Often in the event of claim insurers request a copy of your lease. This is when your legal obligations in respect of what insurance you should have arranged are appreciated. However, this can sometimes be too late, resulting the insurer not being able to make a full settlement.
So what should you know, when you are arranging your insurance and why is this important?
What insurance provisions are dealt with in a commercial lease?
A lease will state what type of insurance is to be obtained. Who is responsible for obtaining it and who is responsible for the cost of it.
Typically, the landlord will insure the building and any loss of rent in the event of an insured event, such as a fire, flood or burst pipe. In these circumstances the lease will also state that the insurance premium will be reimbursed by the tenant. That being said, it is not uncommon for a lease to stipulate that it is the tenant’s responsibility to insure the building. If so, they will also need to note the interest of the landlord on the insurance policy.
Irrespective of who insures the building, when setting the sum insured, it is critical that an accurate reinstatement valuation is obtained. This should take place at least every three years to avoid any underinsurance. Leases are usually drafted on behalf of the landlord to protect their interests. Therefore, if the tenant is responsible for insuring the building, it is highly likely there will be a clause requiring the tenant to obtain the reinstatement valuations. The potential consequences of a tenant not correctly insuring a building are:
- The cost of the repair to the building may not be fully met by the insurance claim leaving the tenant to pay any shortfall.
- There will be a delay in restoring the building and also options to reopen could be significantly affected.
- There will be a breach in contract as the obligations of the lease have not been met.
If the landlord is responsible for the insurance of the building, unfortunately there will not be the same obligations within the lease to ensure the building sum insured is accurate. However, the risks of 1. and 2. detailed above are still an issue to you as a tenant. It is worth asking your own legal advisors to review your leases to ensure they meet your needs as well as the landlords.
Tenants Improvements
Unfortunately, Tenants Improvements cover is often omitted when insurance is placed. This is needed to protect the funds you have invested into the property. In addition, what you are responsible for as tenants under the terms of your lease, such as redecoration costs. Often when nursery owners convert a building into a nursery from a previous use such as office, public house, residential property, it is not unusual for the costs to be significant. We have dealt with some clients that have spent in excess of £1 million. It is vitally important that this work is reviewed in accordance with your lease. This will determine which part of the renovation works falls under the landlord’s building responsibility such as replacement windows. However, adding children’s toilets or replacing a kitchen and flooring generally remains the responsibility of the tenants to insure. This will be covered under a Tenants Improvements sum insured.
Acquisitions
Issues with claims can often arise following an acquisition of an existing nursery operation and a lease is inherited. When the acquisition takes place, it is not always clear what work the previous tenants had carried out in respect of changes to the building. These changes can have occurred over many years and unknowingly transferred to the new tenant under the terms of the existing lease.
The Tenants Improvements sum insured under the above circumstances can be difficult to calculate. It is therefore advisable to either agree a new lease or have an addendum to the existing lease clarifying who needs to insure what.