insurance
Businesses intending to enter into a commercial lease should take account of some major points concerning property insurance.
Under a typical commercial lease, the landlords insure the land and buildings and recover the insurance premium from the tenants. The tenants should do the following:
- they should make sure their landlord is required to insure against an agreed list of insurance risks which is set out in the lease. Tenants should ask their brokers to check that this list of insurance risks is comprehensive. In particular, tenants should consider whether they need the landlords to insure against additional risks, such as the risk of terrorism (particularly relevant to properties at sensitive security locations such as airports and railway stations).
- businesses should investigate whether the property lies in a possible flood-risk zone or not. There are three separate issues. First, insurers may charge increased premiums for high-risk areas or may stop insuring altogether if they assess the risk as too great. Second, flood-risk is likely to grow in significance over the next few years, as more information enters the public realm - the Scottish Environment Protection Agency is currently working to produce a national assessment of flood risk by 2011 and new flood risk and hazard maps by 2013. Third, if a business ignores the flood risk and takes on the lease, it may find that it cannot transfer the lease to another person. You should, then, seek your brokers’ advice on the likely future availability of insurance cover for floods against the property in question. Bear in mind that flood-risk areas include not just coastal and river areas but also areas at risk from overloaded sewers.
- tenants may want either to self-insure or arrange their own insurance against certain insurance risks, the most obvious being risk of glass breakages. As most businesses know, it is often more cost effective to pay for replacing glass panes rather than to make a formal insurance claim.
It is worthwhile asking your insurance broker to look at the level of insurance premium being charged by the landlord. Many landlords do not particularly worry about the cost of the insurance premium, since they know their tenants always bear the costs. Make sure that the landlord under your proposed lease is required to insure the property at a competitive rate