Commercial Lease Insurance Obligations: What Tenants Should Check

A commercial lease does more than set the rent and the length of the tenancy.

It can allocate responsibility for the building, fit-out, glass, public liability, damage, reinstatement and other costs between the landlord and tenant.

Those obligations do not automatically appear in an insurance policy.

A tenant can sign a lease that requires one outcome while holding insurance arranged on a different basis. The mismatch may remain hidden until property is damaged and both parties turn to the contract and policies to determine who is responsible.

The safest time to identify that gap is before the lease is signed or renewed.

Why the lease and the insurance need to be reviewed together

A lease is a legal contract. An insurance policy is also a legal contract.

Each document has its own definitions, limits, exclusions, conditions and responsibilities. Reviewing only one provides an incomplete picture.

For example, a landlord may insure the building, but the lease may still make the tenant responsible for:

• Plate glass
• Internal improvements
• Signs
• Equipment
• Tenant-installed fit-out
• Reinstating the premises at the end of the lease

The lease may also require specific liability limits, require the landlord or financier to be noted as an interested party, impose indemnities or require evidence of insurance to be provided each year.

Whether a policy responds will depend on its wording, the lease and the circumstances of the event.

Insurance should not be assumed simply because a lease says one party must carry it.

The clauses that deserve particular attention

Building and structural property

Confirm who insures the physical building and what the lease treats as part of it.

The definition may include fixtures, structural additions or other property that the tenant might otherwise consider part of its fit-out.

Fit-out and tenant improvements

Identify who owns and insures partitions, cabinetry, flooring, electrical work, air-conditioning additions and other improvements.

Ownership, responsibility for repairs and insurance responsibility may not always sit with the same party.

Contents, stock and equipment

The landlord’s building policy will not ordinarily be a substitute for the tenant’s own property cover.

Review the value of the business’s contents, stock, equipment and machinery, including any seasonal increases.

Glass and signage

Responsibility for plate glass, shopfronts and external signs may be specifically allocated to the tenant.

Check whether these items are covered under the proposed insurance arrangements.

Public liability

Check the minimum limit required under the lease, the activities that must be covered and whether another party must be noted on the policy.

The lease may also require the tenant to provide a certificate of currency each year.

Damage and reinstatement

Review who must repair damage during the lease and who must return the premises to a stated condition when the lease ends.

The tenant’s reinstatement or make-good obligations may extend beyond repairing damage caused by an insured event.

Indemnities and releases

Indemnities and releases can alter the contractual allocation of risk between the parties.

These clauses should be reviewed by a lawyer before the lease is signed.

Business interruption

Consider how the business would meet ongoing expenses and recover lost income if damage made the premises unusable.

The building may be repaired, but the tenant could still face a lengthy interruption to trading.

A common misunderstanding: “The landlord insures the property”

That statement may be true, but it is incomplete.

A landlord may insure the building while the tenant remains responsible for its own property, trading risks and contractual obligations.

Even where both parties hold insurance, the policies may insure different interests and apply different definitions.

The practical questions are more specific:

• Which property is insured?
• For whose benefit?
• Against which events?
• To what limit?
• Who pays the excess?
• What happens to tenant improvements?
• What must the tenant reinstate?
• Who carries the financial impact if the premises cannot be occupied?

Without those answers, “the landlord has insurance” provides very little certainty.

Three steps before signing or renewing a lease

1. Clarify responsibility

Create a list of the building, fit-out, contents, equipment, stock, glass and signs.

Record:

• Who owns each item
• Who the lease says must insure it
• Who must maintain it
• Who must repair or replace it after damage

This creates a clearer picture of where the landlord’s responsibilities end and the tenant’s responsibilities begin.

2. Check the insurance requirements

Identify every lease clause that refers to:

• Insurance
• Liability
• Indemnity
• Damage
• Maintenance
• Make-good obligations
• Reinstatement

Check the required policy types, limits, interested parties, special conditions and evidence the tenant must provide.

3. Bring the advisers together

A lawyer should advise on the legal effect of the lease.

An insurance broker should review the insurance requirements against the proposed insurance program.

Neither review replaces the other. The goal is to identify gaps before the tenant becomes contractually committed.

Questions to take to your lawyer and broker

Before signing or renewing a commercial lease, consider asking:

• Which parts of the premises does the lease make us responsible for?
• Does the definition of premises include our fit-out or landlord-owned equipment?
• Are the required insurance limits appropriate for our operations and contracts?
• Do any indemnities create responsibilities beyond the cover normally available?
• Must the landlord, property manager or financier be noted on the policy?
• Who is responsible for glass, signs, water damage, machinery breakdown and accidental damage?
• What happens if the premises cannot be occupied after an insured event?
• What evidence of insurance must be supplied, and by what date?
• Who pays the policy excess after a claim?
• What are our make-good obligations when the lease ends?

Do not wait for a claim to compare the documents

Once damage occurs, the lease and policy wording become part of the claim analysis.

If the documents allocate risk differently, resolving the position can take time and may require legal advice.

A coordinated review before signing, at renewal and whenever the premises or operations change gives the business a better opportunity to address a mismatch early.

ARP helps businesses understand insurance requirements in plain language and work through how those requirements interact with their insurance program. Legal advice should be obtained on the lease itself.