While many private and commercial landlords have ensured they are protected against the risk of void periods, rent arrears and property damage, they may not be covered for ‘loss of rent’.
Major damage, requiring immediate evacuation of the premises, can prove very costly to landlords. Damage from fire or flooding can render a property uninhabitable and landlords can face loss of rent running into thousands of pounds.
Most tenants have a ‘full repairing and insuring (FRI) lease’ which contains a cessor of rent clause. This clause will generally state that, if the property cannot be used due to damage, the rent to the landlord can be withheld. The loss of rent clause in the policy is intended to fill the gap when the cessor of rent clause becomes effective.
It is important for landlords to remember that when they are insuring property against damage, they check to see if it is also insured against the loss of rent. This will protect them in the event that tenants exercise the ‘cessor of rent clause’ in their lease.
The terms of the lease will generally dictate how long the loss of rent cover is required for. The most common period is 36 months. However, some leases contain a requirement for up to 60 months and so this should be checked before cover is agreed.
The loss of rent insurance protection for residential properties, or the residential elements of commercial properties – is dealt with slightly differently and the insurance cover here provides for the cost of alternative accommodation for tenants following damage to their homes.
When property is being developed for future occupation, cover can be arranged for the anticipated rent which the scheme will attract. This covers the developer for potential loss in the event of damage during the course of construction and the potential loss of future tenants.
In the event of a loss, insurers will need to see evidence of the passing rent in order to process the loss of rent claim. ‘Loss of rent’ insurance claims are generally paid on a deposit basis, rather than in one lump sum, so that landlords still see a regular income stream.
It may be however, that although a demise is currently vacant, a letting was in a solicitor’s hands which may potentially be lost in the event of damage. In this situation, the insured can elect to cover this rent as anticipated rent rather than passing rent. In properties where there may be frequent changes in the tenancy schedule, such as shopping centres, landlords often insure against the potential rent loss in vacant units by insuring based on the Estimated Rental Value (ERV) of sites which they would reasonably expect to let within the insurance year.
Not all rental agreements provide for a fixed rental per month. Some retailers manage to agree turnover rents with their landlord in which the rent is agreed as a percentage of the stores turnover. This provides incentive for both landlord and tenants for the store to trade well.
The main point to remember when discussing loss of rent cover with your broker is to ensure that all parties have a full understanding of the structure of the income stream for rent/potential rent in order that this can be protected as fully as possible by your insurance programme.
By Sandy Mooneeapen, director, Property Insurance Initiatives.