Leasing commercial property often plays a key role in a business’s operations. With commercial leases comes some inherent risk, and one of those risks is uninsured risks.
In this blog post, we’ll look at what uninsured risks are, their implications of them, and what steps you can take to protect yourself as a tenant when it comes to commercial leases.
When it comes to insuring commercial property, it is frequently the case that landlords will be responsible for arranging a building’s policy. This allows them to ensure that their interests in the property are properly protected. The tenant will then usually reimburse the landlord for the cost of insurance in addition to paying rent.
But what about risks that are not covered by standard insurance policies? So-called ‘uninsured risks’ give rise to a grey area – particularly regarding the responsibility for repairs. Older Leases failed to address uninsured risks head-on. Examples of uninsured risks include damage to the property caused by natural disasters, theft, and vandalism or risks for which the Landlord is unable to obtain insurance due to the location of the Property, e.g., flood history.
Where a lease does not provide for such eventualities, the tenant would, by default, be responsible for reinstating the property and making good the damage caused by the uninsured damage. This can be financially devastating for the Tenant, as the tenant may be liable for the full cost of repair or replacement. Furthermore, the tenant is likely to still be obligated to pay rent during any period they are unable to occupy the premises as this would not fall within the Rent Suspension provisions found when dealing with Insured Risks.
Fortunately, there are ways to protect yourself as a tenant when it comes to uninsured risks, and it is not uncommon for tenants to now request that uninsured risk is specifically addressed in the lease. Whilst it is recommended by the RICS that tenants should be permitted to terminate their lease if the property is damaged by an uninsured risk unless the landlord agrees to reinstate the property at its own cost, this is not yet common practice. During negotiations, uninsured risk drafting should be carefully drafted, and the party’s responsibility for and level of liability should be clearly stated. The tenant, for instance, will want to bring in rent suspension provisions with an option to terminate in the event of a prolonged period through which they are unable to occupy the premises due to uninsured risks outside of their control. The landlord will want to carve out an uninsured risk occurring as a consequence of the tenant’s actions or neglect.
Tenants should, as part of pre-lease negotiations, ask to see a copy of the landlord’s insurance policy so they can be aware of what risks are covered and what risks are not. In addition to this, tenants may wish to consider purchasing a tenant’s liability insurance policy, which can cover the risks that are not covered by the landlord’s insurance policy in addition to the specific drafting issues discussed above.
The Commercial Property team at O’Donnell Solicitors can provide expert legal advice and assistance in lease negotiation and drafting and advising both Tenants and Landlords about rights and responsibilities within the Lease. The result should be a lease which is fair and clear as to its practical meaning and effect for both parties, albeit where necessary, more robust negotiation may be required depending on the context of the deal and pre-lease due diligence. Our team frequently act for both Landlords and Tenants in commercial property matters, whether held personally or through corporate SPVs or in a Pension Fund SSAS or SIPP. We also deal with industrial sales and acquisitions, land options and overage, including conditional purchases subject to planning as well as JV Agreements on development land.
Contact James O’Donnell or Julian West at our commercial office in Grasscroft to learn more about how we can help you.