The loss of life and property from the recent fires have been devastating to many. We have all been affected in some way. My prayers are with those who have lost family members, homes, businesses and belongings.
Now that the smoke is slowly clearing and people are back in their homes for those who still have homes to go back to the question was asked, “My home (or commercial building for my business) was destroyed in the fire what happens to my lease?”
I also know of an associate who was days away from closing escrow on a home his clients were purchasing, which was completely destroyed in the fire.
What does a tenant, landlord, buyer, and seller do when a property is destroyed?
Coincidentally, a client who also is a real estate attorney, Stephen M. Flynn, sent me his timely newsletter discussing purchases and leases of real estate destroyed by the fires.
Using what I found in Stephen’s newsletter, I decided to dig a little deeper. After review of the contracts I use in my business for purchasing and leasing of real estate I found the following in each contract about damage, destruction or loss of property:
Basic Commercial Lease (California Association of Realtors (CAR) Commercial Lease)
If total or partial damage occurs to the premises, at no fault of the tenant, the landlord has the right to restore the premises within 90 days. If the landlord elects not to restore the premises or cannot do so within 90 days, the tenant can terminate the lease. The tenant does not need to pay rent during the restoration period.
Detailed Commercial Lease (AIR CRE Standard Commercial/Industrial Lease)
Within 30 days the landlord must notify the tenant whether partial or total damage has occurred. If partial damage occurred for an insured loss, that which could be repaired in six months or less, than the landlord shall commence with repairs and her cost. If the damage is less than $10,000, the tenant has the option to repair. The lease shall remain in full force and effect.
If partial damage occurred for an uninsured loss (the negligent or willful act of tenant), the landlord can repair the damages and collect costs from tenant while the lease remains in full force and effect. The landlord also has the choice to terminate the lease. There are additional provisions for notices and timing so read your lease.
If total damage occurred, the lease is terminated 60 days following the date of destruction. The landlord can recover costs of the damage if caused by the tenant’s negligence or willful act.
Residential Lease (CAR Residential Lease or Month-to-Month Rental Agreement)
If total or partial damage occurs to the premises, at no fault of the tenant, either party may terminate the agreement. Rent shall be abated at time of damage. If the agreement is not terminated the landlord can choose to repair the premises and reduce the rent accordingly during repairs. The landlord has the right to terminate the lease and will not provide a rent abatement when the damage is caused by the tenant.
Purchase Agreement (CAR & AIR CRE)
The various CAR purchase agreements contain no provisions if damage or destruction were to occur before the transfer of title. The AIR CRE commercial purchase contains provisions as noted below.
The Uniform Vendor and Purchaser Risk Act (Uniform Act) (Cal. Civ. Code § 1662) is the default rule which would apply. However, there are provisions in most purchase agreements allowing the buyer to terminate an agreement.
A buyer is purchasing the property as-is in its present physical condition as found on the date the offer was accepted. If the property condition differs from what was expected before the closing of escrow, the buyer could require the seller to correct the issues or terminate the agreement.
The buyer usually retains contingencies for a period to perform inspections or secure financing. The buyer could exercise his right to terminate the agreement if the damage or destruction occurred before the expiration of the contingency period.
Though not a contingency of the sale, many agreements include a final verification of condition allowing the buyer to confirm the condition of the property usually within several days of closing escrow. The buyer can verify the property is in the same condition as when the offer was accepted, regular maintenance has occurred, and seller completed any required repairs.
The AIR CRE standard offer does include provisions if destruction, damage or loss occurred. If the damage is less than $10,000, the seller would need to repair before the closing of escrow. If more than $10,000 the buyer can choose to continue with the sale or terminate the agreement. If the buyer decides to proceed with the sale he would be entitled to any insurance proceeds.
My recommendation is to review your lease and purchase agreement promptly. If you have any real estate questions, please contact me–any legal questions, please call Stephen.
Burt M. Polson, CCIM, is a local real estate broker specializing in commercial, luxury estates and wineries. Reach him at 707-254-8000, or [email protected] Sign up for his email newsletter at BurtPolson.com.