The landlord will normally arrange the “buildings insurance” for the whole building or estate, including your premises.
When we talk about buildings insurance we usually think of fire. Fire is probably the biggest risk on average, but buildings insurance should cover a lot of other risks which are frequently encountered – for example, flooding, malicious damage, – and even the more esoteric risks such as collision from aeroplanes.
When the landlords’ solicitors produce the draft lease, it will set out a whole list of the risks for which the landlords must arrange insurance cover, as well as optional extra risks which the landlord will have the right to insure as well.
You may not be worrying about this in a market town, but if terrorism cover can be provided at a reasonable cost, it should be included.
Leases can vary considerably in how insurance is handled, so you should look at this carefully when you get the draft lease.
The landlords will expect the tenants of the building to reimburse the building insurance premiums, either by way of service charge or as a separate insurance rent. Since the landlords may have to pay the premium in one go at the start of an insurance year, they may require you to pay your contribution in one go too, rather than spread over the year as with service charges. The landlords may expect that valuations for insurance purposes and other expenses relating to insurance are covered by contributions from the tenants as well.
You should make sure that all the other tenants are paying the same proportions, relative to the size of their premises, and that the landlords will pay the due proportion when part of the building is unlet.
What your concerns will be about buildings insurance will probably depend on the length of your lease.
If you have a long lease and your business is indissolubly linked to the premises – for example, you’re running a restaurant or bar – then it will be important that the building is restored to its former state as quickly as possible so that you can resume trading.
So, what is important to you as a long lease holder is that the building insurance covers a full set of risks, provides sufficient cover to rebuild the building, and that the lease obliges the landlords to rebuild the building. Your solicitors need to advise you on this when you take the lease.
You may be thinking that if, fire damage destroys half the building, then as long as the sum insured covers that rebuilding cost at least, it doesn’t matter if the building as a whole was under-insured. But it does matter. There’s a insurance principle called “abatement”. If you under-insure the building then the insurer can apply that underinsurance to any damage. If the building should have been insured for £10 million, but it was insured for £5 million, then even if the damage is only £1 million, the insurance company only needs to pay up £500,000 – half the cost. This is so that landlords can’t gamble that the damage will be less than total, and then only insure for a smaller amount.
So, it is important to you that the obligation on the landlord to insure the building is to insure it for its “full reinstatement value” and that it also covers the estimated cost of demolition, planning and other expenses. It is a good idea also, from your point of view, if the lease says that the landlord is obliged to make up any shortfall from its own resources.
If you are at the other end of the spectrum, with a fairly short lease, you are probably not too worried about whether the building is rebuilt or not, as long as you can get out of it and into some new premises as quickly as possible.
You should make sure that the lease gives you the right to terminate it, if the premises have not been reinstated within, say, one year, or if they clearly cannot be reinstated. You need to get on with your business life again.
Often, leases give the landlord the right to terminate the lease rather than rebuild.
If there is to be no rebuilding, the question then arises: how are the insurance proceeds to be apportioned out between the landlord and the tenants? The lease should require that the funds are apportioned between the landlord and the various tenants in accordance with their respective interests in the property – for example, longer leases have a greater interest in the property than short leases.
Lease will also say that rent is suspended during the period when the tenant cannot use the premises either because of damage to the premises or to the means of access to the premises. This should ideally include service charges. (If only part of your premises are affected by the damage, then only a proportion of the rent will be suspended.)
The landlord will want to maintain “loss of rent insurance” – and this is another cost the tenants have to pay for. This pays the landlord for the rent which is being suspended while you and/or other tenants cannot use their premises. Such insurance is usually for a maximum period, which is often three years. So you may find that the lease says that the suspension of rent for you is limited to three years. Of course you don’t want to accept a situation where you could suddenly find yourself paying rent again for premises which have still not been rebuilt – either because of the landlords’ neglect, or due to problems with obtaining the necessary planning permission. So, if there is a cut-off point for your rent suspension, you must make sure that you have a right to terminate the lease at that point, so that you don’t have to carry on paying rent for premises which don’t exist or which you cannot use. The landlord may also have a right to terminate at that point.
Sometimes, leases grant suspension of rent only in respect of risks covered by the insurance policy or specified in the lease. That is another reason why you may need to make sure that the full range of risks is covered by the building insurance policy, and also that rent suspension will apply in any case when some damage makes it impossible for you to use the premises.
Suppose someone in your employ causes a fire. With traditional policies, the tenant’s act can invalidate the insurance of the entire building. The landlord would sue you. That’s an unsatisfactory situation – particularly for you – but also for the landlord who may not be able to recover enough money from you to cover the rebuilding cost. Many modern policies are not rendered invalid by acts of the tenants, unless they act maliciously or unlawfully. Your solicitors can check for these provisions in the draft lease.
The buildings insurance policy will not cover the contents of your premises or equipment. Nor will it cover your loss of business or other costs if you have to move to other premises when there’s a fire in the building. You should arrange your own comprehensive business insurance for these and other costs.
There may also be provisions in the lease covering uninsured risks. That relates usually to perils which were insured against once but now are unavailable, or available only at an exorbitant cost. For example, in the past the availability and cost of insurance against terrorist threats has fluctuated wildly. A similar issue might be flood damage to buildings in areas with a high risk of flooding. Leases often deal with this by saying that neither party has to repair property damaged by such uninsured risks, but the rent will be suspended, and meanwhile the landlord can decide whether it is going to repair the damage itself or not. If not, then you or the landlord should have the right to terminate the lease.
Insurance for commercial premises is a complex, and often changing, area of lease law and practice. You should make sure your solicitors fully advise you on it, and that you understand where you will stand in the event of any catastrophe, or even minor damage to the building.
You and your solicitors should see the landlords’ insurance policy for the building before you commit to your lease. The insurance clauses in the lease should contain a list of risks which the policy is required to cover, so that you know that those risks must always be covered. It’s reasonable for you to ask the landlords to confirm whether they have any plans to change the coverage – the amount or the risks covered. (That doesn’t prevent them making a change later.)
Your lease should contain an obligation on the landlords to ensure that the building policy is on normal market terms and that the landlord will only insure with reputable insurers. You should be entitled to a copy of the policy and proof of renewal throughout the lease term.
If your business involves any hazardous chemicals which might be present at the premises, you must let the landlords know so that they can check with their insurers that it won’t affect the insurance coverage.
If you propose to leave the premises vacant or unattended for a period you should inform the landlords. It can affect the insurance cover.
You need to make sure that any alterations or improvements you make to the premises will also be covered under the landlords’ insurance policy. They may not be covered by your own business insurance policy.