This winter saw 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
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
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
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, came into effect on
1 April 2016. 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. 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
However, Flood Re will not cover any commercial or mixed use
There are also a number of exclusions for residential
properties. For example, only homes within Council Tax bands
A to H will be covered by Flood Re, buy-to-let properties are
excluded as are flats in leasehold blocks of 4 or more and homes
built after 1 January 2009.
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 has
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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