Flooding – who is responsible for the damage?
02 / 02 / 2016
This winter has seen yet more flooding, devastating businesses and homes in the north of England and Scotland. Where flooding results from natural causes – heavy rainfall and rising rivers – there is nobody to blame. So who is responsible for fixing the damage to leased commercial properties?
The potential disruption to businesses from flooding is significant. In terms of physical damage, this can include a property being inaccessible or damaged, a lack of essential services and loss of stock. Additional disruption includes an inability to trade, loss of profit, a long term loss of customers and goodwill, and a reduction in the value of a property. Business interruption insurance is unlikely to cover all of this.
Where there is physical flood damage to leased commercial property, landlords and tenants should check the terms of the lease to see who is responsible for fixing the damage:
Landlords and tenants should check whether flooding is an insured risk. They should also check who is responsible for insuring the property. If flooding is an insured risk, the party who has insured the property should make a claim under the insurance policy and use the proceeds to repair the damage and rebuild the property.
If flooding is an uninsured risk, a landlord and tenant should check who is responsible for repairing and rebuilding the property. This will not be covered by insurance and any works to fix flood damage will need to be funded by the responsible party out of its own pocket. Traditionally, tenants would take the risk for any damage caused by uninsured risks, but it is becoming more common for landlords to be responsible for this.
Most commercial leases will include a suspension of rent (and possibly service charge) for tenants if there has been damage to property by an insured risk. If a property cannot be used or is inaccessible because of flooding and flooding is covered by insurance, payment of rent will be stopped for a fixed period. This allows the property to be repaired and is consistent with the interruption caused to a tenant’s business. Rent will only become payable before the end of the fixed period of suspension if the property has been repaired, and can be occupied and used by a tenant for its business before then.
It is becoming increasingly common for damage by uninsured risks to be treated in the same way as damage by insured risks. If flooding is an uninsured risk, a landlord and tenant should check the lease to see whether rent will be suspended for a fixed period.
Ending the lease
Commercial leases often include a break clause which will be triggered if a property has not been repaired and reinstated within a fixed period of time following damage by an insured or uninsured risk. Landlords and tenants should check whether a lease can be ended in this way after damage from flooding. In particular they should see if only one or both parties can end the lease, if the right to end the lease results from insured and/or uninsured damage, and the date on which the lease can be ended.
The new flood reinsurance scheme, Flood Re, is expected to be operating by April 2016 (subject to the necessary approvals being in place). Flood Re is a system agreed by the Government and Association of British Insurers to secure affordable insurance for properties which are at a high risk of flooding. It is a reinsurance scheme which will allow insurers to buy subsidised insurance against flood risk where they will not underwrite that risk themselves. Flood Re will result in capped premiums for flood insurance (linked to the Council Tax band of the property) and an initial maximum excess of £250.
However, Flood Re will not cover any commercial or mixed use property.
The flooding this winter affected more commercial properties compared with the severe flooding in recent years. A significant proportion of the businesses affected were not insured due to difficulties obtaining affordable insurance. This had led to calls for a “Flood Re 2” to meet the insurance needs of small and medium sized businesses. The Government is coming under increasing pressure to create a scheme to protect businesses – it remains to be seen whether they will do so.
In the meantime, for new leases landlords should assess the flood risk for a property, see if flood cover can be obtained and, if so, consider the cost of insuring against flood damage. If flood insurance cannot be obtained (or is too expensive), landlords and tenants will need to agree who takes the risk for damage caused to property from flooding.
For further information please contact Claire Haynes at firstname.lastname@example.org.