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As a commercial lease tenant, you must understand whether insurance is your responsibility or the landlords. Your commercial lease concerns the business premises you have the sole occupation of as a commercial tenant. It is a legally binding contract that you and your landlord sign, and details, for example:
- that you must use the business premises for your business use;
- the fixed term of your tenancy; and
- the rights and possibilities of you and your landlord.
The commercial property you occupy is likely worth a large sum of money, which reflects the rent you pay. Therefore, your landlord will want to insure the business property to protect its value. This article will explain insurance under a commercial lease focusing on building and contents insurance. This helps you to understand your insurance responsibilities under the commercial lease.
Insurance
The two main types of business insurance associated with business property and commercial leasing are:
- buildings insurance; and
- contents insurance.
Buildings insurance is insurance for the building as a structure and anything that is part of the building. It covers damage to the building and its design. People may refer to buildings insurance as commercial property or landlord insurance. Commercial buildings insurance will usually look at the risks that need insuring, which your lease should detail, and to which you and your landlord agree. It often also includes for the landlord three years’ loss of rent and covers risks such as fire and theft. In addition, the building’s insurance should insure the total reinstatement value, which means the insurance can cover all costs concerning repair and rebuilding.
Buildings insurance does not usually cover items in the building that are not attached to it, such as fixtures and fittings. However, contents insurance should cover these.
Who is Responsible for Insurance?
Buildings Insurance
Usually, a commercial landlord or the person who is the legal owner of your commercial property is responsible for both arranging and paying the building insurance for your commercial premises. This is because they have an ‘insurable interest’ as the freeholder, landlord or owner. Your landlord is, therefore, the insured party. As a commercial tenant, you do not have an insurable interest towards the building. However, your commercial lease agreement should detail whether you or your landlord are responsible for building insurance. You cannot insure a building twice. Accordingly, you cannot insure it if your landlord has done so already.
If your landlord is responsible for arranging and paying the building insurance, they will typically pass the cost on to you as the tenant as insurance rent. If you share part of the premises, you will generally pay a portion of the insurance which reflects your use of shared parts of the building and the area over which you have the sole occupation. Your lease agreement may detail your insurance cost as part of the service charge or as a ‘stand-alone cost’.
If your commercial premises concern a whole building for a lengthy period, you may be responsible for the insurance. In that case, you and your landlord may have your names on the insurance policy.
Contents Insurance
When you lease commercial premises, you will bring some business possessions into the property. These are your responsibility. Accordingly, if something happens to them, you want the insurance coverage to repair or replace them. For example, you may have:
- computers, if you run an office; or
- machinery to run your business or make certain products.
As a commercial tenant, you arrange the contents insurance for contents you have in the business premises where the commercial lease is in place. Contents insurance can cover
- your belongings;
- fixtures;
- fittings; and
- improvements you have made to the commercial property.
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Other Insurance Points
The lease may require you to insure the plate glass at the property even though the landlord holds the building insurance generally. In addition, there may be other considerations regarding insurance and your commercial premises as follows.
Damaged Premises
If there is damage to your business premises and you cannot use it as it is not fit for occupation, you should not have to pay rent for that period. Your landlord will normally allow for this by insuring themselves against loss of rent. Nevertheless, you should check that you have such protection. Furthermore, you may also ask your landlord to include a clause in your lease agreement allowing you to end the lease early in such circumstances.
Business Interruptions
Where your landlord is responsible for arranging and paying building insurance, you should check that you have insurance that covers you if you experience business interruption and suffer loss.
Employer’s Liability Insurance
In addition to the buildings and contents insurance for your commercial lease, you will need employer’s liability insurance if you employ anyone in your business.
Key Takeaways
If you have a commercial lease, you will need insurance. Building insurance is usually the landlord’s responsibility to arrange and pay. However, as the commercial tenant, you will often bear the costs as they pass these to you in your lease agreement. You should check your lease agreement to understand your responsibilities and payments. Furthermore, you may require contents insurance for your possessions on the commercial premises. Again, note that you are responsible for arranging and paying for this. Finally, for business interruptions and potentially employers’ liability insurance, you may need additional insurance associated with your business on commercial premises, such as when the property is damaged.
If you need help understanding insurance under a commercial lease in the UK, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Typically, insurance under a commercial lease is building insurance and contents instances. However, there are other factors you may need to insure against or ensure within any insurance coverage, such as business interruptions.
The landlord or property owner normally arranges and pays for building insurance as they have an insurable interest in the property. Your lease should detail who is responsible.
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