Legislation around uninsured risks needs to be clearer

Chloe Fay argues in favour of reforming the law in respect of uninsured risks to make questions of liability clearer for landlords and tenants. Standard practice in commercial property leasing is for a landlord to insure its property by obtaining a market standard policy from a reputable insurance provider. The landlord will then recover the premium from the tenant. However, there are some acts and incidents which are excluded from standard policies or uninsurable in the current market. There are also some risks which can only be insured outside of high risk areas or for a substantial premium, such as flooding. These risks are commonly known as uninsured risks. The status quo In the absence of any legislation in this area, liabilities are dictated by the wording of the lease. If a certain risk is not specifically excluded from a tenant’s full repairing covenant in the lease, and is not covered by the landlord’s insurance policy, the tenant will be liable for any damage arising from that risk. The Code for Leasing Business Premises in England and Wales 2007 states that if the whole of the premises are damaged by an uninsured risk so as to prevent occupation, the tenant should be able to terminate their lease, unless the landlord agrees to rebuild at its own cost. It also states that rent should be suspended if the premises are damaged by an uninsured risk. However, the code is not mandatory. It is only a guide and is not necessarily used in practice. It is also incredibly vague and only provides guidance in a limited range of circumstances. Schedule 3 of the Landlord and Tenant Act 1987, which applies to both commercial and residential leases, sets out tenants’ rights in respect of property insurance. However, it largely caters for requests for information and does not provide any rights for landlords. It does not address uninsured risks at all. Reform I would choose to reform current legislation to provide clear and thorough guidance on the liabilities arising from uninsured risks and options for landlords and tenants in the aftermath of such incidents. This is a hugely neglected area of commercial leasehold property law and our clients’ concerns surrounding uninsured risks are increasing. Our transactional colleagues are spending significant time negotiating to protect clients against uninsured risks in leases. The reliance on good drafting and the absence of an established procedure for uninsured losses make this area of the law very uncertain. With the retail market declining, particularly in relation to high street stores, our retail occupier clients are less willing to take financial risks. Occupiers are demanding ever shorter and more flexible leases as they are no longer able to commit to rental payments beyond the foreseeable future. The collapse of retail giant BHS in 2016 demonstrates the fragility of today’s retail market and explains why retailers are “tightening their belts”. The risk of having to pay substantial amounts in repairs, should an uninsured incident occur to a tenant’s premises, will only accelerate decline in the market. On the other hand, accepting liability for uninsured risks will be equally unpalatable for landlord investors and may deter them from investing in the UK market. In addition to the above, both retailers and investors will be concerned about the outcome of Brexit and how it might affect their business, financially and otherwise. Terrorism Terrorism is one of the most commonly uninsurable risks in today’s market and is usually excluded from most standard insurance policies. Specialist terrorism policies can be obtained, but unsurprisingly, the cost can be significant. The MI5 security service threat level for international terrorism in the UK is severe, meaning that an attack in the UK is highly likely. Even where properties are insured against acts of terrorism, insurers are not responding promptly to claims. Businesses which were victims of the London Bridge attack on 3 June 2017, reported that their insurers had still not paid out four months after the incident took place. This will be a concern and potentially a deterrent to investors. An incident also has to be designated as “terrorism” by HM Treasury in order for specialist insurers to provide compensation, but there is no guidance in place for when an incident is not categorised in this way. A statute dealing with uninsured risks, particularly in relation to terrorism, could look similar to the Landlord and Tenant (War Damage) Act 1939. Some of the provisions in this Act which I think would be applicable to uninsured risks are: forbidding of contracting out; the requirement for the tenant to serve notice on the landlord once damage occurs; the landlord (or mortgagor) can enter the premises to inspect the damage; either party can serve notice to disclaim the lease; and provisions dealing with multiple occupancy premises. Uninsured risks legislation will also need to take into account insurance legislation and common practice in the insurance industry. For example, landlords are not obliged by law to insure lettable premises, though they are often required to insure by a mortgagor. In addition, it is common practice for investors to have “block insurance” policies in place. Any legislation will need to cater for block policies and how they will deal with uninsured risks. Riots The Association of British Insurers (ABI) published a guidance note on recovering after riots, following those that took place in August 2011 in London and other cities across England. In this note, ABI commended the Riot (Damages) Act 1886 for allowing those affected by rioting to claim compensation. However, they acknowledged that the legislation needed updating for the modern day. The Riot Compensation Act 2016 received royal assent on 23 March 2016 repealing the Riot (Damages) Act 1886 and replacing it with clear, modern legislation. This Act allows claims for compensation to be brought for damaged, destroyed or stolen property resulting from a riot, whether or not insurance has been put in place. Many of the provisions in this Act could also be applied to other uninsured risks and could help to identify what uninsured risks legislation should cover. Clarity of liability It is not just the cost of repair and reinstatement that needs to be provided for by legislation. Landlords and tenants should both have the ability to determine their lease if an uninsured incident takes place. If the parties choose not to determine the lease and undertake works, the tenant should receive an abatement of rent and other charges while works are undertaken. These provisions should be implied by statute, if not expressly provided for in the lease. Having clear, defined legislation setting out each party’s responsibilities will also ensure that all relevant persons are aware of their liability. In practice, we are asked to advise our clients of the liabilities arising from their leases. Without any legislation or case law in this area, we can only interpret the wording of the lease. It is not uncommon for a court to make a decision which goes against common practice and refutes what was believed to be the correct position. This could certainly occur in relation to uninsured risks, if a dispute became litigious. Putting legislation in place will provide clarity, which will likely reduce the number of potential disputes in this area. However, new legislation is often itself the cause of disputes as we need guidance on how the wording of an Act should be interpreted. Our legal system often requires both legislation and case law before we can actually understand the correct position on any given area of law. Stand by property litigators! Regardless of who should be liable for uninsured damage, it is clear that we need legislation to follow in order to correctly advise our clients and to ensure that all concerned parties are aware of the uninsured risks arising from their lease. Chloe Fay is a real estate litigation paralegal at Squire Patton Boggs The Alan Langleben Memorial Essay Competition 2018 This is the winning entry in this year’s Alan Langleben memorial essay competition, held by the Property Litigation Association. The competition is named in memory of Alan Langleben, an esteemed solicitor and long-server on the organisation’s law reform sub-committee, who passed away in February 2016. PLA members competed to win a £1,000 prize, plus publication in EG, responding to the question: “Reforming commercial leasehold property law is conspicuously absent from the Law Commission’s 13th Programme of Law Reform. If you could change any law in this particular area, what would that be and why is it important to anyone occupying or investing in UK real estate in 2018?” Judges praised Chloe Fay’s winning entry for being “original, interesting and commercial”.  Pic credit: Nigel Howard / Associated Newspapers/REX/Shutterstock