The standard terms of the majority of commercial leases require that the Landlord insures the property and that the tenant must repay the cost of this through means of the “insurance rent”. This insurance usually takes the form of a number of insured risks which are agreed upon in the lease, along with three years loss of rent. The landlord will also insure the property for what they believe its reinstatement value to be.
Many tenants feel that this leaves them at a disadvantage as landlords are not required by the lease to shop around for the best deal, and given that they have no financial “skin in the game” are more often than not, not inclined to do so, leaving their tenants invariably out of pocket.
The reason why the landlord insures is simple; as it is the Landlord’s property, the Landlord wants to ensure that their investment is adequately protected. Furthermore, where the property be part of an industrial estate or office block the Landlord will need to insure the area as a whole or in conjunction with any other properties that the landlord owns. In such circumstances, the tenant will then have to pay a percentage of the cost of the insurance premium. This is usually defined in the lease as a fair percentage; however it may be prudent for tenants to specify a percentage of the premium that they will pay. This would mean that should the landlord fail to let all of the units on the estate or in the building, the tenant’s insurance premium would not increase. It does, however, run the risk that should the landlord expand the estate or add additional properties to the policy, the tenant may then be paying over the odds. Therefore, it is worth considering a clause whereby the tenant pays a fair proportion of the premium but that this does not increase if the landlord does not let all of the units.
There are instances where it is considered more appropriate for the tenant to insure a building. This is when the lease is for a whole building and over a long period of time and, as a minimum, landlords will require that the property is insured in both the name of the landlord and the tenant and that a copy of the policy is provided to the landlord.
Tenants should also consider carefully if they are adequately protected should the property be damaged or destroyed by an insured risk and the property is not fit for occupation. In such circumstances, a tenant will at the least want to ensure that there is a rent suspension for that period and ideally a clause allowing them to end the lease early if the landlord has not rebuilt or repaired the property within a set timeframe.
It is also important to remember that whilst the landlord will be responsible for insuring the property, tenants will need to make sure they have their own cover for plate glass and contents.