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All you need to know about insurance of leasehold property

All you need to know about insurance of leasehold propertyIt is important that the property is insured against possible damage by fire, flood, or other potential threats. The landlord will naturally want to protect his investment and hence make sure that his loss is reinstated in the event of any damage through insurance. The tenant on the other hand would like to be assured that he is living is a safe place that shall remain so throughout his stay.

When the whole property is let, insurance costs are covered by the tenant. And in some instances, the landlord may take out the insurance and charge the tenant by way of a service charge.  This arrangement is comfortable for the landlord who need not pay for the premium, but can be assured that his property is protected against possible damages.

But when the property is let in parts, there are two options before the seller and the buyer;

a)      The tenant should insure the area that is leased to him, while the landlord is responsible for insuring the common parts. While this seems a convenient proposal, carrying it out would lead to several practical problems. For one, the landlord would have to keep a tab on every tenant to check if he has complied with the covenant. Secondly each tenant would have to rely on the other tenant complying with the covenant. If a tenant has not insured his property, it would be difficult to rebuild (in the event of damage) as the proceeds would not be sufficient. It is also possible that the proceeds of the insurance claim may be used for self-use rather than using it for making good any damage caused. Although, the lease may require tenants to insure from a single company, there could be multiplicity of claims, should one need to be made.

b)      To avoid the above mentioned complications, the landlord insures the entire block and passes on the costs to the tenants through a service charge. Usually, it is the decision of the landlord to choose the insurance company, but a conveyancing solicitor acting for the landlord should make sure that the premium can be recovered by inserting the specified provisions for payment of a separate insurance rent when drafting the lease.

Irrespective of the fact that the lease is of the whole or in part, the following issues should be kept in mind;

a)      Risks insured against

b)      Amount of cover

c)      Application of policy monies

Risks covered

Needless to say, a property is to be insured against risks. But what are these risks? The conveyancing solicitor should mention these expressly. Some common risk factors include fire, storm, flood, etc.  But what if the landlord takes insurance to the extreme and insures the property against unlikely and expensive risks like terrorist attacks? A conveyancing solicitor acting for the tenant should check for these.

He should also read the policy and not just rely on the covenant to ascertain the risks that are covered. If an important risk is not covered, the tenant can arrange for this to be done or renegotiate the terms of the clause. But truth be told, this does not happen in practice.

Some suggested clauses to cover most foreseeable risks include;

subject to the reasonable availability of cover, fire, explosion, lightning, tempest, storm, flood, burst pipes, landslip, subsidence, riot, civil commotion, industrial unrest, impact by vehicles, aircraft and other aerial devices and articles dropped there from, acts of malicious persons and vandals and such other risks as the landlord may reasonably require or the tenant may reasonably request.

Amount of cover

The property should be insured to its full value or else, it would be impossible for the landlord to make good any damage. Full reinstatement value would include;

a)      Costs of demolition and site clearance;

b)      Professional fees (for ex. architects, surveyors, etc.)

c)      An allowance for inflation

It is also advisable to opt for a professional valuation or index linking.

Application of policy monies

There should be a covenant to allow the landlord use the proceeds of the sale towards reinstating the premises. But a tenant would want this provision to be extended so as to make the landlord make good any shortfall in the proceeds out of his own pocket.

The solicitor should check if there is a provision to deal with the possibility of reinstatement being impossible. Should the money be retained by the landlord, or passed over to the tenants who have paid premium for the property? It is best advised that the proceeds are shared between both parties to the values of their respective interests.

Rent suspension

Even in the event of any incident where the property is rendered unusable, the tenant is required to pay his rent. Thus, he should make sure to include provisions that allow the suspension of rent during the period when such mishap happens and the property cannot be occupied. The landlord would be more than happy to include such provision because he can insure the property against loss of rent during such time. But this insurance is usually valid only until three years, thus landlord too would limit such a suspension accordingly.

Photo courtesy: Alejandro Erickson



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