Understanding Leases & Insurance
A client recently approached us with a specific question on what insurance is needed when investing in a newly leased building. The business was about to incur costs of around £500,000 to fit-out their premises, as a new state-of-the-art childcare setting, they needed a better understanding of leases and insurance.
The client had recently completed a lease of their premises and so as tenant needed to understand what insurance they were required to put in place.
Although the insurance requirements for tenanted properties need individual consideration, we have collated some thoughts for you to discuss with your landlord and insurance provider.
Leases & Insurance: Who should insure the refurbishment costs whilst the work is being completed?
The tenant who is instructing and paying for the work to take place should speak with their contractor to decide if the contractor is insuring the project or the tenant needs to do this. It should be noted that the landlord has no obligation to insure the works.
If the contractor has agreed to insure the refurbishment, we recommend you obtain a copy of their insurance documents. These can be checked and verified by your insurance provider to ensure adequate cover is in place.
If the tenant is responsible for insuring the works, they will need specific Contract Works insurance cover. This is required from the date the work starts up to completion. The amount to be insured must equal the value of the entire contract.
When the £500,000 renovation work is completed, should the insurance be the responsibility of the Tenant?
Yes, the tenant should add Tenants Improvements cover to their policy, the sum insured should be the cost of the entire refurbishment. From our experience, this cover is often omitted. However, if you have spent a substantial amount of money on a refurbishment, not having Tenant Improvements protection in place significantly weakens your insurance.
Leases & Insurance: How does a Tenant ensure the Building sum insured is adequate from a rebuilding perspective?
If you occupy a leased premise you are often not required to insure the building as that would be the responsibility of the landlord. However, it is worth checking your lease to understand both your obligation and that of the landlord.
As a tenant, you need to know if the building is adequately insured on a reinstatement basis. In simple terms if there is an incident and the building is significantly damaged, will the landlord’s insurance cover the cost to rebuild the premises? If the building is not suitably insured this will have a major effect on your own claim, especially in terms of loss of revenue. Simply put, if the landlord cannot rebuild the premise, you cannot reopen the nursery.
A rebuilding sum insured must include costs for demolition, site clearance, rebuilding the premise in exactly the same materials as the original structure, professional fees (architects etc.) and additional costs such as VAT, if the landlord is not VAT registered.
If the tenant feels the sum insured is insufficient then they would need to request a copy of the rebuild valuation from the landlord. If there is no valuation then the tenant could obtain one for the purposes of verifying or disputing the insured sum insured. Unfortunately, many leases do not put any obligation on the landlord to ensure rebuilding sums insured are accurate or regularly reviewed.
A RICS compliant Reinstatement Cost Assessment (RCA) is the most reliable method for determining a building’s insurance rebuild value. You can obtain an RCA from a Royal Institute of Chartered Surveyors qualified surveyor, The RICS website has a find a surveyor section, or your insurance provider may be able to recommend one.
Do you understand your Insurance obligations under your lease?
Each lease will detail what your insurance obligations will be. These can be:
- You are responsible for the insurance even though you don’t own the property
- You are responsible for insuring any upgrades you have completed at your cost (Tenants Improvements cover as outlined above).
- You are responsible for insuring the interior decoration.
You must understand your obligation and arrange insurance accordingly. However, it is also important to protect your assets and costs.
It is worth remembering that leases are often written to benefit the landlord, so as a tenant you need to make sure you have read and understood your lease and your obligation when it comes to insurance. If you are unsure, speak with your insurance provider who may be able to offer guidance.
There is also a silver lining to be aware of. If a claim occurs and the landlord decides not to rebuild the premises which can happen in the terms of the lease, some insurers will allow you to move to a new location and their Tenants Improvement insurance would fund the fit-out of a new nursery up to the value of £500,000. It is certainly worth checking if you have Tenants Improvement cover in place.