It is absolutely vital that let
property is properly covered for certain risks. These
are usually specified in the lease:
- Buildings insurance
- Public Liability Insurance
- Loss of Rent in the event of
damage or destruction
These are the usual types of risks
covered and these may be extended to include additional
risks such as vandalism and wilful damage.
With shops and offices it is often a
requirement that tenants cover plate glass, a risk
which is often included in their shop owners or business
risks policies.
It is usual practise for the landlord
to arrange the insurance and collect the premiums from
the tenant annually as service charges. This will be
specified in the lease.
Where several tenants occupy one
building, which is covered by one insurance policy, the
lease will specify the apportionment of insurance costs
amongst the tenants. This is often calculated on the basis
of floor area or rateable values etc.
There may be a provision in the
lease to cover suspension of the rent payments or even
the ending of the tenancy in the event of damage or
total destruction. Landlords and tenants need to be clear
about what these provisions are.
In the event of disruption to
trading and an insurance claim there may be important
questions as to how and when repairs are to be carried out
and how the insurance money is to be spent - the lease
should be clear on these aspects.
To ensure that the building is fully
covered in terms of its replacement value (remember
insurance companies will average
in the case of underinsured claims) a surveyor's insurance
valuation will be required from time to time. The lease
may provide for the cost of valuations to be recovered
from the tenant. Where there
has been underinsurance who makes up the difference
in replacement cost - the landlord or the tenant? This is
a difficult one and ideally should be thought about very
carefully at the outset. It is in the tenant's interest
just as much as the landlord's that the building is insured
for its full replacement cost. Problems
often arise where tenants feel that landlord is not going
for the best value (cheapest?) insurance cover. In
practice the landlord may be using one company for several
properties by way of a block policy, which usually
works out cheaper overall. Landlords
will often use insurance companies which they have found
to be best in terms of overall service not
necessarily the cheapest - it's only when you process a
claim when you find out the merits or not of a company. In
any event, legal precedent has established that
landlord's do not have to prove reasonableness regarding
the criteria they use when selecting an insurance company.
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