If you’re a commercial property owner in the UK, then you should know that it’s important to have building insurance. While no one prays for bad situations, bad things like fire outbreaks, floods, storm damage, or freak accidents happen unexpectedly. When such happens, you need all the support you can get to repair the property. And there’s no better support than financial protection. That’s why building insurance is important.
Although it’s important to have building insurance, most people are confused about who pays for it on commercial property. Most tenants and business owners believe it's solely the landlord’s responsibility. However, the tenants also have a role to play in obtaining building insurance.
In this article, you’ll learn all there is to know about:
Building insurance
Lease agreements
Insurance claims
Other things to consider when applying for building insurance.
What is Building Insurance for Commercial Property?
Insurance generally is a form of financial protection against unexpected bad happenings. In essence, it’s like preparing for a rainy day. For commercial properties, building insurance provides extensive financial coverage that helps property owners manage damage caused by unforeseen circumstances. This allows businesses to recover and continue operations shortly after a disaster. The commercial property insurance coverage is typically more than that of the average residential property.
While building insurance usually covers the cost of repairing or rebuilding a commercial property, the type of risk covered varies. Some risks are easier to manage by insurance than others. Some of the risks covered by building insurance include:
Natural Disasters: These include disasters such as fire, flood, storm damage, earthquakes, and volcanic eruptions.
Man-Made Destruction: This includes vandalism, burglary, arson, and other malicious damage.
Accidents: Such as broken pipes, tiles, electrical overloads, equipment or facility failures, can be covered by insurance.
Explosion: Whether caused by accidents or intentional acts, are often included in building insurance policies.
Impact Damage: This includes damages caused by objects colliding with the building, such as vehicles, bricks, or falling debris.
Although building insurance typically offers broad risk coverage, there may be exclusions or limitations depending on the specific risks involved. For example, certain policies might exclude damage from minor accidents.
In addition to covering common risks, building insurance may also offer additional coverage options, such as:
Business Interruption: This covers the temporal loss of income a business may suffer due to extreme property damage.
Contents Insurance: This covers the contents of the building, such as furniture, equipment, and inventory.
Liability Insurance: This protects business owners against claims of negligence or property damage that may be caused by the business.
Who is Typically Responsible for Building Insurance?
Typically, landlords are responsible for paying for building insurance, but that’s not always the case. Both landlords and tenants benefit from the protection these policies provide, so it might seem reasonable for both parties to share the responsibility of paying for building insurance.
Landlord’s Responsibility
Usually, landlords are responsible for paying building insurance on commercial properties as part of their landlord insurance responsibilities. This responsibility is usually written in the property lease agreement. Some of the reasons why landlords are mostly responsible for paying building insurance include:
Property Ownership: As the legal owner of the commercial property, the landlord bears the primary responsibility for its protection and maintenance. Since building insurance is crucial in protecting a property against potential risks, landlords are obligated to pay for it.
Asset Protection: Building insurance is a form of investment for landlords. It protects their properties from devaluation due to damage and outright loss.
Risk Management: Generally, landlords are better equipped to choose the right insurance for their properties. Besides having more experience with insurance companies, they can better assess insurance policies and negotiate favourable terms.
Contractual Terms: The lease agreement between the landlord and tenant usually specifies who is responsible for building insurance. In most cases, the landlord is declared as the responsible party.
Service Charges: For some commercial properties, the cost of building insurance may be included in tenants' service charges. This means that tenants indirectly contribute to paying for the building insurance. However, the landlord has the primary responsibility of finding the best insurance policy.
Tenant’s Responsibility:
While landlords are typically responsible for paying for building insurance, there are instances where tenants may bear some or all of the cost. Often, a tenant may be partly responsible for building insurance through service charges, substantial remodelling, and other shared arrangements. However, in rare cases, a tenant may be solely responsible for building insurance. This usually occurs when a term is subtly included in the lease agreement, shifting the payment responsibility to the tenant. Some instances where a tenant may be liable to pay for building insurance include:
Tenant-owned Improvements: Where a tenant makes significant improvements to the property, such as adding a new wing or renovating existing structures, they may need to insure these improvements. The tenant insurance obligations only extend to the tenant-owned improvements on the property. Note that tenants cannot make extensive improvements on a commercial property without the landlord’s consent.
