Rights and Responsibilities After Weather Damage for Commercial Tenants
In recent years, we have become increasingly accustomed to weather warning announcements and the Met Office rapidly working through the alphabet of storm names. Last weekend saw the turn of Storm Darragh, which brought amber weather warnings, 45,000 NI households without power and much damage across the province.
In the aftermath of severe weather, many properties can be severely damaged to the extent they are uninhabitable or unusable. Homeowners would look to the terms of their insurance in this scenario. Fortunately, most insurance policies include cover for storm and flood damage (though the specifics can vary by provider).
In the case of business tenants, a damaged premises may mean immediate and, potentially long term, disruption to their business. At a worrying time like this, it may be unclear to business tenants what their rights are and who is responsible for what.
In this article, I discuss the questions which may be relevant following storm damage, including:
- who is responsible for repairs;
- insured and uninsured damage;
- continuing lease payments; and
- whether tenants can end a lease early.
Repairs to the Premises
The answer to who will be responsible for repairs will be found in the lease of the premises.
Every lease is different, so there is no “one size fits all” answer. For instance, in a multi-let building, a tenant may be responsible only for internal repairs, whilst the landlord is responsible for repairing common parts and the structure of the building.
Where an entire building is let to a tenant, it may be agreed that the tenant is responsible for all repairs to the building, including external and structural repairs.
If you are unsure of the extent of your repairing liability, a commercial property solicitor will be able to check the terms of your lease and clarify this for you.
Insured damage
Similarly, the arrangements for insurance will vary from one lease to another. In a multi-let building, it is common for a landlord to arrange the building insurance and recharge the premium (proportionally) to the tenants. The tenants will be responsible for their own individual contents insurance, which is important to bear in mind in terms of any damaged stock or equipment.
In this style of lease, it is now the norm that a landlord will require to insure the property against a series of industry standard risks. The exact list of risks can vary between leases, but weather or climatic risks, such as storm, earthquake, flood and tempest are nearly always included.
In the event of property damage resulting from one of the specified “insured risks,” the landlord will generally be obliged to make a claim with their insurer and spend the insurance proceeds on reinstating the property.
Many leases will also require the landlord to have completed the reinstatement works within a specified period. This is usually linked to the period for which insured loss of rent is available, which is typically 3 years. If the reinstatement works are not complete by the end of this timeframe, the tenant can terminate the lease.
It is common for these types of leases to also include terms which require the rent and other lease payments (such as service charge) to be suspended if damage is caused by one of the “insured risks.”
Uninsured damage
What happens if the property is damaged by elements which are not insured (known as “uninsured risks”)?
This may be applicable in a case where insurance is simply unavailable for certain risks or it is too expensive. It is unlikely that storms or severe weather would fall within this category, but this may apply to flooding in some areas, for instance.
Some leases expressly provide for this scenario and contain “uninsured risk clauses.” These clauses will primarily set out who is responsible for reinstating the property in the event of uninsured risk damage. Typically, this will be agreed to be the landlord’s responsibility. However, as the cost of reinstatement following uninsured damage would come out of the landlord’s own pocket as opposed to insurance proceeds, the landlord may choose not to reinstate. For example, where reinstatement would not be economically viable. In this instance, either party would be able to terminate the lease.
Another common feature of uninsured risk clauses is the suspension of rent (and other lease payments) following uninsured risk damage.
Despite a growing number of leases containing clauses to give protection to tenants against uninsured risks, many are silent on the topic. Where uninsured risks provisions are absent, a tenant will be responsible for both the repairs and rent payments, despite the unusable condition of the premises.
Lease payments
If a business premises has been damaged to the extent that it is not fit for occupation, a critical question for the tenant will be whether they must continue to pay rent.
As already mentioned, there may be clauses in a lease which state that rent will be suspended from the time the property is damaged until it is reinstated. This can also cover other lease payments such as service charge.
However, if a lease is silent on this topic, the tenant will remain on the hook to pay rent and any other lease payments during the time which their premises is unusable.
Ending a lease early
The ability to terminate a lease, following property damage, will vary from lease to lease. However, it is generally the case that if the property is damaged by an insured risk, the landlord will first be given a reasonable opportunity to reinstate the property. The period for reinstatement is usually linked to the period of insured loss of rent cover, which is typically 3 years. If the Landlord does not complete reinstatement within this period, the tenant will usually be able to terminate at the 3 year mark.
If the property is damaged by an uninsured risk, some leases contain specific rights for a tenant to terminate a lease, where a landlord has chosen not to reinstate the premises.
If a lease is silent on termination of the lease following damage to the property, the tenant will not have any automatic rights to terminate. Terminating the lease early would therefore require to be negotiated and agreed directly with the landlord.
Conclusion
The rights and responsibilities of a tenant following damage to property very much depend on the terms of their lease and the insurance status of the damage in question.
For this reason, it is crucial to take advice from a commercial property lawyer when entering a new lease to (a) understand the terms you are agreeing to; and (b) negotiate for the inclusion of clauses which protect a tenant’s position in the event of property damage.
If you have any further questions on this topic or require specialist advice, please get in touch with us.
Editorial prepared by Jayne Paterson, Associate, Commercial Property @ Mills Selig
Jayne Paterson, Associate, Commercial Property
Jayne has wide-ranging experience acting for private and public sector clients, including acquisitions and disposals, commercial leases and their management (for both landlords and tenants), refinances and supporting corporate transactions.
T: 028 9694 9463
E: Jayne.Paterson@MillsSelig.com
W: www.MillsSelig.com/CommercialProperty
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