Insurance of commercial premises – issues for landlords and tenants

Insurance provisions in leases


What do leases of business premises say about insurance?

Commercial leases usually require the landlord to insure the premises and the tenant to reimburse the premium (or a fair proportion of the premium in the case of a lease of part of a building).

Buildings insurance and loss of rent insurance

The landlord will maintain buildings insurance against a comprehensive list of risks (fire, theft, earthquake, etc). The cover should be for the full reinstatement value, including the cost of demolition and professional fees. The landlord’s insurance policy usually also includes cover for loss of rent in the event that the premises are destroyed or damaged and cannot be used by the tenant.

What happens if the premises are damaged or destroyed by an insured risk?

If the premises are destroyed or damaged by an insured risk, the tenant can expect the landlord to make an insurance claim and proceed with reinstatement. The tenant’s rent is usually suspended until the premises have been reinstated or until the landlord’s loss of rent cover is exhausted (whichever happens sooner).

What about damage caused by a risk that is not insured?

Things are not so straightforward when it comes to damage caused by uninsured risks. A risk may be “uninsured” because the lease does not oblige the landlord to insure against it (this sometimes applies to terrorism) or because an exclusion or limitation in the landlord’s insurance policy means the risk is not covered.

If a lease is silent on uninsured risks, any uninsured damage has to be repaired by the tenant as part of its repairing obligations and there is no rent suspension. This is generally felt to place an unfair burden on tenants and many leases now include drafting to cover uninsured risks.

Typically, a lease with uninsured risks provisions will state that damage caused by an uninsured risk need not be repaired by the tenant (unless the tenant has caused the damage) and that the tenant will benefit from a rent suspension until the landlord has repaired the damage. The tenant is likely to be given an option to terminate the lease if the landlord does not carry out the repairs.

Impact of the Lease Code

The Code for Leasing Business Premises in England and Wales 2007 is a voluntary code of practice adopted by some commercial landlords. The Code advocates including uninsured risks provisions in leases. The Code is discussed in more detail elsewhere in these information pages.

What insurance does the tenant need?

The landlord’s insurance is not likely to cover the tenant’s contents. The tenant should arrange its own contents cover and may also require employer’s liability insurance, public liability insurance and business interruption cover.
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