Insurance burden in commercial leases: How can landlords and tenants deal with it

How is the insurance premium to be divided between the landlord and the tenants, can be tricky. Here are some tips for a smoother negotiation

Insurance premiums can be a huge cost in commercial property and can dent the pocket of landlords and tenants. As the complexities and uncertainties in the business world are increasing, insurance is also becoming more important and cannot be done away with. Both, landlords and tenants understand that insurance is important and it is in their interest to get it for the property and business.

 

There are different insurance types that are available for commercial properties:

1 ‘All Risk’ insurance coverage in which the insurance company will have to compensate the insurer of the full value of the commercial property in case of loss.

2 ‘Commercial General Liability’ insurance policy in which the specific liability is agreed between the insurer and the insurance company.

3 ‘Business Interruption’ insurance policy.

In some cases, it is mandatory for the tenant to take one of the insurance policies for the property. However, in certain cases, the landlord will have to share the insurance burden. There should be a careful review of the insurance clause in the lease agreement by the tenant. There should also be a discussion and negotiation by the tenant with the landlord, on aspects relating to the insurance requirements and the sharing of insurance premium between the two. How the premium will shared between the two parties depends of the property types which are as follows:

1. Mall: In case the landlord has spaces in a mall to lease and there are multiple tenants, the insurance premium for the entire property gets divided among the several tenants on a pro-rata basis depending on the space each tenant occupies. The premium proportionate to the common areas like staircases and corridors is borne by the landlord. The tenant must pay attention in the lease agreement as to whether the premium calculated by the landlord for the tenant is correct, and is actually proportionate to the area that will be directly under operation by the tenant.

2. Retail store: Sometimes a landlord may be leasing out the entire property to just one retailer. Usually, there is only one retailer at a given location like a Walmart or Big Bazaar and the insurance cost of the commercial property is borne by this retailer alone. However, since these retail chains get a lot of footfall and have a huge brand name, they can arm-twist the landlord to share some of the insurance costs. Even if such a store opens in a mall where there are several other tenants, big retail chains can have the landlord lower their insurance costs by virtue of their name and attractiveness. These stores often act as the anchor tenant for the landlord or the mall.

3. Office building: Just like malls, the tenant should be charged insurance premium on a pro-rata basis depending on the space occupied in the entire office building. However, if the tenant is a Fortune 500 company or a very famous bank, then such a tenant can negotiate for a lower insurance burden by virtue of its fame.

 

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