Who Should Pay Building Insurance On A Commercial Property?

In most commercial properties, the landlord is responsible for arranging the building insurance, but the tenant usually pays the cost through the service charge or by reimbursing the landlord under the terms of the lease.

However, the exact responsibility depends entirely on the wording of the commercial lease. While this arrangement is the most common in the UK, there are circumstances where the tenant is responsible for arranging insurance themselves, particularly in freehold sales, long leasehold interests or certain single-let buildings.

Who Normally Arranges Building Insurance?

For the majority of commercial leasehold properties, the landlord arranges a comprehensive buildings insurance policy covering the property against risks such as:

• Fire

• Flooding

• Storm damage

• Subsidence

• Escape of water

• Impact damage

• Malicious damage

• Terrorism (where appropriate)

The landlord maintains control over the insurance to ensure the building remains adequately protected and complies with lender requirements, particularly where there is a mortgage secured against the property.

Who Pays For The Insurance?

Although the landlord usually arranges the policy, the tenant commonly pays the insurance premium.

This is typically recovered through:

• An annual insurance rent.

• A service charge.

• A reimbursement provision within the lease.

For multi-let buildings, each occupier normally contributes a fair proportion of the total premium based on the terms of their lease. In single-let properties, the tenant often reimburses the landlord for the entire cost of the insurance.

Can A Tenant Arrange Their Own Building Insurance?

Yes, but this is less common.

A tenant may be responsible for arranging building insurance where:

• They own the freehold property.

• They hold a very long lease with full repairing obligations.

• The lease specifically requires the tenant to insure the building.

Even in these situations, the lease will often specify minimum insurance requirements, approved insurers and the level of cover that must be maintained.

Failure to comply with these obligations could place the tenant in breach of the lease.

What Does Building Insurance Cover?

Building insurance protects the physical structure of the property rather than the business operating within it.

A typical commercial buildings insurance policy covers:

• The main building structure.

• Roofs and external walls.

• Permanent fixtures and fittings.

• Foundations.

• External hardstanding.

• Boundary walls and fences.

• Reinstatement costs following insured damage.

It does not normally cover:

• Business contents.

• Stock.

• Equipment.

• Loss of profits.

• Public liability.

• Employers’ liability.

These risks are usually insured separately by the occupier.

What Happens If The Building Is Damaged?

If the property suffers major insured damage, the landlord will normally submit the insurance claim because they hold the policy.

The lease should explain:

• How insurance monies will be used.

• Whether the landlord must rebuild.

• Whether rent is suspended while the building cannot be occupied.

• What happens if reinstatement is impossible.

These provisions are important because they protect both landlord and tenant following a significant event such as a fire or flood.

Should Landlords Shop Around For Insurance?

Yes. Although landlords arrange the policy, they should ensure they obtain appropriate cover at a reasonable market cost.

Many commercial leases require the landlord to insure through a reputable insurer and prohibit recovering unreasonable insurance premiums from tenants. Where tenants believe premiums are excessive, they may be entitled to request evidence of the insurance costs or challenge recoverability depending on the lease wording.

The Importance Of Reading The Lease

An experienced commercial property surveyor can explain how insurance obligations are allocated, identify unusual clauses and ensure the lease reflects standard market practice.

There is no single rule that applies to every commercial property. While landlord-arranged insurance is standard practice across much of the UK commercial property market, every lease is different. The insurance provisions should always be reviewed carefully before entering into a lease, renewing one or purchasing an investment property.