Hope for the best but prepare for the worst. Fires, natural disasters such as floods, hurricanes and earthquakes, and extended power outages can become dangerously “hypothetical” in the heat of a retail lease negotiation. But just ask landlords and retail tenants in Boston’s Back Bay, Chinatown, Theatre District, Kenmore Square and the South End about the importance of utility interruption clauses in their leases in the wake of last week’s electrical transformer explosion. The unexpected explosion resulted in more than 20,000 residences and businesses, including many retail businesses, losing power for several days.
The power outage effectively paralyzed business activity in the affected neighborhoods as retailers were forced to shut their doors and turn away customers. Restaurants also faced the unique challenge of trying to save thousands of pounds of food without the use of refrigerators. Legal Seafoods placed its fish on ice and The Capital Grille transferred thousands of pounds of meat into refrigerated trucks but, in the end, both restaurants were forced to throw out substantial amounts of food (Note: The tigers at the Southwick Zoo were grateful.) The Boston Globe highlighted several other examples of retailers affected by the power outage and the financial losses that resulted. Initial estimates of each retailer’s financial losses range from thousands of dollars to tens of thousands of dollars in only a couple of days without power.
Last week’s events serve as a reminder that retail tenants must prepare for the worst or risk significant financial losses that may be too great to overcome. The questions for landlords and tenants are many. Does the tenant have the right to terminate the lease if it is unable to operate in the retail space for an extended period of time? Is there an abatement of rent or other expenses such as common area maintenance charges and taxes during the time period the tenant is unable to operate its business? Is the tenant required to carry business or service interruption insurance? Is it a default under the lease if the tenant does not have the necessary insurance? Who bears the burden of paying for property damage to the retail space if neither party is at fault?
For those who have thought of these issues ahead of time, the lease will provide answers to these and other important questions. For those who have not, the time to prepare for the worst is now.