News & Events

Avoiding a litigation disaster after a natural disaster

Following Hurricane Katrina in 2005, there was a significant amount of litigation between landlords and tenants over lease terms, particularly regarding the right or obligation to rebuild destroyed commercial properties.  These disputes sometimes arose due to changed zoning and building (particularly elevation) requirements imposed by governmental authorities, or the increased costs of and, sometimes, lack of availability of, flood and windstorm insurance.  However, in our experience, the most common causes of the landlord-tenant disputes were imprecise wording in the leases and failure to adequately provide for rights or obligations to rebuilding in the event of complete destruction of the premises.

In one such case a long-term restaurant lease in a hotel/restaurant building was agreed to using the tenant/restaurant operator’s form lease for its freestanding restaurants.  The modifications to the form lease did not specifically address what would happen if the entire hotel/restaurant building was destroyed and the landlord decided not to rebuild.  The tenant/restaurant owner wanted to build a new freestanding restaurant, but the landlord contended that the lease automatically terminated because the entire building was destroyed.

The outcome turned on the question of whether, under Georgia law as provided in the lease, the tenant’s leasehold interest had been only for the restaurant space in the hotel/restaurant building as the landlord contended or, as the tenant contended, the leasehold included an interest in real property.  The tenant pointed to language saying the landlord “leases…that certain property…together with all buildings, structures and improvements thereon” and “2000 square feet of the Gulf Beach Resort Restaurant area with an area for twenty five (25) parking spaces and an area for a hi-rise pole sign, such parks and sign area to be designated by leasee.”  A recorded memorandum of lease did not contain a legal description, but did contain a survey plat showing the location of the restaurant, parking spaces and sign area.  The landlord contended that the lease conveyed only a leasehold interest in part of the restaurant area and that the use of parking spaces and a sign area were only incidents to the lease of the partial restaurant area, and not a grant of an interest in land.  On cross motions for summary judgment, the United States District Court for the Southern District of Mississippi ruled in favor of the tenant/restaurant owner.  Memorandum Opinion and Order in Civil Action No. 1:11cv516 (S.D. Miss. 3/22/13).

Lessons learned from this and other post-Katrina commercial lease disputes include (1)  try to have the lease provide for all possible events, and (2) carefully review the provisions of form leases for modifications needed due to the circumstances of the property that is the subject of the lease.  Attention should also be paid to which state’s law the lease says controls, and what the law is in that jurisdiction.