Insuring tenant fit-out works
When fitting out its property, either at the start of a new lease or during the term as part of refurbishment works, it is important that the tenant ensures there is adequate insurance in place to cover damage that may be caused to the building by those works.
It is usual practice for the landlord to insure and recover the premium from its tenant, or where the building is multi-let the proportion set out in the lease. Fit-out works may not be covered under an existing insurance policy and that could therefore result in the tenant being exposed to liability far exceeding the value of the fit-out works should any damage occur.
The risk of damage to a building inevitably arises as a consequence of works and it would be reckless for a tenant to carry out works without first checking that they are covered by the landlord’s insurance. A lease will invariably be drafted in such a way as to make the tenant liable to the landlord in the event that the insurer refuses to pay out due to any act or omission on its part, or on the part of its workers or contractors.
Where an existing policy does not cover fit-out works one solution may be for the tenant to discuss with its landlord the option of extending the policy. As the tenant reimburses the premium it would seem reasonable. However, a landlord may refuse to cooperate. The administrative burden may be enough to dissuade a landlord from arranging extra cover or it may argue against doing so as many landlords arrange insurance through a block policy.
A tenant may think that adequate cover is provided by its entering into a standard form of building contract. Unfortunately this is not the case and risks remain.
The JCT standard building contract 2005 (revision 2, 2009) provides three standard insurance options (A, B and C). Option C - most appropriate for tenant fit-out works because it specifically refers to works to an existing structure - requires the tenant to take out an insurance policy jointly with the contractor for the full reinstatement value of the works. However, if the lease prevents the tenant from obtaining this type of insurance they are once again at the mercy of the landlord who, for the reasons outlined above, may not be prepared to extend cover.
Where Option C is unsuitable the parties may opt for Option A or B – covering the works and site materials but not the existing structure. The tenant may seek to cover the risk of damage to the existing building by relying on the landlord’s insurance (though this again requires the cooperation of the landlord) and by seeking to rely on the contractor’s public liability insurance.
With the cooperation of its landlord it is possible for a tenant to manage the risk associated with fit-out works. However, such assistance may now be less forthcoming as landlords are looking to manage their profits. The costs associated with damage could be significant and accordingly, tenants are strongly advised to seek professional advice early and consider the insurance position before works are started.
To speak to someone who can help with your commercial property matters call, email or request a call back from one of our specialist lawyers.
This article contains information of general interest about current legal issues. It does not give legal advice and specific advice should always be sought about your particular circumstances. We will be happy to assist.
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