Specialised Insurance: For specialised commercial properties like factories, industrial facilities, and research laboratories, the landlord’s standard insurance policy may not cover certain specialised risks. In such cases, the tenant may need to obtain additional specialised insurance. This ensures that the property is both generally protected and specifically insured against risks unique to the tenant's business operations.
Hidden Clauses: Lease agreements can be difficult to understand due to confusing legal jargon. Occasionally, clauses are intentionally written ambiguously, leading to unexpected obligations for tenants. For instance, landlords may subtly shift the responsibility for building insurance onto tenants, even if it’s not explicitly stated. These clauses can be buried deep within the fine print, making them easy to overlook.
Common Lease Agreement Clauses Related to Building Insurance
Given that commercial lease agreements may contain hidden and ambiguous clauses, it’s important for businesses to act cautiously. Before signing any agreement, prospective tenants should carefully review the terms and seek clarification on any unclear points. To ensure a thorough understanding and avoid potential pitfalls, it’s wise to have an attorney review the fine print and provide recommendations.
Some lease clauses that tenants should look out for include:
Full Repairing and Insuring (FRI) Leases
Full repairing and insuring (FRI) leases typically place the responsibility for property maintenance, including repairs and building insurance, on the tenant. Under this lease, you’ll find:
Tenant's Obligation to Insure: This clause clearly mandates that tenants pay for and maintain extensive insurance coverage for the property throughout the lease. Tenants are expected to insure both the property and its contents against risks such as fire, flood, storm damage, and the like.
Insurance Rent: This clause requires tenants to periodically pay the landlord a sum used specifically for building insurance. The sum is usually calculated based on the property's value and the level of coverage needed.
Mixed-Use Properties: This clause combines commercial and residential elements in a lease agreement. In this case, the lease may specify who is responsible for insuring different parts of the property. For instance, the landlord may be responsible for common areas and other structural components of the building, while the tenants may be responsible for insuring their individual units.
When dealing with mixed-use properties, it's important to consider the following:
Insurance Premium: This is the cost of insurance for mixed-use properties. Due to their increased complexity and potential risks, it is usually higher than the cost for strictly commercial or residential properties.
Insurance Coverage: When choosing insurance coverage for mixed-use properties, it is advisable to opt for comprehensive coverage for both the commercial and residential components of the building.
Insurance Claims: To avoid payout complications, it’s important to clearly define who is responsible for filing the insurance claim and how any payouts will be distributed.
What Happens in Case of a Claim?
Insurance claims are typically initiated only when there is damage to the property. It's important to note that claims can only be made for damages specifically covered by the insurance policy.
The Landlord’s Role
As the party primarily responsible for building insurance, the landlord is also responsible for initiating an insurance claim when covered damage occurs.
Here are the steps involved:
Reporting the Claim: Once there’s damage to the commercial property that falls within the insurance coverage, the landlord should contact the insurance provider. This can be done by phone or by submitting a claims request online. It's crucial to provide as much detail as possible when reporting the incident, including the date, time, and extent of the damage.
Initial Assessment: After lodging a request, the insurance company will send an insurance adjuster to assess the damage. The adjuster will inspect the property, take photos, and document the extent of the damage. They will also gather information about the property's value and the cost of repairs or replacement.
Claim Investigation: After the assessment, the insurance provider may conduct further investigations to verify the details of the claim. This may involve reviewing the assessments and documents, interviewing witnesses, or consulting experts.
Determining Coverage: Once the investigation is complete, the insurance company will determine whether your insurance policy covers the damage. This usually involves reviewing the policy terms to identify any exclusions or limitations that may apply to the claim.
Calculating the Loss: If the damage is covered, the insurance company will calculate the loss suffered. This involves assessing the cost of repairs or replacement.
Making a Settlement Offer: After the loss assessment, the insurance company will contact you with a settlement offer. The offer may be a cheque, property repair, or replacement.
