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I'm Lucy, and I'd be happy to answer your questions today.
Is this a residential or commercial lease? What state are you in?
Ok, thank you. I wanted to check because that kind of clause in a residential lease would not be enforceable.
There's no legal reason you should have to pay the full cost of installing the drywall. For him to collect 3.78% of the cost, as per your lease, he'd need to establish that this was an intrinsic part of the plumbing or heating system. I'll admit, I'm not a contractor, but I just don't see how that's possible. The insurance company most likely wants dry wall around the water heater to reduce the risk of fire if it sparks or malfunctions. That's really not part of plumbing, heating, or anything else you agreed in the lease to cover. And that means it's not your responsibility.
It's not a violation of your lease to refuse to pay monies that you don't have any legal obligation to pay. He cannot terminate your lease if it's for an established term.