Commercial Leases & the Obligation to Insure

Thursday, April 7, 2016

A commercial lease is typically entered into by a person or company (“the tenant“) with the owner of the building or premises (“the ‘landlord“) for the purpose of receiving exclusive possession of said premises from which the tenant may conduct or manage his, her or its business.

A lease will usually grant the tenant a right to exclusive possession of the premises for a fixed period, in exchange for consideration being paid by the tenant to the landlord in the form of rent, outgoings (which may include insurance premiums) and compliance with a host of other terms and conditions of the lease.

The interesting feature of the legal relationship between a landlord and tenant is that, in circumstances where a lease agreement is entered, the rights and obligations of the parties is governed by both the terms of the lease agreement itself and the principles of general and statutory law relating to estates and interests in land.

In short, the landlord and tenant relationship is recognised as giving the tenant not just the contractual right to occupy the premises, but an actual grant of a proprietary interest or estate in the land for the term agreed between the parties. This is an interesting point because holders of estates or interests in land will usually enjoy additional rights (known as a ‘bundle of rights’) in respect of the premises.

But this duality of rights and obligations also raises an important question about the parties liability for risk, damage and injury, that may be sustained in respect of, or in connection with, the lease and premises, including the building, the employees, invitees and customers that may have cause to enter or come in contact with the leased premises.

This is where a tenant will be smart to turn its careful attention to the terms of the lease to ascertain which party is responsible for what liabilities, and which party is required to obtain, and keep current, the various insurance policies that exist these days to indemnify the parties against the various types of loss and damage that may be sustained in the course conducting a business from a leased premises.

Insurance Explained  

Insurance plays a vital role in a commercial lease as a mechanism of risk transfer and loss spreading arrangement between the party giving insurance (“the insurer“) and the party obtaining insurance (“the insured“). In the event where the risk eventuates, the insurer may pay the insured a sum of money equalling the financial loss suffered by the insured (given the insurance policy covers the type of loss in question).

The types of risks inherent in commercial real property lease include the risk of loss due to fire, damage to the building and to other property, personal injury, cancellation of the lease, disruptions in a landlord’s rental income or tenant’s business, the loss of use of the premises and the continuing obligation to pay rent in the absence of a rent abatement clause.

There are different forms of insurance policies available to protect a tenant and landlord from the consequences of an occurrence of an event, which may include public liability insurance, building and contents insurance, business insurance and the like, and the level of insurance required will usually be expressed within the terms of the lease. The level of protection available to either party is dependent on the insurance policy itself.

Obligation to Insure

The standard obligations for a tenant commonly found in commercial leases are to insure items such as plate glass, windows, doors and any other glass forming part of the demised premises, fixtures, improvements, plant and equipment and to maintain public liability policy that covers personal injury, bodily injury, product liability, contractual and contingent liability.

A lease may also expressly state that such cover must not be less than a certain percentage of damage or loss, the policy to note the interests of the landlord, the insurer and insurance policy must be satisfactory to the landlord, and the tenant must provide a copy of the certificate of currency of the insurance policy to the landlord upon demand.

In a standard commercial lease where the premises contain multiple tenancies (such as offices or stores), the risk of loss or damage to the external structure of the building may remain with the landlord, on the basis that it would be more practical for the landlord to obtain insurance over the whole building rather than each tenant insuring the building. The lease may also contain an express covenant requiring the landlord to insure the building and common facilities or areas and recoup a proportion of the insurance premiums from each tenant.

In circumstances where the building is in single occupation by the tenant, the landlord may still insure the building and recoup a premium from the tenant. However, in such cases the tenant may also insure the building for such cover as fire damage and usually the landlord will be listed on the tenant’s insurance policy, to minimise risk in cases where the tenant may have caused damage to the building by their negligence.

In certain circumstances the tenant may have the obligation to insure against a particular risk, the tenant may be required to obtain insurance with a reputable insurer to the landlord’s satisfaction. The landlord may have the right to withhold their approval in respect to a particular insurer, despite the fact that the landlord’s preference of insurer may have a higher premium will not have a bearing on the matter.

In absence of an express obligation on the landlord or the tenant to insure the whole or part of the premises under a covenant of the lease, potential issues may arise in respect to which party has the obligation to insure and any legal consequences resulting from failure to renew a policy of insurance.

Obligation to Repair & Reinstate

In determining who has the obligations to insure under a commercial lease it is important to interpret the lease as a whole and to review other covenants including the covenant to repair, reinstate and damage covenants.

Usually, a tenant will be excluded for their obligations under such covenants should the damages be caused by fire, flood, storm, tempest, explosion, riot, civil commotion, war or otherwise an inevitable accident or act of god without any negligence or default on part of the tenant.

The landlord will often insure the above risks and in the event of the building being wholly damaged without negligence or default of the tenant, and may choose to repair the premises from the proceeds of the insurance.

In the event that damage or destruction to the premises is caused by default or negligence on the part of the tenant, notwithstanding the fact that the landlord may have insured such risks, it may not relieve the tenant from the tenant’s liability to repair or reinstate the premises under the lease.

Obligation to Indemnify

It may be expressly stated in the commercial lease for the tenant to indemnify and hold indemnified the landlord against all actions, claims, demands, losses, damages and costs and expenses which the landlord may sustain, incur or for which the landlord may become liable arising from the following: breach of covenant, misuse, escape of harmful agent, failure to notify the landlord of any defect, use of demised premises or personal injury. The tenant may be held to indemnify the landlord for any loss, damage or injury caused to the property or person caused by the neglect or default of the tenant.

Obligations in Respect of Rent

The standard covenants will usually state that in the event that the building is totally or partially damaged by fire, flood, storm, tempest, explosion, riot, civil commotion, war or otherwise by inevitable accident or act of God, and without any neglect or default on part of the Tenant, and the premises is wholly or partially unfit for occupation or use, then rent may be reserved until the premises is restored, or if the building is wholly unfit for occupation the tenant or landlord may give written notice of its intention to cancel the lease.


The level of protection afforded to either the tenant or landlord under a commercial lease will depend upon a number of factors, but will usually, and largely, depend upon a construction of the express terms of the lease, the terms and conditions of any insurance policies obtained, and the law governing the area.

A prudent tenant should always make its own enquiries of the landlord to ensure that the landlord has obtained insurance (in circumstance where the landlord is required to obtain insurance) and that the tenant is covered against all loss, including loss caused by negligence (if applicable) or as otherwise required by the lease.

If in doubt, a tenant would be wise to consider obtaining a separate insurance policy for itself.

But ultimately, to ensure an adequate level of protection under the lease, the tenant should carefully analyse the terms of the lease, followed by a careful review of the insurance policies to ensure adequate insurance cover exists for the tenant to match the terms of the lease.

The tenant should always provide a copy of the lease and insurance clause to the insurer or broker to ascertain that insurance can be obtained for the insurance being requested pursuant to the insurance clause. It may not always be the case that insurance can be provided for what is requested in the insurance clause.

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