Tenant liable to insurance claim for damage to the remainder of the building

The High Court has recently ruled that where a landlord is not obliged to insure the whole building on behalf of a tenant who has taken a lease of part of that building, the landlord’s insurers can make a claim against the tenant for loss and damage to the parts of the building the tenant does not occupy.

This is being referred to by lawyers as an “insurance trap” for tenants.

It is well established that where a landlord is obliged to take out insurance for the benefit of both the landlord and the tenant, the “Mark Rowlands” rule applies which prevents an insurance claim being brought against the tenant. As such, the “Mark Rowlands” rule makes it desirable to tenants for the lease to oblige the landlord to insure the whole building rather than just the demised premises which is occupied by the tenant, forming part of the building. 

The case was Prezzo Ltd v High Point Estates Ltd [2018] where the tenant was the leaseholder of the ground floor and basement of the building, defined in the lease as “the Premises”. The lease obliged the landlord to insure the Premises and the tenant was obliged to pay insurance rent towards the cost of the insurance. The landlord did in fact insure the whole building, but only the Premises was insured for the benefit of the tenant.

A fire, resulting from the tenant’s negligence, caused damage to the Premises and the rest of the building. The insurer indemnified the landlord under the policy and sought to recover from the tenant the money it had paid out.

The “Mark Rowlands” rule applied in respect of the Premises as the landlord had insured the Premises for the benefit of both the landlord and the tenant in accordance with its obligations under the lease. This meant that the insurers could not bring a claim against the tenant for damage to the restaurant. However, as the rest of the building was insured only for the benefit of the landlord, the Court held that the landlord’s insurer was able to make a claim against the tenant for loss and damage to the remainder of the building.

The Court did look at other terms in the lease to see if they could have the effect of widening the obligation to insure the Premises into one to insure the whole building, however, the wording was drafted such that they could not.

This case highlights the importance of carefully considering the wording of a lease, particularly where a tenant is negotiating terms for a lease of part of a building. The risk of future damage to the whole of the building should not be overlooked and the lease should provide adequate protection in respect of this eventuality.

At Myerson our property team has extensive experience in acting for all parties in connection with landlord and tenant issues. If you would like advice in this area you can contact us by calling 0161 941 4000 or by emailing lawyers@myerson.co.uk.