Uninsured Risks: A Tenant’s Guide

Jeremy Pow

Most leases of commercial premises oblige the landlord to insure the building against a specified list of insurable risks, usually including fire, explosion, storm and so forth, subject to cover for such risks being available upon reasonable terms in the insurance market. The examples of such risks which can be subject to particular terms or prohibitive premiums that are frequently highlighted are terrorism and flooding (although the latter is less relevant in London as at June 2018).

In addition to this, in a full repairing and insuring lease, the tenant tends to be responsible for maintaining the premises in good repair with an express exclusion of damage caused by insured risks. Accordingly, where damage has been caused by an insured risk, the tenant need not repair that part of the premises.

A lease of commercial premises should also contain provisions dealing with the obligations of each of the parties following damage or destruction of the premises, or the building in which the premises is found. More often than not, these provisions will enable the parties to bring the lease to an end in certain circumstances and provide for the rent to be suspended whilst the damage to the premises (and/or the means of access to it) is rectified.

Many leases contain no express provisions dealing with damage caused by risks which the landlord has not insured against, often referred to as “uninsured risks”.  The absence of such provisions can place the tenant in a difficult position if damage to the premises by an uninsured risk occurs. Usually only damage resulting from an insured risk is excluded from the tenant’s repairing obligation under the lease. Consequently, if there is damage to the premises by an uninsured risk, the tenant would be responsible for repairing all damage to the premises caused by such a risk. Where substantial damage, or even destruction, has occurred, the costs to the tenant can be significant.

When negotiating a lease, it is prudent therefore for a tenant to seek that damage or destruction by uninsured risks are excluded from the repairing obligations of the tenant under the lease. Whether the tenant will be able to secure such an exclusion will depend very much on the respective bargaining powers of each of the parties.

This exclusion should also extend to the service charge contributions to be made by the tenant under the lease to avoid the landlord attempting to recover the costs of rectifying the damage via this avenue.

As most landlords (perhaps quite sensibly) are unlikely to assume any obligation to the tenant to remedy any damage by uninsured risks, the tenant should also seek to include an ability in the lease to terminate the same should the landlord fail to elect to reinstate the premises (and/or the means of access to it) within a certain time frame. Furthermore, if such an election is made, the landlord should be under a duty to complete the works within a certain period, otherwise the ability for the tenant to terminate should kick in again. Whilst the landlord is coming to a decision about whether to reinstate and/or any remedial works are being undertaken, the rent should be suspended, in much the same way as if damage by insured risks had occurred.

For more information, please contact a member of our Property Department.

Jeremy Pow

07.06.2018

By |2018-08-24T14:37:11+00:00June 7th, 2018|Latest, News/Blog, Property|Comments Off on Uninsured Risks: A Tenant’s Guide