For some years now, tenants (especially those of the blue chip variety) have argued against taking responsibility, under their lease, for damage or destruction caused to their premises as a result of an uninsured risk.

There was a time when landlords would successfully counter this argument on the basis that the risks of damage or destruction should remain with the tenant, that being the very essence of an ‘institutionally acceptable lease’ drawn on full repairing and insuring terms. However, as we all know, the institutional lease is no longer what it once was, with landlords now having to respond to tenants demands.

From a landlord’s point of view, a typical lease will include provisions dealing with damage or destruction by insured risks on the following terms:

  • The landlord, having insured against certain specified risks, will be under an obligation to reinstate the damaged or destroyed building
  • Rent and possibly service charge payments are suspended for so long as the tenant cannot use the premises, following insured risk damage, but for no longer than the loss of rent period insured against by the landlord
  • Damage by insured risks is excluded from the tenant’s repair obligation and
  • Failure to reinstate the premises by the end of the loss of rent period entitles the landlord and (in most cases) the tenant to terminate the lease.

But what if a property is damaged or destroyed by a risk that the landlord has not insured against?

Applying the landlord-friendly position set out above, the tenant’s rent suspension provisions would not apply and (depending on how widely their repair obligation has been drafted) the tenant may find itself having to make good the damage at its own expense. The financial risks to a tenant could be huge. Accordingly, with the increased threat of terrorism over the last 10-15 years and the possibility of other risks, such as flooding, not being insurable, tenants have become increasingly aware of dealing with uninsured risks when negotiating their lease terms.

The recent Code for Leasing Business Premises in England and Wales (See Property Update July 2007) has also focused upon this issue. So, in order to call itself truly ‘code-compliant’, a modern lease should entitle the tenant to terminate the lease if they can no longer use premises following damage by an uninsured risk, unless the landlord reinstates at its own cost. In addition, rent suspension will apply, following damage by an uninsured risk as well as damage by an insured risk, unless such damage has been caused by the tenant. The upshot of this is that it is the landlord who takes on all the risk as the choice he is left with is to either reinstate the premises at his own cost (there are no insurance proceeds to fall back on) or be left with no building, no tenant and no rental income.

The treatment of uninsured risks is therefore an exercise in risk allocation, and is increasingly forming part of routine negotiations between landlord and tenant.

The reality is that, depending upon who holds the upper hand in the lease negotiation, a compromise is likely to be agreed, with the landlord receiving some form of contribution (for example, through a partial suspension of rent only) from the tenant if the landlord chooses to rebuild at its own cost.

The important lesson for tenants is to check carefully both the insurance provisions in their leases and the landlord’s insurance policy so as to ensure, as far as is possible, that appropriate amendments are made to protect them from exposure to rebuilding costs and ongoing rental liabilities following damage or destruction by an uninsured risk. Other useful practical steps for a tenant include checking whether the landlord is a member of the Commercial Landlords Accreditation Scheme (and therefore under a duty to abide by the 2007 Code) and also to obtain, where possible, copies of other leases granted by the landlord to see what concessions may have been given to other tenants. Finally, if a landlord is not prepared to compromise at all, one may wish to reconsider how much rent they ought to be paying in return for the risk they are required to take on.