Commercial Leases - The Importance of Negotiating Insurance Provisions
If commercial premises are damaged to the extent that the tenant is unable to use the premises, then you would think that the tenant would expect a rent break. In such circumstances a landlord would look to rely upon their insurance to cover any loss of rent and to cover the cost of the damage where possible. The provisions on what happens in these circumstances are set out in the lease.
Full Repairing and Insuring Lease (FRI)
Many commercial landlords and tenants agree to a full repairing and insuring lease, where the tenant takes on the costs of repairing and insuring the premises. In practice, the landlord will be responsible for arranging the insurance and the associated costs are then passed onto the tenant.
Typically, the landlord will be obliged to insure the premises for its full reinstatement value against several ‘insured risks’, as defined in the lease. These ‘insured risks’ usually provide cover for items such a fire, explosions and flooding, although some items may be subject to an excess.
Moreover, the landlord should insure for loss of rent for a certain period – ordinarily 3 years. Where the premises have been damaged and the tenant is therefore unable to use them, then the tenant can request a rent break and the landlord would then claim upon this insurance.
There are often items outside these defined ‘insured risks’ that the Landlord is not responsible for insuring. There may be times when a certain risk cannot be covered due to a policy exclusion, or it may not be commercially available. It is important to review the lease terms carefully, as the tenant could be left with responsibility for reinstating the premises and making good any damage caused by the ‘uninsured’ risk.
Tenants’ obligation to repair
As mentioned above, under an FRI lease, the tenant is required to repair the premises, but where the premises are damaged by an insured risk, an insurance claim can be made. An exception to this is where the insurers refuse to pay out due to the damage being caused by the tenant. In this case, then often the lease will provide for the tenant to reimburse the landlord for the amount the insurers refuse to pay.
Reinstatement and repair by an Insured Risk
Following any damage caused by an insured risk and a successful insurance claim, the landlord will be obliged to carry out the necessary repairs to the premises. The lease will set out a timeframe for when these repairs should be undertaken and what happens where the building or damage cannot be reinstated or repaired. For example, the lease might provide that after 3 years, each party is entitled to terminate the lease. It is important that any rent break coincides with this timeframe, as a matter of law rent is still ‘due’ under the lease.
Quite clearly, where such damage occurs each party’s commercial perspectives will differ. The tenant may wish to find another suitable premises to trade from whereas the landlord might not wish to have empty premises. For this reason, it is important to agree upon what happens in these circumstances.
So, to avoid any disputes over reinstatement or repair, it is important make clear at the outset how any insured and uninsured damage is to be dealt with, including who is responsible for repairing the damage, covering the associated costs and how long each party is prepared to wait for the damage to be repaired. This will wholly depend on each parties’ individual circumstances and their bargaining power.