Summary and implications
The recent riots across the UK could have significant implications for owners and occupiers of commercial property. The Local Data Company reveals that more than 10 per cent of the nation’s 475,000 shops, pubs, restaurants and clubs have been affected by the disturbances. The Prime Minister has vowed to help landlords and retailers repair damage caused by the rioting. He has pledged £20m to help retailers and has set up a £10m recovery scheme for councils to make buildings safe and to speed up planning consent for reinstating properties.
This briefing highlights a few issues which landlords of commercial premises of whatever size, be it a shopping centre, small parade of shops or a single let unit, need to be aware of when seeking to repair the damage and protect their businesses:
- Insurance – is the damage covered?
- Loss of rent insurance/rent cesser – will the rent suspension be triggered in leases and if so what are the implications?
- Reinstatement – to what extent is this the landlord’s responsibility and what does a landlord need to watch out for when rebuilding?
Insurance – are you covered?
Where your building has suffered loss by an insured risk (through no fault of the occupier as is the case in the recent riots) you may be able to look to your insurance company to pay for making good the damage.
Most modern, commercial leases are likely to provide for the landlord to insure the building against loss suffered from what are known as “insured risks”. Risks covered are usually listed in detail (to avoid ambiguity and argument later). Firstly you need to consider if the recent events fall within one of the defined risks.
The obvious risk that springs to mind is “riot”. However, you should consider all relevant risks for example fire, theft, civil commotion and damage by malicious persons. Your starting point should be checking what risks are covered by your policy. Many policies nowadays are “all risks”, so you should be covered, however, everything hinges on the specific policy wording.
Rent and service charge – does a tenant still have to pay?
Most commercial leases provide that the rent (or a fair proportion of it) is suspended while premises are unusable or incapable of occupation, however always check the drafting of the rent suspension clause in your lease carefully:
- Ascertain exactly what is suspended – is it only principal rent, or is it principal rent, service charge and insurance rent?
- Check the length of time that the suspension applies – it is normally only for a limited time to coincide with loss of rent insurance but sometimes can be open-ended until reinstatement is complete.
- If common areas or accesses have been damaged or destroyed so as to render the premises unusable or incapable of occupation, but the premises themselves are not actually damaged, it may be that the tenant is still liable under the lease for its rent. Whilst it is common nowadays for tenants’ solicitors to amend rent cesser clauses to provide that the rent is suspended in the event of damage or destruction to the premises or any access or services to it, this is not always the case.
- As the rent suspension may not apply if the tenant is in arrears.
Rent suspension should not be an issue provided your insurance cover for loss of rent mirrors the provisions of the rent suspension clause – you could, however, find yourself with a shortfall if you have only insured for loss of principal rent but the rent cesser in the occupational lease provides for all rents to be suspended.
Some retail leases contain “keep open” provisions which require a tenant to remain open for trade during specified opening hours. A breach of this obligation could give rise to a damages claim against the tenant. However it may be difficult for a landlord to demonstrate any loss in these circumstances. Pursuing a tenant under a “keep open” clause may be seen as an aggressive stance and is likely to be unpopular in the market.
Repair and reinstatement – who is responsible for what?
If on checking your policy, the relevant damage is covered as an insured risk, it will be your responsibility as landlord to make the necessary notification to the insurers and proceed to make a claim.
Damage covered by insurance is highly likely to be carved out of the tenant’s obligation to repair. It is, however, worth checking that this is the case as, if not, and your insurance claim is not successful, you may be able to pursue your tenant under its repairing obligations in the lease.
It is usual in a multi-let building for the landlord to covenant not only to reinstate the premises but all the retained parts and depending on the nature of the damage to your property, this may impact on the construction programme of any reinstatement works.
Ideally, a landlord’s obligation to reinstate will be subject to the landlord being able to obtain all necessary permissions and consents.
The precise terms of the occupational leases should be reviewed to ascertain whether or not there are any best endeavours obligations (which may require you to go over and above making an application for consent to reinstate).
It is also important to check if you are required to provide the same premises on reinstatement or if you can provide a different configuration – this may present an opportunity to create a more efficient layout with more units or better servicing. Usually where leases allow comparable premises to be reconstructed, there will be obligations on the landlord to provide the same size premises with the same services and amenities. The terms of the leases should be reviewed to check how flexible they are in these circumstances.
What if reinstatement is not possible?
Usually leases state that all insurance proceeds belong to the landlord if reinstatement is frustrated. If the lease is silent, the position at common law is unclear as the courts must establish the intention of the parties by looking at the lease as a whole and usually take into account the value of the parties’ respective interests which can mean insurance proceeds being split between landlord and tenant.
If the landlord considers it is impossible or impractical to reinstate the premises the lease may allow the landlord to terminate the lease upon giving notice to the tenant.
Similarly the tenant may be able to terminate the lease by giving notice to the landlord if, following damage or destruction of the premises by an insured risk, the premises have not been reinstated within a fixed time period after the date of the damage or destruction. Although this may be some way off, it is advisable to diarise any such dates so that they are factored into any construction programme for reinstatement.
Removal of properties from valuation lists
As part of the riot support package published by the Department for Communities and Local Government, “seriously damaged” business properties will be taken off the valuation lists, removing the liability for paying rates. This relief includes empty rates for landlords, however the decision on exemption ultimately falls with the local authority. Landlords are therefore urged to contact their local authority as soon as possible if they think they might be entitled to this relief. Inspections of damaged properties by the local authorities are expected to be especially stringent.
Definition of a riot
“Where 12 or more persons who are present together use or threaten unlawful violence for a common purpose and conduct of them (taken together) is such as would cause a person of reasonable firmness present at the scene to fear for his personal safety, each of the persons using unlawful violence for the common purpose is guilt of riot.” (section 1(1) Public Order Act 1986)