Help, my building has burned down!

Author: Chris Alexander

This is hopefully a statement that the vast majority of us will never have to utter.  However, with the recent spate of civil unrest and several buildings across London ablaze over the last couple of nights, it is worth considering what provision your lease makes in the case of destruction or damage by an insured risk:

1.    Commercial leasehold premises

Every lease will be different but the usual position is that the landlord is responsible for insuring the building against  loss or damage by certain insured risks for its full reinstatement cost.  Fire and civil commotion (which is considered to include riots) are usually insured risks in most leases.

If the building is damaged or destroyed by an insured risk then the usual position is that the tenant should notify the landlord of the damage and the landlord should make a claim on the buildings insurance policy (most policies require notification within a certain period of time or cover can be lost).  The landlord is then usually obliged to apply the insurance monies for the reinstatement or rebuilding of the premises.  However, there are some exceptions to this general position:

a)    where the landlords obligations are conditional upon the tenant paying the insurance rent  and the tenant has failed to make payment;
b)    where the lease gives the landlord a discretion to decide whether to rebuild/reinstate (usually only in cases where it is considered impossible or impractical to do so)

I would also usually expect to see a suspension of rent clause, which will mean that the tenant is not obliged to pay the rent again until the premises are fit for occupation.

However, that said insurers as a general rule exclude riot from their fire damage policies.  It may therefore be the case that the policy in place does not exactly coincide with the landlord’s insurance obligations.  In the case of a claim denied by the insurers this could lead to a dispute between the landlord and tenant (unless the landlord’s obligation to insure is subject to any exclusions, limitations, excesses and conditions that may be imposed by the insurers).

The Riot (Damages) Act 1886 does give a right of action for damage against the police authority in instances of riot (although claims must be delivered within 14 clear days after the day on which the happenings giving rise to them occurred).  This provides alternative recourse for those affected by riot damage.

Finally, the landlord’s insurance covenant will rarely require the landlord to insure against the tenant’s loss of profit for the period for which the premises are beyond use.  Therefore, only tenants who have taken out business interruption insurance will be completely protected.

2.    Residential Long Leases

The position is similar in a residential long leasehold situation, in that the landlord is likely to be obliged to insure and reinstate in the same way.  However, in the event that it is impractical or impossible to repair or rebuild the building, there may be an issue of an insurance shortfall between the reinstatement cost (which is what the insurers would pay out for) and the market value of the leasehold premises (ie what it was purchased for).

Chris advises on litigation and dispute resolution within the property sector, with a particular specialism in ‘real property’ and landlord/tenant matters.

If you would like more information or advice relating to a specific matter, please do not hesitate to contact Chris Alexander on 01727 798000 or by email at chris.alexander@salaw.com.

© SA LAW 2011
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