Where a Tenant proposes to undertake works within let premises the Landlord and Tenant will normally agree terms in an agreement for lease or licence for alterations. Importantly those terms should address responsibility for damage to the works and the existing premises within which they are being undertaken.
In the current market, however, it is important that when agreeing these terms the parties have proper regard to the arrangements that will be put in place between the Tenant and the building contractor that it will engage to carry out the works.
The relevant insurances
Where works are being undertaken in existing premises there are 3 key types of insurance that ought to be addressed:
- insurance against loss or damage to the existing structures (normally together with the contents thereof) (“Buildings Insurance”);
- insurance against physical loss or damage to work executed and site materials (“All Risks Insurance”); and
- insurance against liability to third parties for death or personal injury or loss or damage to third party (“Public Liability Insurance”).
Buildings Insurance will generally be maintained by the Landlord. Often under the terms of the lease the Tenant will be named as an insured on that policy.
Where works are being procured by the Tenant, All Risks Insurance will be maintained by the Tenant or (more commonly) the Contractor.
Each party, where a commercial organisation, will normally maintain some level of Public Liability Insurance, and it is likely that both the Landlord and the Tenant will want to ensure that the Contractor (who will be the party most likely to cause third party damage) maintains such insurance to a minimum level.
Avoiding the risk of a subrogated claim
Where an insurer is required to respond to a claim under a policy of insurance, the general position is that the insurer will be entitled to pursue, by way of subrogation, any claim that the insured may have had against the party responsible for the event that caused the insured loss. Accordingly, where a contractor causes damage to works or property that is insured, it will be exposed to the potential of a “subrogated” claim by the insurer of that works or property.
In order to avoid such a claim, contractors will generally seek to be named as an insured on the relevant insurance policies. An insurer is unable to pursue a subrogated claim against a party that is a named insured.
The standard JCT contracts commonly used for building projects in England and Wales, reflect this by providing that where works are to be undertaken in an existing building, the employer will maintain insurance of the existing structure, in the joint names of the employer and the contractor.
The issue with Tenant Works
The issue that needs to be addressed with Tenant Works is that the Tenant will be the employer under the building contract, but the Landlord is responsible for maintaining insurance of the existing structure. Until relatively recently, this issue was readily addressed by the Landlord agreeing to name the Tenant’s Contractor as a joint insured on the Buildings Insurance policy. The Tenant would agree to pay the cost of any additional premium for doing so, together with any increase in premium arising from a claim in respect of the Tenant’s Works. The Landlord might also agree to add the All Risks Insurance of the Works as a "bolt on" to the Buildings Insurance.
Alternatively, if the Tenant's Contractor is not able to be named as a joint insured, the existing Building Insurance might be amended to include a waiver of subrogation in favour of the Tenant's contractor.
The issue in the current market
Landlords are increasingly resisting the request to name Tenant's contractors on Buildings Insurance policies. This is because:
- it would prevent insurers being able to recover losses against the contractor responsible
- claims would lead to increased premiums on the Buildings Insurance, potentially across a Landlord’s portfolio of properties
For the same reasons Landlords are resisting any waiver of subrogation in favour of the Tenant's contractor.
Unless addressed early this causes issues for all parties:
- The Tenant's contractor faces significant exposure with the risk of a subrogation claim. This risk is more significant if the existing building is of high value and less easy for the contractor to bear if the fit out costs are modest. Contractors are increasingly alive to this issue.
- The Tenant faces the risk that as a result, contractors will price that risk in their tenders, or in extreme circumstances decline to tender.
The Landlord lacks clarity in the insurance arrangements applicable to works undertaken in its property. Also, if the issue only becomes apparent when the Tenant is tendering it's works, this can delay lease deals whilst the Tenant seeks to address the issue.
Addressing the risks
It is therefore important for the issues to be recognised and dealt with early. There are the following points:
- Tenants should address the issue when negotiating agreements for lease, ideally at heads of terms stage. After that, the Tenant's ability to persuade the Landlord to adopt the preferred joint names/waiver of subrogation approach is greatly reduced.
- If the Landlord will not agree, then it is important that the issue is addressed in the Tenant's tender documents for its fit out works. These should make clear that the contractor will not benefit from Buildings Insurance or a waiver of subrogation. Contractors will then need to consider the impact as part of their competitive tender.
- Generally, contractors will need to protect their position by ensuring they have an appropriate level of Public Liability Insurance. This may involve increasing their normal policy cover, and any increased premium cost will need to be factored into their tender assessment.
- Contractors will also need to assess the risk in the context of the nature of their works. The issue will be more significant if structural or hot works are involved, than if there are simple works of partitioning and the like.
Whatever solution is adopted needs to be properly documented in the building contract. None of the standard JCT insurance options adequately deal with the position, and will need to be amended where the existing Building Insurance is maintained by the Landlord.