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Commercial Leases & Property

Help and advice to those looking for insurance in the commercial property market, whether they are a landlord or tenant.

Insurance Provisions in Commercial Leases

Veronica Pembleton Veronica Pembleton , 2/19/2018
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If you are a tenant of a landlord of a commercial property it is vital that the lease you have outlines the exact insurance details of who you will be insured and what will be insured.
If the lease is silent, there is no implied obligation on either party to insure the property and/or to lay out any insurance monies received in reinstating it. This piece outlines the insurance issues that need to be decided upon for both landlords and tenants.


Who Will Insure?


For most leases, landlords will agree to insure the property as it's in their best interests to do so. Sometimes, where a tenant is taking a lease of a whole building, paying a large premium and a minimal ground rent, the tenant may seek to arrange the insurance itself – although this is highly rare.


Despite landlords agreeing to insure, they will typically seek to recover the full costs of this from the tenant. Landlords are likely to want reimbursement for the costs of the premium including insurance for loss of rent, public liability insurance and professional fees for people such as architects, chartered surveyors etc. The landlords need for insurance will be also often to be subject to any exclusions, limitations, conditions and excesses imposed by the insurers.


What Are the Premises That Should Be Insured?


When a tenant is taking a lease of a whole stand-alone building, the landlord’s insurance covenant will encompass the premises as outlined in the lease. When it’s a part of a building, the landlord will need to insure the whole of the building, otherwise, you could risk that sections of the building may be damaged with no one required to make fixes. This could affect the look of your business premises and even prevent access to the building.


What Happens if the property is damaged by an insured risk?


In this scenario, the lease should provide the policies outlined in the contract. Here, the landlord will disclose the insurance monies that they receive by reinstating the property or its damaged element. The landlord’s covenant will usually be caveated so that the landlord is not required to do so until it has received the money and obtained all necessary consents to enable it to do so. Often the landlords will have outlined that they won’t provide identical replacements in terms of accommodation/facilities provided that it is similar to what was there before the damage. The tenant should aim to get the landlord to lay out the insurance monies as soon as possible, making good of any shortfall at its own cost.


It is worth noting that landlords aren’t commonly required to repair or rebuild if the tenant hasn’t paid the appropriate insurance monies that were due. The lease will usually also set out detailed insurance covenants relating to the use and occupation of the property, which the tenant must comply with. This part can be tricky so it is always best to seek the advice of professionals who can help you in this situation whether it’s an independent insurer or your commercial property agents who assist on the property.


Do I Still Have to Pay Rent in The Event of Damage?


This will all depend on what is outlined in the lease contract. In the eventually that the damage is caused by an uninsured, the rent will still be payable irrespective of whether the premises are fit for use. In addition, the lease will need to insure the loss of rent for a fixed period of time – this is often 3 years with commercial premises. If the property is damaged/destroyed by an insured risk making it unfit for occupation, the lease will state that the rent will be suspended for the period.


Please note that most cases will vary on the terms and conditions of the lease. This article should be used for guidance only and not reliance. If you are unsure of your position, you should consult with your legal team or get advice on your specific case.