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COVID-19 UK: Landlord and tenant insurance issues

As the COVID-19 pandemic spreads across the globe, so does uncertainty. Landlords and tenants are facing unprecedented impacts on their businesses, and it is no surprise in this environment that both parties are looking to their insurance for comfort.

Business interruption insurance

Calling COVID-19 an interruption to business would be something of an understatement, and understandably commercial tenants are looking to their business interruption insurance as they have to close their premises, face unprecedented disruptions to their supply chains and deal with the implications of lockdowns and other similar measures.

Most commercial tenants will have taken out interruption cover as part of their usual business insurance packages. A policy will cover the tenant for lost revenue, mitigation costs and increased costs of working caused by certain triggering events.

Whether a tenant can rely on business interruption insurance due to COVID-19 will depend on the specific policy. Unfortunately most “standard” business interruption cover is only triggered by physical damage to the tenant’s premises or the building of which the premises form part, and insurers will not pay out for losses caused by the COVID-19 pandemic. This will apply to the majority of commercial tenants who will have standard coverage.

However, certain tenants may have purchased coverage extensions which expand the triggers for cover. These contingent triggers could include:

  • Notifiable disease – tenants may have coverage where their premises are closed or are subject to restrictions as a result of a “notifiable disease”. In England and Wales, COVID-19 only became a notifiable disease on 5 March 2020 (the date differs in different parts of the UK).
  • Denial of access – this would apply if the tenant’s premises cannot be accessed due to government, police or other regulatory action. COVID-19 “lockdown” measures – for example the government exercising its power to close or restrict entry to premises under the Coronavirus Act 2020 – could be a trigger in this context. The key question will be whether the closure is due to legally binding government action.
  • Loss of attraction – tenants may have a policy that responds to occurrences in the area its premises are situated which result in a reduction of business turnover. Hypothetically, a tenant who operates an essential business from its premises in a shopping centre where all other units are closed could seek to rely on this type of insurance, but ultimately it will be a factual question.

All tenants should be conducting reviews of their insurance policies if they have not done so already and be seeking advice on their position, as the devil is in the detail – whether their cover responds to certain triggers, and what type of loss is covered, will ultimately depend on the wording in each policy. If there is potential for an insurance claim, that claim needs to be notified to insurers promptly.

Can a landlord look to its loss of rent insurance?

Landlords will be just as worried about the adverse impact of the virus on their businesses, particularly on the flow of rental income. Commercial landlords will usually have taken out loss of rent cover as part of their property insurance, and as rent ceases to be paid due to the impact of COVID-19 landlords will be looking to their loss of rent cover for protection.

However, they are likely to be disappointed.

  • Pandemics are very unlikely to be included in the insured risks under a standard loss of rent insurance policy. As the policy will only kick in in the event of an insured risk, landlords will fall at the first hurdle
  • Loss of rent policies will normally only cover a landlord where its property cannot be occupied due to an insured risk causing physical damage to its property or the accesses to it, and will not provide cover where there is a loss of rental income due to a non-physical damage event

It is important to look at the specific policy – landlords may have purchased extensions, for example loss of rent due to the impact of notifiable diseases, or to cover denial of access caused by government action.

Can a tenant rely on the rent suspension provisions in a lease?

Most commercial leases will include rent suspension provisions, and tenants could be forgiven for assuming that they can rely on these provisions and cease to pay rent if they are unable to use their demised premises as a result of COVID-19. However, these arguments are not likely to go far because:

  • Rent suspension provisions in commercial leases are usually only triggered where there is physical damage to the property, estate or centre rendering the tenant’s demised premises unfit for occupation or inaccessible
  • In the unlikely event that this is not the case, rent suspension provisions usually only apply where the triggering event is caused by an insured risk (or an uninsured risk if the lease includes uninsured risk provisions). Most landlord insurance policies will not include pandemics as an insured risk. Similarly, pandemics will not be an uninsured risk. An “uninsured risk” is commonly defined as an insured risk against which insurance ceases to be obtainable in the London insurance market on normal commercial terms and commercial rates. If pandemics were never an insured risk, they will not fall into the uninsured risk definition

Whilst tenants will not be able to rely on the rent suspension provisions in their leases, the Coronavirus Act 2020 does give commercial tenants the opportunity to avoid paying rent up to the end of June 2020.

 

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all  of our resources on the topic – from crisis leadership to supply chain.

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning