Is Earthquake Coverage a Pass-Through Expense In AIR Leases?

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

By | 2019-07-25T17:25:30+00:00 July 25th, 2019|Leasing|7 Comments


  1. Asha Dhillon August 7, 2019 at 6:33 pm - Reply


    • Usman Mohammed August 7, 2019 at 6:37 pm - Reply

      Thank you Asha!

  2. Greg Hylton (Cushman & Wakefield) August 7, 2019 at 6:34 pm - Reply

    A better question is whether the landlord can charge its tenants for the cost of a deductible in the event of a large earthquake. Example would be a landlord insures the building but includes a deductible of 80% of the building’s value. An earthquake strikes and the building is totally destroyed. Do the tenants have to cover 80% of the replacement cost?

    • Usman Mohammed August 7, 2019 at 6:53 pm - Reply

      Thank you for the insightful comment/question. AIR leases protect tenants from an unfair outcome like the one you described. The end of Paragraph 8.3(a) provides that if there is a deductible clause, “the deductible amount shall not exceed $5,000 per occurrence.”

    • Usman Mohammed August 7, 2019 at 8:43 pm - Reply

      Also Greg, please note that Paragraph 9 of the AIR leases relate to damage/destruction. If the Premises cannot be repaired in 3 months or 6 months (depending on the lease form), it is designated as Premises Total Destruction, and the Lease terminates.

  3. Tim Gosselin (Lee & Associates) August 7, 2019 at 6:35 pm - Reply

    Nice [post] Usman. I like it.

    • Usman Mohammed August 7, 2019 at 7:03 pm - Reply

      Thanks Tim!

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