Severe damage to or destruction of demised premises can cause enormous problems for both a landlord and tenant. The landlord's investment could be affected if the premises are under-insured, and the tenant's trade will, of course, be disrupted in respect of commercial premises. It is therefore essential that insurance provisions in commercial leases are carefully and properly worded.
The premises must be insured to their full reinstatement value from time to time during the lease term. Under-insurance, and a poor landlord, could result in problems in reinstatement, including delay. It is also essential to ensure that where the premises form part of a larger building or a shopping centre, the building (or the shopping centre) should also be stated in the lease as being insured, as the tenant would wish the whole of the building to be reinstated in the event of damage or destruction and not just the premises.
Although unlikely the landlord would do otherwise, a prudent tenant may wish to include in the insurance provisions reference to the insurance being effected by a reputable insurer or with an underwriter of repute.
The landlord should also ensure that the usual risks are insured against and that none are omitted. Terrorism, for instance, is now considered to be an important risk to cover. This will also be important to the tenant, as the suspension of rent provision in a lease invariably refers to the rent being suspended if the premises are damaged or destroyed by an insured risk. The tenant may endeavour to include the words "or otherwise" after "insured risk", but this is unlikely to be accepted.
As regards the suspension of rent provisions, the tenant should be wary to ensure that there is no limitation on the period of the suspension of rent. Sometimes this is restricted to a three year period, but there could be planning and other reasons why the premises cannot be reinstated within the three year period. If so, then the tenant would have to start paying rent again for premises that it is unable to occupy. In addition to the yearly rent being suspended, the tenant may wish to make reference to service charges (where applicable) also ceasing until the premises are again available for occupation and use. The tenant may also wish to include a provision enabling it to determine the lease if the premises have not been reinstated in, say, three years from the date of the damage or destruction. A retail tenant, for instance, may decide that it is time to seek other premises. There may, in fact, be a provision that either party may be entitled to determine the lease if it has not been possible to reinstate the premises within a stated time. In the event of determination, it is only reasonable that the proceeds of insurance should be retained by the landlord and not divided between the landlord and tenant, and it would be advisable for the determination provision to state this.
The tenant should also be protecting any rent free period that may have been granted at the commencement of the lease and which period may not have expired by the date when the damage or destruction occurred. This will involve amending the cessation of rent clause to provide that the period of suspension of rent should be extended for a period equal to the balance of the rent free period that the tenant was unable to enjoy because of the damage or destruction.
A useful provision for a tenant to ensure is inserted is that the landlord will forthwith on any damage or destruction occurring submit a claim under the insurance policy and use its best endeavours to obtain as soon as possible all planning and other consents necessary to reinstate the premises and, indeed, to proceed to reinstate as soon as all such consents are to hand. Any delay can be costly.
The tenant may also try to have included in the insurance provisions an obligation on the landlord to procure that the interest of the tenant is noted or endorsed on the insurance policy to avoid subrogation. An alternative is to provide that the landlord obtains from the insurers a waiver of subrogation rights. Subrogation can occur where the insurer pays out money to the landlord under an insurance policy and is subrogated to any rights the landlord may have against the tenant for breaches of covenant, which may have given rise to the damage or destruction.
Insurance provisions in commercial leases also usually include covenants on the part of the landlord to produce to the tenant a copy of the policy or reasonable evidence of the terms of the policy, which is useful from the tenant's point of view. The covenants may also include a provision requiring a landlord to notify the tenant of any change in the risks covered by the policy from time to time, as well as any changes in the terms of cover.
Insurance provisions in commercial leases are accordingly extremely important and worth careful consideration. For advice on this or any matter concerning commercial leases, please contact Robert Sweet.