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Dealing with Uninsured Damage to Commercial Premises

Damage to Premises caused by Uninsured Risks

Damage or destruction cause by an uninsured risk

A standard commercial lease requires the landlord to insure the premises against a long list of “insured risks”. However, some risks will not be covered by insurance. What happens when the premises are damaged or destroyed by a risk that is not insured?

Uninsured risks

A standard insuring covenant will state that the landlord is not required to maintain insurance against a risk that is within the definition of “insured risks” if cover is excluded by the insurer or if cover cannot be obtained on commercially acceptable terms.

In addition, some risks may not appear in the definition of insured risks. A common one is damage caused by terrorist activities.

If damage is caused by one of these “uninsured” risks, the provisions of the lease which apply to damage caused by insured risks (regarding repair, reinstatement and rent suspension) will not apply.

If the lease is silent on uninsured risks

If the lease does not contain express provisions dealing with uninsured risks, the burden will fall on the tenant. The tenant will (in theory) be required to repair the damage at its own cost and rent will continue to be payable even though the premises may be unfit for use.

This is increasingly felt to be unfair to tenants. A well advised tenant will therefore push for “uninsured risks” provisions to be included in the lease, placing the risk of uninsured damage on the landlord.

Tenants are supported in this view by the Code for Leasing Business Premises in England and Wales 2007, a voluntary code of practice adopted by some commercial landlords. The Code advocates including uninsured risks provisions in leases. Information about the Code can be found elsewhere in these information pages.

If the lease contains uninsured risks clauses

If the lease makes provision for uninsured risks, the risk will be placed on the landlord rather than the tenant. Generally, the thrust will be:

• The landlord will either be required to repair the damage at its own cost or will have a short period (e.g. 3 or 6 months) in which to decide not to carry out repairs.

• The tenant will not be required to repair damage caused by an uninsured risk

• The tenant will benefit from a rent suspension while the premises are unfit for occupation.

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