Compliance with landlords’ insurance policies


Posted By on 2/03/16 at 5:10 PM

Issue

Commercial leases often contain provisions that prohibit the tenant from doing anything that may void a landlord’s insurance policy or cause insurance policy premiums to increase. The lease typically gives the landlord the right to demand from the tenant reimbursement of any increase in premiums as a result of the tenant’s breach, and to end the lease if the breach is not rectified.

For example, clause 2.2.7 of the Law Institute of Victoria August 2014 Revision of the Lease of Real Estate (LIV Lease) states:

The Tenant must not, and must not let anyone else do anything which might affect any insurance policy relating to the Premises by causing –

  1. it to become void or voidable,
  2. any claim on it being rejected, or
  3. a premium to be increased.

Clause 2.2.7 is listed as an essential term under the LIV Lease.

Risk

A tenant who agrees to such a clause without an understanding of the details of the relevant insurance policy puts themselves in a difficult position whereby they may unknowingly breach the provision.

Approaches and Discussion

There are a number of approaches that a tenant may take when dealing with such a clause, including:

  1. requesting a copy of the relevant insurance policy from the landlord for the tenant’s review;
  2. amending the clause so that the tenant is only required to comply with those terms of the insurance policy as could reasonably be expected to apply; and
  3. amending the clause to limit the tenant’s obligation to comply with the policy to the extent that:
    1. the landlord has notified the tenant as to those terms; and
    2. the policy provisions are reasonable.

Even if the Landlord was willing to provide its insurance policy pursuant to the first approach, reviewing it could be a costly and challenging task for the tenant, and accordingly should generally be avoided.

The second approach ensures the tenant is generally not responsible for complying with unusual or unexpected provisions. Although it requires a tenant to familiarise themselves with provisions likely to apply in landlord’s insurance policies, KHQ considers this approach to be one that potentially best balances the interests and obligations of the landlord and the tenant.

The final alternative is the preferred position for a tenant. However, many landlords will be reluctant to accept the suggested amendment, as it imposes an obligation upon the landlord as a pre-condition of the tenant’s liability.

What to do next

Tenants should treat these clauses with caution. If you discover a similar provision in your lease, or if you’re currently negotiating a lease with a similar provision and require some guidance, please contact us on (03) 9663 9877.

Director

David Krolikowski leads the Commercial Property & Development team.

David has extensive, in-depth experience in relation to property acquisition, sale, development and leasing, with a particular... Read More