Traditionally, tenants bore the risk of damage to their premises by uninsured risks, but in today’s market, uninsured risk provisions in leases are generally accepted, with the landlord agreeing to reinstate damage caused to the premises by an uninsured risk.

However, some landlords do not automatically include uninsured risk clauses in the draft lease, so tenants will want to make sure that they amend the lease to limit their repair obligation in relation to uninsured risk damage.

The basic position in most commercial leases is that the landlord will covenant to insure the premises, and the tenant will covenant to pay insurance rent to cover the cost of the premium.

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Insurance Provisions and Repairing Obligations in Lease Agreements

The tenant’s repairing obligation should exclude damage caused by an insured risk, as the landlord will receive insurance proceeds for insured risk damage which it will use to rebuild or reinstate the premises.

However, there is usually a caveat that the tenant will be obliged to repair insured risk damage where the insurance is vitiated or insurance monies withheld because of an act or omission of the tenant.

Where the landlord covenants to insure and reinstate, the insurance provisions in the lease should cover four main elements:

  • The landlord’s obligation to insure
  • The tenant’s obligation to contribute towards the insurance costs and other insurance obligations
  • The landlord’s obligation to reinstate damage caused by an insured risk
  • Provisions for suspension of rent payments following insured damage

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Repairing Obligations and Uninsured Risk Provisions in Lease Agreements

But what happens in the event of damage by an insured risk that the landlord has not insured?

This would be classed as an uninsured risk, and in the absence of uninsured risk provisions in the lease, the tenant would be obliged to repair the damage.

Typically, an uninsured risk is a risk that would have been an insured risk (as defined in the lease) but is not covered by the insurance due to exclusions or limitations imposed by the insurers or the unavailability of insurance in the commercial market.

If a lease is silent on damage by uninsured risks, the tenant will be responsible for repairing uninsured risk damage to its premises.

However, tenants are now less willing to accept an obligation to make good uninsured risk damage.

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Rent Suspension and Termination Rights

In the same way, when there is damage to the premises by an insured risk, the tenant will want to ensure that there are provisions for the suspension of rent payments following uninsured risk damage.

From the landlord’s point of view, they will want to ensure that they have a sufficient period of time (usually 12 months) to decide whether to reinstate the damage (at its own cost) or terminate the lease.

If the landlord does not elect to reinstate within this period or if they elect to reinstate but fail to complete the works by a certain deadline (usually by the expiration of the landlord’s insurance period for loss of rent), then the tenant will want the right to terminate the lease.

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If you need legal advice regarding uninsured risks in commercial leases, Myerson's Commercial Property Team can help: