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Lease Overview: Insurance

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Part 5 – Insurance

The landlord will always want to protect the capital asset that is the building so will take out their own buildings insurance.  However, it is generally expected that the tenant will pay the cost of this.  The tenant will also have to pay the excess on any claims made.  The tenant remains responsible for taking out their own contents insurance and whatever business insurance they feel necessary, to include public and employer’s liability insurance. 

The lease will oblige the landlord to act reasonably in taking out the policy but will also oblige the tenant to take the necessary actions to comply with the terms of the insurance.  In the event of damage occurring to the property, there should be provision for the rent, or a proportion part of it, to be suspended whilst the tenant cannot use all or part of the property.  For this reason, landlords commonly purchase ‘loss of rent’ insurance, at the tenant’s expense, so that their income stream is not affected.  If the damage is very significant or even total, the lease may contain provision for the lease to be brought to an early end. 

The lease will be very explicit about the risks that the policy must cover.  It should be made clear that if the damage is caused by an insured risk, it is the landlord’s responsibility to repair it, using the insurance proceeds.  What is less clear is what happens if damage is caused by an uninsured risk and this is often a cause for contention during the lease negotiations. 

In this series of articles, we are aiming to give you a brief overview of the principal areas covered by a commercial lease.  These articles are for guidance only and do not represent legal advice.  If you need advice or assistance on leases or any other property concern, please do not hesitate to contact Andrew Rannie, Head of the Property Department for a free initial consultation.