During the sparring that normally occurs between landlord and tenant when negotiating the terms of a lease, the issue of who is responsible for damage and destruction caused by uninsurable risks has traditionally been a notoriously sensitive subject. After all, who wants to be responsible for reinstating premises when insurance monies are not available!
In a standard tenant’s full repairing commercial lease a landlord would generally accept the following:-
Given the above, a tenant might mistakenly assume that so long as the landlord is to insure leased premises, their interests will be adequately protected if the premises are damaged or destroyed.
First, it is likely that the risks which the landlord must insure against will be qualified by reference to specific risks e.g fire. Second, it is likely that liability for insuring specific risks will be subject to insurance cover being not only available, but also on economic terms. The result: premises may not be covered for uninsurable perils or only on uneconomic terms. In such circumstances, and in the absence of contrary provisions, the consequences of such risks effectively passes to the tenant.
Code for leasing business premises in England and Wales
For a number of years tenants have managed with greater or lesser success to share the burden which might arise from an uninsurable risk. As the threat of the sorts of risks which might become uninsurable (such as terrorism, flooding and subsidence) has increased in recent times, the stakes have increased.
Recently, however, the tenant’s bargaining position on uninsurable risk has been greatly strengthened by the Code for Leasing Business Premises in England and Wales, published in 2007. The Code is recognised by the commercial property industry and is aimed at promoting greater fairness between parties in commercial leases. One of its recommendations is to shift the burden of insurable risks away from the tenant.
Essentially in respect of uninsured damage, the code recommends the following: -
Tenants should be entitled to terminate the lease if they can no longer use premises following damage by insurable risks, unless the landlord agrees to reinstate at its own cost.
Rent suspension should apply, following damage by an insurable risks as well as damage by an insured risk.
In essence the Code shifts risk of damage by an uninsured risk onto the landlord.
Although the code is still only voluntary, it carries considerable weight in negotiations, not least because Government is threatening to make its provisions mandatory if its recommendations are not generally followed.
In conclusion
Although negotiating the terms of uninsured risk remains to an extent dependent on the relative bargaining strengths of the parties, the Code provides the tenant with a powerful negotiating position. If the landlord will not accept liability for the entirety of uninsurable loss, a reasonable compromise can then often be struck.
For more information or advice on the risks involved in unisured damage, please contact Mark Miller in the commercial property team.
