Empty threat

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Nick Symes

In the current economic climate there are now a much higher proportion of empty properties on the market for rent. From a landlord's perspective this is bad news; aside from the obvious lack of rental income owners are saddled with additional costs, writes Nick Symes.

The previous Labour government introduced the Rating Empty Properties Act 2007 which provided that from 1 April 2008 empty properties will pay occupied business rates subject to conditions:

  • During the first three months of vacancy 100% relief will be given
  • During the first six months of vacancy 100% relief will be given to factories and warehouses

Therefore, after the period of relief, the building owner is liable for business rates.

It is possible to insure against this additional cost where an insured event causes damage to the property resulting in the tenant surrendering their lease or a prospective tenant delaying completion of a new lease.

In addition, under most commercial leases the tenant is liable to the owner for the cost of insurance. Clearly when vacant there is still a need to insure the building and this cost falls back to the landlord.

Insurance companies view vacant buildings as high risk and there are a number of aspects that a building owner should be aware of:

Duty of Disclosure

A contract of insurance is founded on the legal principle of 'utmost good faith'. This requires the insured to disclose all material facts about the building to the insurer. This applies not only at the time of renewal but is an ongoing duty throughout the period of insurance. A failure to do this can allow the insurer to refuse to pay out in the event of a claim. Therefore, once a property becomes vacant, even if the lease remains in force, it is imperative that this is disclosed to the insurance broker who will then notify the insurer.

Most policies require this disclosure to be made immediately the owner becomes aware.

Premium

Once the vacant nature of the premises has been disclosed the insurance company will review the insurance cover being provided and the premium they charge. Whilst each property is considered on its own merits, insurers generally view empty buildings as a higher risk than an occupied building. Therefore, it is likely that the premium cost will rise, putting a further strain on the owner's resources.

Policy cover

In some cases the insurance company may also restrict cover by excluding theft, malicious damage, burst pipes and escape of water. In some cases they will only offer cover for fire, lightning, explosion and aircraft.

Therefore, not only has the owner to bear the higher cost of insurance but also the level of protection is reduced.

Policy conditions

The majority of commercial property owners' insurance policies include specific conditions that must be complied with when a property becomes vacant.

Typically this will include:

  • Inspect the building internally at least once during each seven day period keeping a log of such visits and making good any defects that become apparent.
  • Remove all trade waste and refuse from the interior of the property and around the building exterior.
  • Secure the building and put all protective and locking devices including any alarms into full and effective operation.
  • Seal letterboxes to avoid an accumulation of mail.
  • Isolate all services at the mains except those required to maintain security devices.
  • Drain down the water systems.

Failure to comply with these conditions can result in insurers turning down claims.

Where the building is empty with no lease in force the costs of implementing these measures will again fall to the property owner.

In summary, there are many implications for the property owner to consider when their building becomes vacant. It is essential that their insurance brokers are notified immediately so that they can provide advice and guidance as to the actions required to ensure their valuable assets remain protected.

Nick Symes is head of department, property investors at Reich Insurance Brokers. Symes currently leads a team of 15 insurance specialists at Reich Insurance Brokers. He is responsible for the insurance of properties with a value of over £13bn. He has worked in the insurance industry for over 20 years and has extensive experience in most areas of general insurance including property, liability, business interruption, financial lines, engineering and contract works.

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