Commercial Property Insurance

Commercial property insurance is a highly technical area and desires to be grasped by freehold owners, landlords and tenants and occupiers alike.

For freehold owners, it is just a question of generating sure that the proper risks are covered. These include things like the usual commercial risks but also third party liability. If the premises are in inner city area terrorism insurance must also be integrated. You will need to get the suggestions of a surveyor or valuer to make certain that the reinstatement value is accurate.

For leasehold properties, both landlord and tenants need to have to get their heads about a whole host of issues and this is what this write-up focuses on. The insurance provisions in a typical lease are discovered about two-thirds of the way by way of the lease just after the Landlord's covenants. Most leases would oblige the Landlord to insurance the premises recouping the expense of the premiums from the tenant or tenants in a multi-let building.

The Landlord wants to insure given that it means the landlord can make sure that his investment is protected. It is too risky to let the tenant to ensure and then uncover out later that the tenant has either not been insuring or has insured for less than the reinstatement value.

The Landlord covenants to insure the developing in the complete reinstatement value against the usual commercial risks. Reinstatement value is ordinarily determined by annual insurance valuations. It is essential that the Landlord uses a surveyor for this considering if the insurance proceeds are insufficient to reinstate the constructing or premises, most leases oblige the landlord to make any shortfall out of the landlord's own monies.

The insured risks would normally contain loss or harm by fire, explosion, flood, tempest, storm, lightning, impact from aircraft and vehicles, bursting of tanks. If you are a tenant you really should also get subsidence landslip and heave added to the insured risks. These risks are ordinarily covered for most commercial policies but leases for some reason do not include things like these risks as common in the definition of "insured risks".

The landlord will also insure against loss of rent. The period varies from two to three years and is supposed to cover the time it would take to fully reinstate the building in the event of total destruction or damage. The insurance provisions will also include things like a provision providing that in the event of damage or destruction to the constructing such that the building cannot be occupied or utilized by the tenant, then the rent is suspended (but not commonly the service charge) for the loss of rent insurance period. The ideal for a tenant here would be that the rent would be suspended until the creating is reinstated such that it is fit for occupation and use by the tenant.

The lease ought to include an obligation on the landlord to lay out all insurance monies received in reinstating the constructing. You would not want the landlord pocketing the income and terminating the lease. There are regularly provisos to this reinstatement obligation stating that if the landlord is unable to reinstate for whatever reason then either party can terminate the lease. This is typically soon after a lengthy period of time say 2 to three years despite the fact that a tenant would possibly want this suitable of termination to kick in as soon as becomes apparent that the landlord can not reinstate the building.

The tenant's repairing obligation in relation to the premises would normally state that harm by insured risks are excepted from the tenant's obligation so if the premises is damaged by an insured threat then the tenant is relieved of the obligation to repair the premises. Still, this wording is frequently qualified to state that if the creating was damaged or destroyed due to the tenant's fault then this does not apply and the tenant would then be obliged to reinstate out of its own monies. This could be catastrophic for a tenant who would not be in a position to claim on any insurance policy of its own for the reason that the tenant would not commonly double insure the constructing it is occupying. Some tenant's solicitors try to amend this so that the tenant is only liable to repair the uninsured harm to the extent that the damage was the fault of the tenant so that if the landlord is partially responsible, the landlord will bear a proportion of the liability and so some of the insurance proceeds will be out there.

What takes place if the lease is terminated due to the fact it is not feasible to reinstate the building (say the landlord could not obtain preparing permission)? Who gets the insurance proceeds? Most leases would produce that the landlord gets to keep all of the insurance proceeds but it would be fairer if the insurance proceeds are divided up in accordance with the value of the landlord and tenant's interest in the creating. Whilst more fair to the tenant, I pity the valuer/surveyor who has to value that without any guidelines. Does the tenant have an interest in a lease below which it pays a full open industry rental? Certainly, this is classified as a liability rather than an asset?

An additional question which a tenant really should focus on is if the rent is suspended whilst the constructing is destroyed or damaged what about exactly where the tenant has just paid 3 months in advance. Really should the landlord be allowed to sit on what could be a substantial sum of money whilst everyone waits for the creating to be reinstated? A tiny amendment to the lease can supply that in the event of the rent getting suspended just after damage or destruction, then any monies paid in advance by the landlord need to be refunded. The obligation to pay rent in advance will kick in again as soon as the rent suspension is ended.

Most leases offer that the landlord ought to insure the building with trustworthy insurers. In these rocky times with awesome giants like AIG teetering on the brink of collapse what constitutes a reliable insurer is not so straightforward an concern as it used to be.