air conditioning portion of the system shall be as set forth in Exhibit A (and any such exhibit relating to such central system) attached hereto and made part hereof. Landlord shall not be obligated to Tenant for any damages or cost or expense resulting, directly or indirectly, for any failure or malfunction of the Central Air Conditioning supply system (or central condenser water system, as applicable) or any component parts thereof.”

You ask yourself WTH? This isn’t my building! So you call your insurance agent and inform them of the situation and proceed to file a claim. 48 hours later, which have been filled with no shortage of sweating and complaining employees, you learn there is no coverage. Your WTH just escalated!

And now for the technical reasons why your insurance policy will not provide coverage. Three things must be proved for your business personal property insurance policy to provide coverage:

  1. The cause of loss (in-take valve failed resulting in freeze up) must be a covered cause of loss.
  2. You must be responsible for the repair as set forth in the lease agreement.
  3. You must have improved or bettered the air conditioning unit during the time you have been a tenant in this building AND your business personal property insurance policy must have a tenants improvements and betterments clause contained within.

Although you could prove items 1 and 2 noted above, item 3 could not be proved, therefore, the cost of repairs or replacement to the air conditioning unit comes out of your own pocket.

Solution: Be proactive. Obtain a copy of the lease in advance and review. Look for this clause (or one similar in nature) in the lease agreement and negotiate it out of the lease. If the landlord is unwilling to remove, either move on to the next property on your list, pay for an inspection of the equipment including improving upon what is already there and be sure to save the receipt, or know that you will need to set aside funds for repairs to the building and building equipment that are the responsibility of the tenant. Also make sure your property insurance policy contains coverage for improvements and betterments.

In summary, manage your risks by being proactive. Take the time to learn the language within the lease agreement before entering in to the contract. Discuss with your trusted professionals the pros and cons of the language. The hour or two of the mundane learning just may pay huge dividends and save thousands of hard earned dollars.

Brian Clement is a licensed insurance agent and a risk management consultant with the Ralph C. Wilson Agency in Southfield, MI. For over ten years Mr. Clement has guided companies operating in various industries throughout the United States through risk management and purchasing decisions regarding Property, Casualty, Professional Liability, Errors & Omissions, Workers’ Compensation and other specialty insurance programs . Furthermore, Mr. Clement advises employers on various employee benefit offerings and funding arrangements, including navigating the state and federal compliance waters of HIPAA, HI-TECH, COBRA and FMLA. Follow Mr. Clement on Twitter – @BrianJClement and on LinkedIn at