Summary
- Under a commercial lease in the UK, buildings insurance is ordinarily the landlord’s responsibility to arrange and pay, as they hold the insurable interest as freeholder or owner; the cost is typically passed to the tenant as insurance rent, either as part of the service charge or as a standalone cost.
- As a commercial tenant, you are responsible for arranging your own contents insurance to cover your business belongings, fixtures, fittings, and any improvements you have made to the premises, as these are not covered by the landlord’s buildings insurance.
- Tenants should also check their lease for provisions on rent suspension if premises become unusable, ensure they have business interruption cover, and obtain employer’s liability insurance if they employ staff.
- This article is a plain-English guide to insurance responsibilities under a commercial lease for UK business tenants, prepared by LegalVision, a commercial law firm.
- LegalVision specialises in advising clients on commercial leasing and property matters.
Tips for Businesses
Review your commercial lease carefully to confirm exactly which insurance obligations fall on you and which fall on your landlord. Arrange contents insurance before moving into the premises. Check whether your lease includes a rent suspension clause and, if not, negotiate one. Ensure you have business interruption cover and, if you employ staff, employer’s liability insurance in place from the outset.
As a commercial lease tenant, you must understand whether insurance is your responsibility or the As a commercial lease tenant, you must understand whether insurance is your responsibility or the landlord’s. This will be set out in your commercial lease, which contains all of the terms agreed between you and the landlord. For example:
- that you must use the business premises for the permitted use;
- the fixed term of your tenancy; and
- your/your landlord’s rights and obligations.
The risk is that any damage, either by you or the landlord, could affect the value of the property, but also your ability to run your business from the premises. This can lead to costly and complex claims, which is why insurance is required both by you and the landlord – for different reasons. 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 related to repairing and rebuilding.
Buildings insurance does not usually cover items in the building that are not attached to it, such as fixtures and fittings. These are usually covered by contents insurance.
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. This obligation will be confirmed in your commercial lease.
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 premium 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 lease covers a whole building or unit, you will often pay the full insurance premium. 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 to maintain/repair and fall within your ownership. 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, your rent will usually be suspended for the period until the property is reinstated. This will be set out in your lease, and the maximum period for suspension depends on your landlord’s policy. You should ensure 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.
This cheatsheet includes practical tips to understand key clauses and avoid disputes in leasing agreements.
Key Takeaways
If you have a commercial lease, you will need insurance. Building insurance is usually the landlord’s responsibility to arrange and pay. As a tenant, your main responsibilities will be to pay insurance rent and to arrange your own cover for your business needs.
If you need help understanding insurance under a commercial lease in the UK, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced leasing lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What is insured under a commercial lease?
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.
As a commercial tenant, am I responsible for building insurance?
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.
What does contents insurance cover for a commercial tenant?
Contents insurance covers your business belongings, fixtures, fittings, and improvements you have made to the premises, such as computers, machinery, and other items not attached to the building.
What happens to my rent if my premises are damaged and unusable?
Your rent is usually suspended for the period until the property is reinstated. The maximum suspension period depends on your landlord’s insurance policy, and this should be set out in your lease.
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