Uninsured risks

Is it the landlord's or tenant's responsibility when a commercial property is damaged due to an uninsured risk?

In most commercial property leases the landlord will insure the property, and this will be recharged to the tenant. Therefore, if the property is damaged or destroyed by an insured risk, the insurance will cover this.

However, the issue usually arises where the damage is due to an uninsured risk. An uninsured risk is a risk where no insurance is available or an insurer does not usually cover. Therefore, if the property is damaged or destroyed by an uninsured risk, the insurance will not cover this.

The default position usually is if the lease is silent on uninsured risks, it would usually fall on the tenant to reinstate the property. This can leave the tenant in a difficult position, as they will have a property unfit for occupation and will have to bear the costs to reinstate it.

Section 9.3 of the lease code states:

"Leases should state that if the whole or a substantial part of the premises or any landlord's areas or services serving them are so damaged by an uninsured risk as not to be capable of normal use by the tenant, either party should be allowed to terminate the lease unless the landlord agrees to rebuild at its own cost".

Most institutional landlords accept this and will include provisions in the lease in respect to uninsured risk, stating if the property is damaged by an uninsured risk and the tenant cannot use the property, then the landlord can either reinstate the property or terminate the lease.

However, the lease code is only a recommendation and not binding therefore, it is vital for a tenant and even the landlord to agree upon whose responsibility uninsured risks are before entering into the lease.

Shazia Issa - Solicitor - Commercial Property Department