Negotiating the Settlement: If you’re not satisfied with the settlement offer, you can ask for a better offer. When negotiating, it’s advisable to provide strong evidence that may strengthen your claim. Receipts and estimates would help.
Repair or Replacement: Once you accept a settlement offer, the company will either send you a cheque or schedule for repairs or replacement of the damaged parts of the property. They may work with contractors or suppliers to ensure that the work is done properly and at a fair price.
Closing the Claim: The insurance company will close the claim after the repairs or replacement are completed. This means you have received full compensation for the damage, and nothing else is required.
In all this, the landlord is the intermediary between the insurance company and the tenants. The landlord is responsible for filing the claim, negotiating and ultimately deciding whether to accept or reject the settlement offer. Additionally, the landlord is also responsible for supervising the repairs or replacements to be done on the property.
The Tenant’s Role:
While the landlord typically handles the insurance process, tenants also have important responsibilities. If tenants are required to pay for or contribute to building insurance, they should:
Assess the Lease Agreement: Carefully review the lease agreement to fully understand the exact terms and conditions related to insurance. Pay close attention to the amount of the contribution expected from you and how it is calculated.
Obtain Insurance Information: You can request a copy of the landlord's insurance policy. This document details the insurance coverage, limits, and exclusions.
Talk to the Landlord About Coverage Adequacy: If you're uncertain about the insurance coverage, discussing your concerns with the landlord is important. Together, you should make arrangements to protect the contents of the property while the insurance claim is being processed. If you're unsatisfied with the existing coverage, you may purchase additional insurance, such as contents insurance.
Stay Updated: Don’t leave the supervision to the landlord alone. Periodically ask for the status of the claim. Document all insurance payments, repairs, and communications. These would help in case of legal disputes or future claims.
Additional Insurance Considerations for Tenants
Besides the general coverage for building insurance, tenants need to invest in protecting their own assets on the property. This is why contents insurance is important.
Contents Insurance
This is an insurance policy that protects the contents in a property. It covers personal belongings, equipment, furniture, and inventory.
Tenants should obtain contents insurance to protect their personal property and business assets within the leased premises. The landlord's building insurance typically does not cover the tenant's belongings, such as furniture, equipment, inventory, or other valuable items. Contents insurance ensures that in the event of damage, theft, or other covered incidents, the tenant's assets are protected and can be replaced or repaired.
Tenant’s Improvements Insurance
If tenants make improvements or modifications to the leased property, such as installing new fixtures, partitioning spaces, or customising the layout, these changes may not be covered by the landlord’s building insurance. Tenant’s improvements insurance provides coverage for these enhancements, ensuring that the tenant’s investments are protected in case of damage or loss.
FAQs
Do tenants need to arrange their own building insurance?
No, a single building insurance done by a landlord is enough for a commercial property.
Can a landlord pass building insurance costs to the tenant?
No, a landlord shouldn’t pass building insurance costs to the tenant. But, special circumstances may require the tenant to contribute to the insurance costs.
What should be included in a lease agreement regarding building insurance?
A lease agreement must include clear insurance clauses stating who is responsible for building insurance.
Who pays for building insurance in a mixed-use property?
Both the landlord and tenants contribute to building insurance in a mixed-use property. The landlord covers the common areas and structural facilities, while tenants insure the contents in the property units.
What is the difference between building insurance and contents insurance?
Building insurance protects the property from damage, while contents insurance protects the items in the property.
Conclusion
Building insurance is as important as a shepherd dog to sheep herder. Besides having a commercial property available for rent, landlords must protect their properties from unforeseen disasters like fire outbreaks, floods, storm damage, accidents, arson, etc. Although landlords are generally responsible for building insurance, tenants may sometimes be obligated to contribute or take full responsibility.
Given the potential for hidden clauses and legal jargon, it’s essential to approach lease agreements with caution. To protect your interests, carefully review all terms and seek legal advice if necessary.
At Lawhive, we specialise in making legal services more accessible and transparent. Our network of expert solicitors can help you navigate the fine print, ensuring you're fully aware of your responsibilities and rights. Contact Lawhive today for a thorough review of your lease agreement and personalised legal guidance.