Protect Yourself from Uncovered Business Losses in Leased Commercial Space

A young couple with a growing ceramic tableware business outgrew their home studio and looked for nearby affordable workspace to rent. They found an option that that seemed perfect, with ample room to work, store supplies and operate two newly-purchased kilns. They signed a 2-year lease for the former garden supply building and set up shop in the new space. Five months later, a suspicious fire started in the vacant lot next to the building, destroying their entire inventory, supplies and the kilns. The landlord refuses to cover their loss. Now what?

When Disaster Strikes Commercial Property

We’ll come back to our unfortunate couple. Commercial properties are as susceptible to calamity as residential properties, but with a twist. Tenants must do twice the due diligence before signing a lease.

Landlords are responsible for maintaining safety standards, performing repairs and maintenance, observing appropriate, allowable use of their property and carrying insurance. Prospective tenants should seek as much information about that insurance as possible before signing a lease. In many cases, the property of the landlord is insured, but not the property of the business tenant.

Lessons Learned – Two Notable California Cases

In 2016 in Oakland, a disastrous fire at a Fruitvale warehouse occupied by an unauthorized artist collective killed 36 people and destroyed the housing, personal property and livelihoods of the residents. The Ghost Ship Warehouse Fire tragedy caused enormous legal fallout. Multiple lawsuits focused on illegal occupancy, code enforcement failures and a tangled arrangement between the property owner and the primary tenant. In the end, the City of Oakland paid $33 million to victims and families.

The 2023 Los Angeles Interstate 10 Storage Yard Fire damaged the freeway infrastructure and forced the eviction of many tenants and subtenants of the storage yard. Some of the businesses were found to be storing vehicles, stacks of pallets and hazardous materials in a space with long-standing safety violations and minimal landlord oversight. Tenants suffered massive losses in the arson-caused event.

What Can Commercial Tenants do To Mitigate Business Risk?

• If you are commercial tenant now or plan to become one, take a thorough look at your lease agreement. Does the landlord carry comprehensive property and liability insurance, including coverage for loss of your income caused by their negligence?
• Are there indemnification clauses that shift responsibility onto tenants for landlord negligence? Beware of this.
• Is the property zoned for your type of business? You can request proof of compliance with city and county zoning laws.
• Is the property up-to-date with all required safety inspections? Is there evidence proving potential issues are addressed quickly and fully?

Proactive Steps to Take as a Commercial Tenant

Avoid relying on your landlord’s insurance to make you whole if something bad happens. Purchase your own strong commercial renter insurance policy. This may be required by your landlord, but not always. Factor in potential loss of your inventory and equipment, the impact of business interruption and general liability. Good insurance is an essential part of your business plan, so keep it in the budget and consider it money well spent.

Remember calamity can work two ways. Consider the case of the couple we started with and their ceramics studio. What if the cause of their fire was determined to be faulty wiring in one of their kilns? Where does this leave the landlord? That’s another reason you should have your own commercial renter insurance.

The Bottom Line

We invented the couple with the ceramics studio to prove a point. Good insurance is a good bet. If you need advice about your risk exposure as a commercial tenant, or are facing a situation like this now as a commercial tenant, seek advice from a real estate attorney.

Know Your Rights. Protect Yourself.