Commercial Tenants - How Well Do You Understand Your Obligations?

Before signing up to a commercial lease, tenants should always take expert legal advice to ensure they truly understand the obligations they are taking on. The point was powerfully made by a case in which the insurance provisions of a lease became the focus of dispute more than 50 years after it was executed.

The case concerned premises which were held under a 99-year lease dating back to 1968. Under the lease, the tenant was required to insure the premises against various perils in both its name and that of the landlord. The obligation to reinstate the premises following an insured incident also fell upon the tenant.

The lease imposed no express corresponding obligation on the landlord to apply any insurance monies it received to reinstate the premises. The absence of such a provision gave rise to the tenant's concern that the landlord could claim entitlement to retain such part of any insurance payout that represented its insurable interest in the premises. If that occurred, the tenant feared that it would be left with insufficient funds to meet its reinstatement obligation.

The landlord was reluctant to agree to any amendment of the lease and argued that the tenant's concerns were divorced from any concrete facts. It accepted that, if the premises were to be rebuilt or reinstated, it would be obliged to pay over to the tenant any insurance monies it received for that purpose. It denied having any intention to obtain and keep any such monies for itself whilst at the same time requiring the tenant to fully fund reinstatement works.

Ruling on the dispute, a judge nevertheless found that the tenant had grounds for legitimate concern that the landlord might seek to retain at least part of relevant insurance monies for its own purposes. It was therefore appropriate and just to protect the tenant's position by granting a binding declaration framed in accordance with its existing obligations under the lease.

The judge declared that, in the event of an insured peril destroying or damaging the premises, any monies paid to the landlord by insurers are required to be paid over to the tenant insofar as they are reasonably required for the purpose of reinstatement works. It would remain open to the landlord to claw back any such monies which were not in fact used to pay for such works.