Most leases require the landlord to insure the property to cover risks such as fire, earthquake or storms and the tenant to be responsible for repairing the whole of the property let to them. The tenant’s repair obligation is usually limited to exclude damage by a risk that the landlord has insured against. So if a property is damaged or destroyed by any one of these risks, the lease explains who is responsible for repairing the damage and at whose cost (usually via an insurance claim). However some leases don’t deal with what happens if the property is damaged or destroyed by uninsured risks which can lead to disputes between landlords and tenants.

Dealing with uninsured risks is not a new issue for the commercial property market in the UK. Threats such as damage by flooding has meant increased premiums and insurers are increasingly withdrawing flood risk from their insurance policies. But how should a landlord and tenant deal with this in the lease?

If the tenant’s repair liability isn’t limited, they will remain responsible for the cost of carrying out any repair or reinstatement works required including the repair and reinstatement works caused by an uninsured risk. The tenant may also remain responsible for paying the rent for the property during the period that the property cannot be used because of the damage caused. However a landlord will want to take measures to ensure that their property will be protected. There therefore needs to be a balance between the tenant’s concerns and protecting the landlord’s property.

Tenant’s Concerns

Tenants should bear the following in mind when negotiating the lease and uninsured risks provision:

  • The cost of repairing any damage caused by an uninsured risk should be excluded from the tenant’s responsibility. However the tenant would remain responsible for any damage caused to their own contents or fixtures and fittings.
  • Rent and service charge (if any) should be suspended if the property is damaged by an uninsured risk.
  • It will be the landlord’s decision whether they want to repair the property. If they do want to repair, any repair works should be at their own cost. However if the landlord is paying to repair the damage, they will want to make sure they still have a tenant once the works have been completed. It is therefore often agreed that the landlord will have a certain period to decide whether they want to reinstate and the tenant will not be able to terminate the lease until this decision has been made. If the landlord does decide to reinstate, they will again have an agreed period within which to carry out these works. If the works are not carried out by the end of the agreed period so that the property can once again be used, the tenant ought to have the opportunity to terminate the lease and move to alternative premises.  The tenant may need to make alternative arrangements to continue trading while the property cannot be used.

Landlord’s Concerns

Landlords should bear in mind the following:

  • The risks against which the landlord must insure should be qualified to the extent that those risks can be insured at reasonable rates and on reasonable terms.
  • The landlord should not be obliged to reinstate as there will be no insurance claim and insurance proceeds to use. Therefore the decision whether to reinstate should be the landlord’s. The decision should be made within a time which allows the landlord to assess the damage and source funding. The tenant should have no ability to end the lease so long as the landlord elects to reinstate and has not failed to complete the reinstatement by an agreed date. Many landlords will need the certainty of having the tenant in place to justify the reinstatement cost and secure the necessary funding.

For advice on a lease, whether you are a landlord or a tenant, please give us a call on 0116 289 7000.

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