Check small print to avoid flood misery
As businesses in Essex mop up after this week’s floods, a leading solicitor is urging landlords and tenants to check the small print of their lease as insurers prepare to withdraw flood damage as standard.
Flood risk cover has come under the microscope of insurers in recent years as claims have increased and more properties are planned to be built on flood plains.
And, according to David Rayner, who leads the commercial property team at Birkett Long in Chelmsford, news that the Government plans to spend £500m a year on flood defences – half the amount recommended by the Environment Agency – is doing little to ease insurers’ fears.
The insurance industry has yet to confirm it will renew an agreement with the Government – which runs out in 2013 – committing it to provide cover for customers, as long as flood risk is properly managed.
“There is a real danger that some properties will become uninsurable for flood risk, and if the premises are mortgaged, that could put the borrower in breach of some of their mortgage obligations,” said Mr Rayner.
“Where premises are leased, both landlords and tenants will want to review the terms of the lease to check who has responsibility for obtaining insurance cover and who has responsibility – and potentially liability – if a risk ceases to be insurable.”
Many old leases place a duty on landlords to insure against specific risks, usually including flooding, and if the risk becomes uninsurable then the landlord will be responsible for repairs.
But newer leases often include clauses that remove that obligation where risks can not be covered in the UK insurance market at reasonable cost.
“So the landlord will no longer have a responsibility to insure against flooding if it becomes prohibitively expensive,” explained Mr Rayner. “But that’s not the end of the story, because the tenant will have a duty to repair, which will include damage caused by uninsurable risks.
“Not only that, but while the tenant will usually not have to pay rent if the property is damaged or destroyed by any of the insured risks, they will have to continue paying if damage is caused by an uninsured risk – even if the property is unusable.
“It stands to reason that some tenants will look to amend the lease to put all liability for damage caused by uninsured risks back on the landlord.”
But, according to Mr Rayner, there is a fairer way – to require the landlord to insure against risks where cover is readily available at reasonable rates, but to make specific provision for what happens if damage is caused by an uninsured risk.
“Normally, that will mean giving the landlord the option to repair the uninsured damage at the landlord’s cost, and if he does, the rent would be suspended until the repairs are complete.
“However, if the landlord decided not to carry out the repair within an agreed timescale, then either party would be able to bring the lease to an end.”
Unfortunately, not only could flooding prove to be a human tragedy, as it has in Australia, but it has the potential to cause real harm to the viability of many businesses.
For further information and/or to request a review of your existing property documents please contact David Rayner on 01245 453826 or email firstname.lastname@example.org