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Wise tenants always insure themselves against liabilities that they may incur as occupiers of leased premises.  

 

For example, tenants take out public liability insurance to protect their assets if they do something that damages the premises or causes injury to a customer.

 

It is now becoming common for retail and commercial leases to include provisions requiring a tenant to take out a public liability policy that insures not just the tenant but also the landlord. Often the lease has specific requirements as to what the insurance policy is to include. An example of this is a requirement that the insurance policy will not lapse without the landlord being given at least one month's prior written notice.

 

Also, most leases require the tenant to "indemnify" the landlord against certain losses. An indemnity is an agreement by a person (for example, the tenant) to pay for losses which another person (the landlord) has incurred, even though the tenant did not cause the loss. A common example of this is where the tenant is required to indemnify the landlord in respect of water damage to anything in the premises, even if the water entered the premises because the landlord has not kept the premises watertight or because pipes have burst. Some might think that is unfair, but tenants sign leases with these provisions every day without knowing the effect of what they are signing.

 

If a tenant has not complied with the insurance and indemnity provisions in their lease they could possibly be liable to cover all losses, even if the landlord has been at fault.

 

Tenants should immediately check their leases and speak to their broker to ensure that their insurance policy covers all potential liability under the lease. 

 

Tenants should ask: 

"Does this lease require me to insure the liability of both landlord & tenant?"

"Does my insurance policy comply fully with the insurance provisions in the lease?"

"Does my insurance policy cover me for all of the indemnities in the lease?"

 

From our experience in acting for tenants on a range of commercial, retail and retirement village leases, it appears that many lawyers who act for landlords do not fully understand the insurance issues in the leases that they prepare.

 

We recently asked a lawyer from a large city law firm to discuss the insurance provisions in the lease of premises owned by a well-known landlord where we acted for the tenant.  The response from the lawyer was: "I don’t know anything about insurance”.. And he was not able, or prepared, to refer the matter to anybody in the firm who would!  Eventually the issues were addressed by a senior insurance person in the landlord company, who was able to discuss the issues knowledgeably with us and who agreed to amend the insurance provisions in the lease appropriately.  Guess who had to pay the tenant’s legal costs of all this? Not the landlord.

 

This was a comment made to us by a landlord’s lawyer.  The answer is “no”, the tenant’s public liability policy does not also cover the landlord, unless the policy is a joint insurance policy.

 

In this case there were trees on leased premises. Because the landlord knew that the trees had dropped branches in the past it required the tenant to indemnify the landlord against any injury the trees might cause to a customer of the tenant while the customer was on the leased premises. A tenant’s public liability policy only covers anything the tenant does wrong. If a branch falls from a tree, it is hardly likely to be the tenant’s fault.  In any event, under normal circumstances, the landlord's insurance would have covered that liability.  It took at least six months, while the parties incurred a substantial amount of legal costs, before the landlord’s lawyer understood that the tenant was not in a position to insure the landlord's liability, and the landlord was covered anyway. In the meantime, both the landlord and tenant were anxious that the lease was not in place.

 

A lawyer who was acting for a big well-known landlord, where the lease required joint insurance, said: "Leave the joint insurance clause in the lease, but the landlord will not enforce it in the first year".  To agree to this suggestion would have left the insurance issues in the subsequent years of the lease very much up in the air.

The above examples not only reflect unfavourably on the lawyers but also on their landlord clients.  Landlords should always understand exactly what is in their leases and why, and ensure that their leases reflect the commercial professional image that they otherwise display in their leasing operations.