Southern California recently experienced a magnitude 7.1 earthquake.  Well before the recent quake, our clients have been increasingly considering earthquake coverage for their buildings.  Under the various AIR Leases, if a Lessor obtains earthquake coverage for its building, can it charge this cost to Lessee?

Short answer: Sometimes.  In the AIR “Net” leases, it is a pass-through to Lessee, but only if the earthquake coverage is required by Lessor’s lender.  (See the excerpt from an AIR “Net” lease below.)

In the commercial/industrial “Gross” leases, Lessees pay only “Insurance Cost Increases” above the premiums paid for Lessor’s insurance at the time of lease commencement.  Any increased cost for earthquake coverage can be charged to Lessee, but only if, subsequent to lease commencement, the coverage is required by Lessor’s lender. (See the excerpt from an AIR “Gross” lease below.)

Lessors preparing an AIR “Net” lease who wish to obtain earthquake coverage should consider whether to modify the AIR lease.  The modification could allow Lessor to obtain earthquake coverage in Lessor’s discretion and pass through the cost if Lessor obtains such coverage; rather than passing through the cost only if required by a lender.

And let’s hope that no claim is ever made on that policy!

AIR Multi-Tenant Lease Net – Excerpt

AIR Single-Tenant Gross Lease – Excerpt