Commercial Leasing in Fire-Prone Areas

April 2025

By: J.J. Sherman, Law Offices of J.J. Sherman, P.C.
and Erinn N. Lew, St. John’s University School of Law

Following the devastating wildfires across Southern California in January 2025, it is a good time to revisit standard terms found in commercial leases and consider what upgrades, if any, can be made to protect Tenants in fire-prone areas.   Here are several important considerations for Tenants with existing commercial leases or who may be signing leases in fire-prone areas.

Has an inspection been performed by the Tenant? 

Tenants can save themselves fire-related headaches by conducting a proper physical inspection prior to signing a lease.   Unless express representations and warranties as to the condition of the premises are set forth in the lease, commercial spaces are leased “as-is, where-is.”[1]   Thus, Tenants should inspect the premises for any fire-resistant building materials, fire-proofing measures, or the lack thereof.   Tenants may note the age of the building, the presence of a compliant fire sprinkler or life safety system, whether there are any local fire-proofing requirements applicable to the space, and whether the premises are in compliance.   Following the January 2025 wildfires, some municipalities now require that property owners clear brush and trim back flammable greenery from buildings or install other fire-proofing measures.[2]

Depending on the results of the inspection, Tenants may request that the Landlord perform certain improvements to fire-proof the premises prior to Tenant’s occupation, or Tenants may need to include such improvements in their own initial build-out of the premises.

What does the Force Majeure clause say?

Wildfires can create numerous unforeseeable conditions that prevent Tenants from being open and operating from their premises.   Even if their premises are not damaged by fire, municipal and state governments may limit access to evacuated or fire-threatened areas by closing roads and issuing orders that forbid residents and business-owners from entering evacuation zones.

Force Majeure clauses typically give Tenants much-needed leeway to delay performance, such as being open and operating, in the face of circumstances out of the Tenants’ control, until the obstacle or condition is removed.[3]   For example, if a retail Tenant is unable to access its premises due to a government-mandated road closure following a fire, a well-drafted Force Majeure clause would excuse the Tenant from being open and operating from its store while the road closure remained in effect.

However, it is important to note that most Force Majeure clauses do not excuse a Tenant from paying rent to the Landlord, despite the fact that the Tenant may not be able to operate from the premises.

One solution for Tenants who are concerned about this potential scenario in fire-prone areas is to negotiate a rent abatement in the Force Majeure clause.   Such language states that if the Tenant is prevented and prohibited from opening or operating its business at the premises or public access to the premises is restricted for any period of time due to a government action or order resulting from an outbreak of a pandemic disease, fire, hurricane, earthquake or other force majeure event not due to the Tenant’s particular actions, all rent payable by the Tenant during the time it is closed by government action or order will be abated in full.   Commercial Tenants favor this approach following the Covid-19 pandemic, when government stay-at-home orders required businesses to close unexpectedly.   However, commercial Landlords often resist granting rent abatement.   After all, they argue, the Tenant purchases business interruption insurance for such scenarios.   Nonetheless, some Landlords may be willing to agree that rent abatement will apply up to a finite number of days in the aggregate over the lease term.

For Tenants in fire-prone areas, adding language tied to a government action or order gives Tenants a critical buffer from incurring major rent expenses when they may have limited ability to generate income.   Adding a time limit helps to ensure that Landlords do not feel that the rent abatement is unreasonably long and protects their rental income interests.

What does the casualty provision say?

Casualty or damage provisions in commercial leases typically state that if the premises are damaged by fire or other casualty, the Tenant is entitled to some rent abatement until the damaged premises are repaired by the Landlord.[4]   However, the rent will be abated only in proportion to the portion of the premises that cannot be used.   If a Tenant cannot use one quarter of its space due to fire or smoke damage, rent would only be abated by one quarter.

In addition, Landlord-friendly casualty provisions in commercial leases permit rent abatement following a casualty only to the extent the Tenant has maintained business interruption or loss of income insurance required by the lease, and the proceeds have been exhausted during the period of restoration following the casualty.   Landlords also tend to limit rent abatement to the amount of loss of rental income insurance proceeds the Landlord actually receives following a casualty.   At the end of the day, this is just a matter of risk allocation.   From the Tenant’s perspective, if the Tenant can’t use the premises following a casualty, the Tenant shouldn’t be required to pay rent.   From the Landlord’s perspective, the Tenant’s business interruption insurance is intended to cover the rent cost, and once that is depleted, the Landlord may not be willing to abate rent beyond its own rental insurance proceeds.

