As a tenant of commercial premises, you hope that it will never happen to you, but what are your rights and obligations if your premises have been damaged or destroyed by fire, flood or another insured risk?
Below is a brief guide to some of the key points to consider in a commercial lease.
Do I have to continue to pay rent?
It depends on the extent of the damage.
Ideally, a commercial lease should provide that rent payments can be suspended if the premises are damaged or destroyed by an insured risk to such an extent that you (as the tenant) can no longer use them.
However, if the premises have been partially damaged but can still be used, a fair proportion of the rent should be suspended until the premises have been repaired.
Does the landlord need to rebuild the premises?
Usually, the landlord will be required to use the insurance money to rebuild the premises. However, this obligation may be qualified so that the landlord only has to rebuild if, for example:
- all planning permissions and consents have been granted; and
- the building insurance policy has not been cancelled as a result of your (the tenant's) actions.
If the landlord is unable to rebuild the premises within three years then either the landlord or you should have the right to terminate the lease.
Most insurance policies cover only three years' loss of rent so the landlord will need the right to terminate the lease before the insurance cover runs out.
The landlord may not be required to rebuild the premises to the exact specification from before the damage occurred, but they should be reasonably comparable to what was in place before the damage occurred.
What if there is a shortfall in the insurance monies?
From your perspective, the lease should ideally require the landlord to:
- insure the premises for their full reinstatement value; and
- make up any shortfall in the insurance pay-out from its own resources.
If the lease does not include such obligations then the specification of the rebuilt premises will be limited to what can be built with the insurance monies that are available. The risk here is that the landlord has under-insured the premises.
What if I caused the damage?
This is a very important and complex area of the law.
In short, you could be liable for the entire rebuild cost of the premises. If the premises form part of a larger building then you could be on the hook for the cost of rebuilding the entire building.
The extent to which you would be liable depends on what caused the damage.
For example, if you have carried out electrical work without using a properly-qualified electrician and the faulty electrics cause a fire then you could be in serious trouble.
The lease will often specify that all work to the premises must be carried out by proper tradespeople, to a high standard and then regularly tested.
If any of these elements are missing then the insurance cover for the premises may be withdrawn. If that happens then you would usually be liable for the entire cost of rebuilding the premises, or the building.
You would also be liable for any losses that have been suffered by the landlord as a result of the damage, for example professional fees of lawyers, architects, surveyors, planning consultants etc.
For that reason, all work carried out to the premises should be done by appropriate professional tradespeople.
What about my contents?
The landlord will usually insure the building, but you should have your own insurance policy to cover damage to contents.
Am I covered for loss of income?
You should speak to your insurance broker regarding business interruption insurance, which would cover losses from an interruption to your business.
Before entering into any lease, you should consider what would happen in the worst case scenario. The law is complex in this area, so we would advise you to seek legal advice at the earliest opportunity.
While we can't prevent damage occurring to your premises, we can help to put you in the best position possible if something does happen.
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