Blog Question: Leases
Quite an interesting question today:
Our client is the tenant operating a super market in the [withheld for privacy reasons].
The Property owner have provided a lease which contains a number of condition as highlighted in the attached (Section 19)
The tenant is concerned that if a loss occurs , the landlord will use section 19 as a way of not repairing or reinstating the property therefore allowing our client to continue trading. (Worth noting that 19.1 b B advises that they will not rebuild if the building sustains more than 50% damage)
Our client wants cover over their $2.5 million investment should this occur.
Question 1. – Are these type of Lease conditions normal?
Question 2. – Could this type of financial risk be insured?
Thanks Alan, happy to have a chat if need be.
Scott [surname and email provided]
My response is as follows:
First up it is prudent for a broker to understand the terms of the building lease (and all other contracts an Insured may have entered into). What you raise is a good example of why.
Turning to the first question, I have not seen this exact wording but I have seen ones similar or that achieve the same effect. In reality, many landlords take the opportunity to redevelop the land if the building is substantially damaged.
I am not sure what the $2.5 million investment involves.
If it is the stock, plant and equipment and all other contents then this would, I assume, be insured under an ISR policy for all insured perils. The policy allows for the assets to be replaced anywhere in Australia so if they had to relocate they would simply replace the assets at the new location.
The two big difficulties are:
- Finding a fresh location. The answer here is to have sufficient indemnity period to allow for the finding phase, lease negotiation phase, fit out and grand reopening and secondly having sufficient additional increase in cost of working coverage.
- If the insured’s property is not destroyed or badly damaged but the landlord decides that the building is not going to be rebuilt.
The trigger for the business interruption coverage is property owned or used by the Insured at the situation and or premises. If the landlord where not to rebuild, this would trigger coverage for the Insured to relocate and the two issues of sufficient indemnity period and additional increase in cost of working both apply.
The only other thing that comes to mind is that it may be necessary to insure loss of goodwill but this only covers the cost of buying out the goodwill of an existing competitor so that the Insured can take over this business in place of their own.
This may be of use if the Insured paid goodwill for the business that they may have acquired at this location and would have to pay again in the circumstances you describe. Please note that it would only cover the Insured in the event of the lease being cancelled due to a peril insured by the policy and only what they paid to get a new lease, not the investment they may have already made in purchasing the goodwill of a buainess.
For the sake of completeness I enclose the wording of the Goodwill Extension but I would ask you to note that a Sub-Limit for Goodwill is required to be shown on the policy Schedule.
I hope all this assists.
The Basis of Settlement clauses in Section 2 are extended to include the following provision:
Subject to the Sub-Limit of Liability stated in the Schedule against “Goodwill”, in the event of Damage (other than in circumstances where cover is excluded) occurring during the Period of Insurance to any building or other property or any part thereof used by the Insured at the Premises for the purposes of the Business, which results in one of the following circumstances:
(a) the rebuilding or reinstatement, whether total or partial, of the premises at the site being prohibited by, or not being commercially viable because of, any Act of Parliament or regulation made thereunder or any by-law or regulation of any municipal or statutory authority,
(b) the lessor’s neglect, refusal or inability to rebuild or reinstate the Premises or to renew the Insured’s lease or monthly tenancy,
(c) the refusal of any liquor licensing authority to grant an extension to carry on the Business at the Premises under the licence held by the Insured,
the Insurer(s) will compensate the Insured under this Item for the cost expended by the Insured to purchase Goodwill and/or a liquor licence upon acquisition of a similar business, within a reasonable time after the Damage, less that part of any amount(s) recoverable under any other Item or Items of Section 2 of this Policy which represent(s) the actual loss sustained by the Insured resulting directly from the interruption of the Business for such additional time, beyond the period required with the exercise of due diligence and despatch to rebuild or reinstate the Damage, required to restore the Business to the condition that would have existed had no Damage occurred.
GOODWILL means the future benefit from unidentifiable assets.
1. The Insurer(s) shall not be liable under this Item unless the Insured shall also have maintained in force an insurance on Gross Profit or Gross Revenue.
2. The Insurer(s) shall not be liable under circumstance (c) unless the Insured has used due diligence to ensure the observance of all licensing laws.
3. The insurance by this Endorsement shall not be prejudiced if any of the circumstances stated in Clauses (a), (b) or (c) of Condition 13 of this Policy arise due to the Damage.