Summary and implications

An agreement for lease or a licence to alter often allows for fit-out works to be carried out by the tenant. The clauses in these agreements dealing with the fit-out need to cover the question of insurance. This is insurance both for the existing building and for the fit-out work itself.

Everyone concerned, landlord, tenant and fit-out contractor, must carefully consider the question of insurance whenever a tenant is undertaking works within a building insured by the landlord. Crucially, they should do this as early as possible to ensure there is time to reach agreement and put the required insurance in place.

The problem is that:

  • The tenant does not usually insure the existing building and is not in a position to procure insurance for it;
  • Landlords may be reluctant to include tenants and their fit-out contractors on the buildings insurance as joint insured, due to the risk of an increase in premiums both during the works and in the future if a claim occurs; and
  • Even if the landlord is prepared to include the tenant and its fit-out contractor on the insurance policy, the usual building contract risks are not exactly the same as property insurance risks.

Key questions to ask

  • Is it feasible to add the tenant and its fit-out contractor as joint names on the policy for the existing building, and preferably for the fit-out works too? What are the cost implications of doing so?
  • Is the fit-out contractor’s public liability insurance adequate to meet claims for damage to the existing building?
  • Do the lease, licence for alterations and fit-out building contract reflect exactly the insurance that has been put in place?

Open discussion on how to share risk

The starting point is to recognise that insurance is an issue. Everyone should talk to insurance brokers early on in the process and decide the optimum approach in the particular circumstances. Moreover, both the agreement for lease/licence to alter and the fit-out building contract should be drafted to reflect the insurance arrangements.

Worst case: what if the fit-out contractor negligently destroys the building?

  • Where a tenant of a single floor of a building carries out works to that floor.
  • Under an unamended JCT building contract the tenant (as employer under the fit-out building contract) must insure the existing building and the fit-out works in the joint names of itself and its contractor.
  • However, without landlord’s co-operation, the tenant will be unable to comply with this obligation.
  • Under the lease (or agreement for lease) the tenant will probably only have the benefit of a waiver of subrogation under the buildings insurance rather than being a joint name on the policy.
  • The lease will almost certainly not provide for the tenant’s fit-out contractor to be a joint name on the buildings insurance.
  • Without the tenant and the tenant’s fit-out contractor as joint names on the buildings insurance policy, or alternatively a waiver of subrogation against them from the landlord’s insurer, the landlord’s insurer could choose to pursue the tenant and/or the contractor to recoup its payment for the loss of the building.
  • If the insurance company pursues the fit-out contractor, the fit-out contractor could then look to the tenant to recover the amount based on the tenant being in breach of its building contract obligation to insure the existing building in joint names.
  • In the context of a large building the potential rebuild cost could be significant, so this represents a significant risk for both tenants and fit-out contractors, and so, indirectly, for landlords.

Waiver of subrogation? Stepping into the shoes of the insured

Subrogation allows an insurer to “step into the shoes” of the insured. The insurer may pay out but can take any rights the insured had and sue on them.

When a car driver is in an accident caused by someone else, their insurer will often pay out and then sue the person responsible for the accident – stepping into their shoes.

A waiver of subrogation means one party to a contract waives its rights against another so that an insurer cannot sue that other party. The insurer only has the same rights as its insured – and if these have been waived, the insurer has no rights.

So what should the landlord and tenant to avoid that scenario?

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