The City of London Law Society (Land Law Committee) has published on its website a new set of insurance provisions for a rack rent lease of commercial property. Specimen insurance clauses have been available on the CoLLS website since about 2005 when clauses were first introduced to address, in particular, the problems associated with uninsured damage. The new insurance provisions are not an update on the previous version, but a redraft, and are worth a detailed analysis.
The new City of London Law Society clauses include some useful features which others may wish to incorporate into their own provisions. For example:
Warranties on re-instatement. The process of reinstatement following significant damage may involve providing the tenant with what is effectively a new building. Accordingly, there is an optional obligation for the landlord to procure from the building contractor and the professional team engaged in the design, reinstatement or rebuilding, collateral warranties or equivalent protection under the Contracts (Rights of Third Parties) Act 1999 in favour of the tenant in a form which reflects current market practice. This would be particularly relevant where the tenant’s lease was originally granted with the benefit of such protections.
Rent abatements in rent-free periods. Rent abatement clauses provide no assistance if insured damage occurs during a rent-free period. A tenant with the benefit of a substantial rent-free period should try to postpone the running of the rent-free period if insured damage occurs so that its benefit is not lost. Accordingly, new insurance provisions provide an option for the tenant to get the benefit of a credit against rent payable after the end of the rent abatement period to the extent of the period of overlap of the rent abatement period with the rent-free period. Provision is also made to provide a credit where rent is only partially suspended.
Uninsured damage. As an optional addition, uninsured risk protection is once again provided by these clauses. An “Uninsured Risk” is one which would ordinarily fall within the definition of insured risks but which is excluded from being so by reason of a withdrawal of cover by the insurer (and is not otherwise available to be insured in the London insurance market), or which is withdrawn from cover by the Landlord on the grounds that “in the Landlord’s reasonable opinion cover cannot be placed in the London insurance market at reasonable commercial rates or on reasonable commercial conditions.”
Where damage by such a risk occurs, the tenant’s liability to repair the damage is removed in the same way that a tenant does not normally repair insured risk damage. If the premises are so damaged as to make them unfit for occupation, use or enjoyment, the landlord is given an election, on notice within 12 months of the date of damage, to rebuild (in which case the rent abatement clause would apply). Alternatively, the landlord may elect to terminate. However, if the landlord has not elected either way within 12 months of the date of damage, the tenant itself enjoys a right to terminate. Pending a landlord’s election, an option is provided for rent to be suspended. What is not included is an option for the tenant to elect to reinstate where it is concerned that it will lose a valuable or strategic site through lease termination.
It should be noted that an insured risk does not become an “Uninsured Risk” for the purposes of these clauses by reason only of its being excluded, or partially excluded, from cover due to a standard exclusion provision in the policy. Acts of terrorism, which are included in the list of “Insured Risks” in these clauses, are excluded from cover from most commercial property buildings insurance and business interruption polices due to standard exclusion provisions. On request by a policyholder, an insurer participating in the Pool Re scheme will quote a premium for the inclusion of terrorism cover. Accordingly, as it is a standard exclusion, unless cover is not otherwise available, or “in the Landlord’s reasonable opinion cover cannot be placed in the London insurance market at reasonable commercial rates or on reasonable commercial conditions” the risk is an Insured Risk.
Further points to note:
Fixtures and fittings. The premises insured under the new insurance provisions include alterations, additions and improvements only if made by or at the expense of the landlord or which the landlord and the tenant expressly agree to treat as landlord’s fixtures and fittings. Expressly excluded are tenant’s fixtures and fittings which should be covered separately by the tenant. The fact that tenant’s fixtures and fittings are not part of the insured premises is relevant not only to what extent of property is insured, but also to what must be re-instated, and at what point the tenant’s rent abatement will end.
Facsimile reinstatement? The landlord’s reinstatement obligation (which involves applying “the proceeds of the insurance covering reinstatement and rebuilding costs” towards reinstatement and making “good any deficiency in the proceeds of the insurance out of its own resources”) provides that the Tenant “may not object to the reinstatement or rebuilding of the [Premises] [Building] in a form which is not identical to the [Premises] [Building] immediately before the damage or destruction occurred, if the [Premises] [Building] as reinstated or rebuilt [are] [is] of at least an equivalent standard and area, and afford[s] amenities which are at least equivalent to those enjoyed by the Tenant before the damage or destruction.” As with other reinstatement obligations, the tenant should understand that the process may result in the tenant obtaining a much better building following reinstatement which could result in an uplift in rental value at the next rent review date.
Insured risks. The insured risk definition differs from other leases (and from the previous set of CoLLS insurance clauses) and appears to have an element of circularity to it. “Insured Risks” are defined in clause 1.1 as meaning “the risks and other contingencies against which the Premises [and the Building] are required to be, or which may be, insured under this Lease.” To find out what risks are required to be insured against, we turn to clause 4.1 which requires that the landlord “shall keep [the Premises] insured with a substantial insurer of good repute against Insured Risks.” (This seems to create an element of circularity). Back at the definition of Insured Risks, clause 1.2 states that Insured Risks “include” the normal range of insured risks. Other leases tend to state that Insured Risks “means” [the normal range of risks]. So, if a landlord chooses not to insure against flood, subsidence, heave and landslip, but all other normal risks are covered, it would say that it has insured “against Insured Risks” because it has insured against risks which are in the list of risks included in clause 1.2. The result of this drafting appears to be that Insured Risks are what the landlord has actually arranged to cover, and not necessarily what are specified in the list. Footnote 2 states that “The tenant should be aware that damage by risks not included in the “Insured Risks” definition may be the tenant’s responsibility under the tenant’s repair obligation.” However, it seems that it is damage by the risks that the landlord has not in fact insured against that may be the tenant’s responsibility.
Noting interests. The landlord is obliged by these clauses to “notify its insurers of the interest of the Tenant in the Premises and have it noted on the policies of insurance or by a general noting under the conditions of the policies.” However, the footnotes caution that “there is no established authority to prove the benefit of such noting” and that the noting of the tenant’s interest on an insurance policy does not protect the tenant against the insurer exercising subrogation rights against the tenant. Accordingly, there is a separate obligation on the landlord to use its reasonable endeavours to procure that the insurers waive entitlement to rights of subrogation against the tenant, any sub-tenants and any other persons lawfully occupying the premises.