To be published in the May edition of the QHA Review.
If we have learnt anything by now, it is that we cannot predict the future.
With many of our clients’ venues suffering damage as a result of the recent floods, we thought it would be a timely opportunity to revisit the importance of being aware of the terms of your lease, particularly in respect of insurance obligations.
On behalf of Mullins, I would also like to extend our thoughts to everyone on the East Coast that has been impacted by the recent natural disaster and ongoing COVID-19 challenges.
Insurances
A typical commercial or retail lease should require the tenant to take out at least three general types of insurance: public liability, plate glass and coverage of the tenant’s contents. Depending on the use permitted under the lease, there may be additional insurances required: workers’ compensation and business interruption coverage or any other insurance that the tenant is required to have by law, are some that come to mind.
While plate glass and public liability insurance are quite straightforward, things get more complicated with the requirement for tenants to take out insurance for their contents, which is commonly for replacement value.
Do You Know Exactly What the Tenant's Contents Are?
The definition of Tenant’s Property, or a term alike, under a lease will often relate to all property that the tenant brings on to the premises, that is not the Landlord’s Property. This will generally include stock, fit out and the tenant’s chattels. However, this is not always the case, and it may include the things like air-conditioning units and fire equipment, that may be the Tenant’s Property for the purposes of insuring and maintaining, but not actually items that are legally owned by the tenant.
Therefore, it is critical that when you are entering into a lease, careful consideration is placed on accurately defining the Tenant’s Property and Landlord’s Property, not only from an insurance perspective but also from a disputes perspective should one arise.
Appropriate Coverage
For existing tenants, and landlords, it is important to frequently check that the value your insurance coverage provides represents the accurate market value of those items that you are insuring for.
For tenants, with the increase in EBITDA multiple, it is important that your insurance reflects the true value of your business, to ensure that the indemnity provided by your insurer is comprehensive if you are to suffer a loss. Further, supply chains operating at a reduced capacity has led to an increase in construction costs and delay on construction timelines generally. With this in mind, where a business suffers interruption from an event such as a natural disaster, it is important that adequate business interruption coverage is in place.
On the landlord side, any prudent landlord should insure their property, paying particular attention to Landlord’s Property as defined under the lease. Again, with the value of freehold properties increasing rapidly in South-East Queensland, it is important that the value that the property is insured for represents the current market value.
Conclusion
While no one can predict events like floods or fires, tenants and landlords can prepare themselves to an extent by having adequate and appropriate insurance. Please seek legal advice before entering into a lease to avoid confusion about what your insurance obligations are. Should you have any queries about entering into or reviewing the terms of an existing lease, please contact me on (07) 3224 0230.