It is also important to know what the casualty provision says about the Landlord’s obligation to rebuild the premises following a casualty.   A Landlord’s obligation to rebuild, repair, or restore the premises after fire damage is often related to whether the damage was covered by insurance.

For fire damage that is insured, meaning covered by Landlord’s insurance as required under the lease, the Landlord may have an obligation to begin repairs within a certain period of time.   However, if a significant amount of the premises has been damaged, or if the premises or shopping center where the premises are located has been totally destroyed, especially in the final years of the lease term, the Landlord or both parties may have the right to terminate the lease.

For fire damage that is uninsured, the Landlord may be required to repair, however if the damage exceeds a certain replacement cost, the Landlord may elect within a certain time period to terminate the lease instead.

Sometimes both parties may wish to terminate the lease regardless of Landlord’s obligation to rebuild.   For example, if the Landlord will not be able to rebuild the premises within 12 months, a Tenant may wish to walk away from the lease, rather than sideline their business.

Is the Tenant properly insured?

Landlords require Tenants to maintain property insurance in an amount not less than the full replacement cost of the Tenant improvements to the premises for damage caused by various hazards and unanticipated events, such as fire, flood, or wind.   They also require Tenants to maintain business interruption insurance in amounts sufficient to insure the Tenant’s business operations for a period of not less than one (1) year.[5]   Importantly, except for damage to property or injury to individuals arising from Landlord’s gross negligence or willful misconduct, a commercial lease will include a clause expressly exempting  the Landlord from liability for damage to property or injury to individuals resulting from fire and other natural disasters.[6]  

Therefore, before taking possession of the premises, Tenants must ensure they have the correct amount of, and type of, insurance in place to cover risks associated with wildfires, including property insurance and business interruption insurance.   If there are exclusions to any of these policies, it is important to understand the real life scenarios in which those exclusions would occur.

Key Takeaways

With fire risk in California and other states likely to remain a concern for years to come, here are four key steps that practitioners can take with commercial Tenant clients to prepare and protect from fires:

• Check for fire-proofing and prevention measures during Tenant’s inspection of the premises.
• Consider negotiating a limited rent abatement for force majeure events related to government action or order.
• Review the lease’s casualty provision to understand the amount of rent abatement offered, its relation to insurance coverage, and Tenant and Landlord’s rights to terminate.
• Ensure that Tenant has purchased the necessary amounts of insurance required by the lease, such as property and business interruption insurance.

For more information on this or other commercial real estate law topics, visit the website for Law Offices of J.J. Sherman, P.C.

This communication is for informational purposes only. It is not intended to create an attorney-client relationship or constitute an advertisement, a solicitation, or professional advice as to any particular situation. If this communication is considered advertising, then it is herewith identified as such. This communication does not constitute a guarantee, warranty or prediction regarding the result of representation. Prior results do not guarantee a similar outcome.

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[1]State of California, Department of Real Estate, Reference Book 138 (2010).

[2] Noah Haggerty & Sean Greene, New Fire Maps Increase Hazard Zones in L.A. and Southern California by 3.5 Million Acres, L.A. Times (Mar. 24, 2025, 4:03 PM), https://www.latimes.com/environment/story/2025-03-24/new-fire-hazard-maps-for-los-angeles-and-southern-california.

[3] Debbie Yoon Jones, Force Majeure Clauses in the Face of COVID-19: Commercial Leasing Guidance (CA), Practice Note, https://plus.lexis.com/api/permalink/9487213c-4616-4d6e-a69d-cab83d906a65/?context=1530671 (Current as of: Apr. 10, 2020).

[4] Michelle M. McAtee and M. Christine Graff, Retail Lease Agreements, Practice Note, https://plus.lexis.com/api/permalink/da7cfeee-186d-41c3-86ce-0e84a9f79acf/?context=1530671 (Current as of: Dec. 23, 2024).

[5] Insurance Considerations in Commercial Leasing (Tenant), Practice Note, https://plus.lexis.com/api/permalink/c8f0a6e3-ad79-4a84-b3fd-1d609fcae6c1/?context=153067 (Current as of: May 16, 2024).

[6] McAtee supra note 4.