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Death and Disability Clauses

(Editor’s Note: This blog post was updated at: https://azleaselaw.wordpress.com/2010/03/08/death-and-disability-clauses-part-2/)

Death and Disability Clauses

This past week I negotiated a lease on behalf of a group of dentists and was reminded of an essential but often overlooked lease provision.  If a closely-held company is entering into a lease, the company needs to consider whether it can continue to operate if a critical owner or employee dies or becomes disabled and cannot work.  Examples include physicians, dentists, veterinarians, attorneys, architects, artists and other types of unique personal services where another person cannot easily step in and run the company.  The company must have the ability to terminate the lease if it loses its critical person.

Without protective language in the lease, the company will remain bound to the lease despite the absence of the critical person.  The lease is often between the company and the landlord, so the company still legally survives and remains obligated to perform under the lease.  If the company defaults, the landlord can strip the company of its assets.  Even worse, the lease could be personally guaranteed and the guarantors or guarantors’ estate could remain liable for the company’s performance under the lease.

These types of companies must include a “death and disability” clause in their leases to allow lease termination in the event of a death or disability of a critical person.  Following is an example of a “death and disability” clause:

In the event of the death of ____________ (the “Critical Person”), or in the event the Critical Person becomes disabled or unable to perform his/her customary duties for Tenant, Tenant shall have the option of terminating this Lease upon thirty (30) days’ written notice to Landlord.   The effective date of such termination shall be the thirtieth (30th) day following delivery of such written notice.  On such termination date, Tenant shall surrender the Premises to Landlord in accordance with this Lease, this Lease shall terminate and neither party will have any further obligations with respect to this Lease.

Depending on the financial terms of the lease, it may be reasonable for the landlord to require a termination fee from the tenant.  If that is the case, the lease should require that the tenant deliver the predetermined termination fee at the time of delivery of the termination notice or on the effective date of the termination.

In addition, there may be circumstances where the landlord is unwilling to include a death and disability clause.  For example, if the landlord provides a large tenant improvement allowance, performs substantial unique tenant improvements to the leased premises, or provides a buyout allowance to the tenant for its existing lease, it may be unreasonable for the landlord to have no recovery regardless of the circumstances.  In these cases, the tenant may be able to obtain a “key person” or “key man” life insurance policy.  The tenant would be the beneficiary of such a policy and the proceeds received by the tenant would allow the tenant to perform its financial obligations under the lease.

Prior to using this language in any agreement, consult with an attorney.

Ryan Rosensteel is a real estate and construction attorney licensed in Arizona.  You can contact him at ryan.rosensteel@azbar.org.

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