Lease Insurance Clause for Green Buildings and LEED Certification

September 27, 2010

The following insurance clause is one prepared from a landlord's perspective. Although some lease agreements obligate the tenants to pay their proportionate share of the insurance costs by lumping them into the common area maintenance charge provisions of the lease, other lease agreements carve out insurance and require tenants to pay their proportionate share of premiums in a separate clause. In either instance, if the building is green-certified, the landlord should assure that this clause requires the tenant to pay its proportionate share of the premiums for broad coverage that will permit the reconstruction of the damaged or destroyed building to a level of green certification that is equivalent to its original level of green certification. The clause below requires the tenant to pay its pro rata share of a very broad level of coverage; however, it does not obligate the landlord to maintain this coverage. Of course, this clause addresses only casualty coverage and does not address all liability or other insurance for which a tenant must reimburse the landlord under a lease agreement.

(a) Casualty Insurance. The Tenant shall pay the Landlord, as additional rent, either upon demand or, in the Landlord's discretion, as provided in subparagraph (b) below, the Tenant's Proportionate Share of the Landlord's premiums for Property Insurance (Special Form). This coverage may include such coverage and endorsements as the Landlord shall determine in its discretion, including, without limitation, rent insurance, water damage insurance, building ordinance coverage, vandalism and malicious mischief insurance, flood insurance and war and terrorism insurance, as well as any other coverage that may reason-ably be required by a mortgagee of the Landlord. The Tenant acknowledges that the Building on the Property, of which the Premises is a part, has been certified as [insert rating] under the U.S. Green Building Council's Leadership in Energy and Environmental Design ("LEED") system. Without limiting any of the foregoing, the coverage obtained by the Landlord may include, without limitation, coverage and endorsements that will cover the cost to reconstruct the Building in a manner that shall enable the Building to be certified as [insert rating] under the LEED system; or if the LEED system no longer exists, a similar rating under a then existing equivalent rating system. Such coverage may include, without limitation, the following risks and/or losses: (i) the additional cost of upgrades due to a change in applicable green building standards; (ii) losses associated with the loss of a LEED certification, including government tax benefits, utility credits, and other financial incentives; (iii) additional debris removal costs associated with recycling in lieu of landfill disposal; (iv) the cost to hire a LEED accredited professional, or a then similarly qualified professional, to oversee Building design and construction; (v) the added expense to retain a qualified engineer to properly commission the Building in order to ensure that the Building's systems are designed, installed, and tested to ensure their performance according to the design intent, their proper alignment with one another and their operation at peak performance; (vi) registration and re-certification fees to re-certify the Building as [insert rating] under the LEED system, or if the LEED sys-tem no longer exists, a similar rating under a then-existing equivalent rating system; (vii) additional business interruption loss during the extended period required for re-certification as [insert rating] under the LEED system, or if the LEED system no longer exists, a similar rating under a then-existing equivalent system; (viii) the cost to reconstruct a vegetative roof; (ix) the cost to obtain and reconstruct any alternative energy producing system existing at the time of the casualty; (x) the cost of air testing as well as the cost to flush out the reconstructed space/Building with 100% fresh air; (xi) the cost of obtaining alternative energy during the interim construction period; (xii) the loss of income if alternative energy producing equipment was sending surplus power to the public utility power grid; and (xiii) additional soft cost expenses such as additional interest expense, additional legal, accounting, and architectural expenses, and lost rental value for the added period of construction attributable to green development requirements. This insurance may (A) name only the Landlord and the Landlord's mortgagee, if any, as the insured and provide that any loss shall be payable to the Landlord and the Landlord's mortgagee, if any, as their respective interests may appear; (B) be in an amount equal to the full replacement cost of all buildings, improvements, alterations, additions, and replacements now or hereafter on or at the Property; (C) provide that no act of the Tenant shall impede the right of the Landlord or the Landlord's mortgagee, if any, to receive and collect the insurance proceeds; and (D) provide that the right of the Landlord and the Landlord's mortgagee, if any, shall not be diminished because of any additional insurance carried by the Tenant for the Tenant's own account.

(b) Insurance Escrow. At the option of the Landlord, which the Landlord may exercise at any time, and from time to time, during the Lease Term, the Tenant shall pay the Landlord the Tenant's Proportionate Share of all insurance premiums for the insurance coverages referred to in subparagraph (a) above, on the first day of each month in advance, in a sum equal to 1 /12th of the Tenant's Proportionate Share of all insurance premiums then due and payable. Additional rent based upon insurance premiums payable for the first and last years of the Lease Term, shall be adjusted and prorated, so that the Landlord shall be responsible for the Landlord's prorated share for the period prior to and subsequent to the Lease Term, and the Tenant shall pay the Landlord its prorated share for the Lease Term.

This clause is an example of a pro-landlord and casualty insurance provision, and it underscores the need for careful review by the tenant's lawyer. First, the tenant's lawyer may want to make a minimum level of coverage mandatory, subject to a cost analysis, because the tenant will have to pay a share of the premiums. In addition, both the landlord and the tenant need to align carefully the risk of loss clause with the insurance provisions of the lease. Although the tenant may have an interest in requiring the landlord to rebuild to a particular green-certified level, before committing to do so, the landlord needs to ensure that the actual insurance for which the tenant will reimburse the landlord is sufficient to permit the landlord to achieve compliance without coming out of pocket. As a result, while the lease can structure the landlord's insurance requirements in a permissive fashion, the rebuilding requirements of the lease will dictate the coverage that the landlord actually should procure—and for which the tenant should reimburse the landlord if the lease requires this reimbursement. In addition, depending on which party has responsibility for restoring the interior space of the building, the landlord and the tenant may be in a role reversal relative to the required insurance and rebuilding standards.

Conclusion

Although the current economic crisis has significantly reduced development generally, as the real estate industry moves out of this crisis, there will be an increasing need for real estate develop-ers to distinguish their product. As a result, green-certified buildings may well become more commonplace in the industry. As the sustainable development model becomes more popular, even limited efforts, such as solar panels and other forms of alternative fuel production, will require a more careful analysis of the risks and related insurance needs. Just as the insurance industry responded to the increased risks associated with Brownfield redevelopment, it is likely that insurers will provide an increasing number of products that meet the demands of sustainable development. Real estate lawyers will have to understand the risks inherent in green development and be able to evaluate the insurance products that are available to address those risks.