Who insures? An introduction to insurance under a commercial lease.

27 September 2018

The news headlines have been dominated by stories of the Bank Buildings engulfed in flames and at risk of collapse. The Bank Buildings was constructed in 1785, having withstood not only the 1941 Blitz but also three bomb explosions in 1975. Whilst discussions continue regarding the structural integrity of the building, Associated British Foods plc (Primark’s parent company) has confirmed that the building is covered by a policy of insurance and this should prompt property owners, landlords and tenants to consider their responsibilities when it comes to insuring their building or business premises.

Who insures? An introduction to insurance under a commercial lease.

In Northern Ireland a large proportion of commercial and retail units are held under commercial leases. A commercial lease contains a number of obligations of which one will relate to the insurance of the building. As the landlord’s interest in the building is greater than that of an occupational tenant, they will usually retain the responsibility of obtaining insurance. Where the landlord insures, the tenant will usually be expected to reimburse the full cost of that insurance policy (or a fair proportion of the costs where they occupy part of the building). It is unlikely that any policy of insurance will extend to the tenant’s contents, fixtures or fittings. Therefore, a tenant should arrange its own contents insurance and may be expected to obtain public liability insurance, employer’s liability insurance and insurance for the plate glass in the premises.

Any building insurance policy should cover the full cost of repairing or reinstating the building. It is not sufficient for the insurance policy to simply cover the market value of the building as this may differ substantially from the costs of reinstating the building. A landlord will usually insist that in addition to the rebuilding cost, the value of the policy includes any costs associated with clearing the site, instructing architects and other professionals and obtaining statutory consents. Whilst this may inflate the price of any such policy, it will help to ensure that no additional costs associated with the rebuilding works filter down to the tenant directly or through the service charges.

A well drafted commercial lease will include an obligation for the landlord to insure against a number of specific risks. Such risks typically include fire, earthquake, storm, flooding, riot and impact by vehicle or aircraft but may not extend to terrorism. It is important that the risks insured against are as comprehensive as possible as the tenant may find themselves responsible for repairing damage or destruction caused by an uninsured risk under the repair provisions in their lease.

A lease should include a mechanism for the suspension of rent where the building is damaged or destroyed by a specified risk. Where a tenant is leasing part of a building, it is vital that the suspension of rent is linked to the damage or destruction of the building and not just their premises. If the suspension of rent was linked to the tenant’s premises only (as opposed to the building which the premises form part of), the tenant’s obligation to pay rent would continue even if their premises were unfit for occupation. A tenant should also ensure that any clause dealing with the suspension of rent extends to the suspension of the service charge and additional costs payable under their lease.

It may seem unusual to consider the damage or destruction of the Landlord’s building or the Tenant’s premises when entering into a lease. However, the blackened sandstone façade of the Bank Buildings stands as a reminder that this eventuality is not outside the realms of possibility.

Michael Press is a solicitor in the commercial department at Worthingtons Solicitors, Belfast with experience in a broad range of property transactions including commercial leases, acquisitions and disposals and residential conveyancing. He can be contacted at michaelp@worthingtonslaw.co.uk or on 028 9043 4015.


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