Uninsured Risks in Commercial Leases

The tenant’s repairing obligation should exclude damage caused by an insured risk, as the landlord will receive insurance proceeds for insured risk damage which it will use to rebuild or reinstate the premises.

However, there is usually a caveat that the tenant will be obliged to repair insured risk damage where the insurance is vitiated or insurance monies withheld because of an act or omission of the tenant.

Where the landlord covenants to insure and reinstate, the insurance provisions in the lease should cover four main elements:

• The landlord’s obligation to insure
• The tenant’s obligation to contribute towards the insurance costs and other insurance obligations
• The landlord’s obligation to reinstate damage caused by an insured risk
• Provisions for suspension of rent payments following insured damage

In the same way, when there is damage to the premises by an insured risk, the tenant will want to ensure that there are provisions for the suspension of rent payments following uninsured risk damage.

From the landlord’s point of view, they will want to ensure that they have a sufficient period of time (usually 12 months) to decide whether to reinstate the damage (at its own cost) or terminate the lease.

If the landlord does not elect to reinstate within this period or if they elect to reinstate but fail to complete the works by a certain deadline (usually by the expiration of the landlord’s insurance period for loss of rent), then the tenant will want the right to terminate the lease.