Who Pays Building Insurance on Commercial Property?
Understanding exactly who pays building insurance on commercial property in Australia is crucial. Confusion or ignorance over the issue could lead to missed premiums or insufficient cover — leaving the building unprotected.
This could mean serious, and costly, consequences — whether you’re the landlord or the tenant.
Who Pays Building Insurance Landlord or Tenant?
If you own the commercial building, and you use the property for your own business enterprise, the responsible party is obvious — you pay for the bricks-and-mortar cover.
However, with let premises, the issue is less straightforward.
Ultimately, it should be the landlord’s obligation to insure a commercial premises — since, as the owner, they have the insurable interest. That is, if a negative event such as fire or flood damages the building, it’s the landlord who will suffer loss. And equally, with a successful insurance claim, they receive the benefit.
However, while the landlord has the responsibility for arranging commercial insurance, the expense of this cover can be — and typically is — passed on to the tenant.
Do Commercial Tenants Have To Pay Building Insurance?
Under the terms of most commercial tenancies, the landlord is permitted to pass on the full cost of the building cover to their lessees.
How this is determined and paid for usually depends upon whether the agreement is a gross or net lease.
- Gross lease — the lessee pays fixed rent that includes all the building’s running costs, such as repairs, taxes, maintenance, and insurance.
- Net lease — the lessee pays rent for use of the premises, but also has to meet additional, and often variable, expenses for the building’s operating costs.
While this is uncomplicated for a single tenant, it’s slightly more complex if there are multiple tenants. Generally speaking, each individual lessee should pay a just share of the total insurance cost. However, what determines fairness can be open to interpretation.
Although it seems sensible to calculate the share of floor area, the landlord and tenants should also consider potential risks. For example, a lessee using a small space for metal welding presents a greater risk to the building than an accountant using a larger area as an office — suggesting the welder should hold a greater burden of the insurance cost.
Most respected commercial insurance brokers, such as PIB, can provide professionally arranged split invoices — apportioning the overall cost of the commercial insurance between tenants.
In all circumstances, the allotment of the commercial insurance cost to the individual tenants must be clearly stated in the lease.
Insurance Commercial Tenants Must Pay
The landlord should be ultimately responsible for arranging the commercial building insurance — even if the premiums are paid for by the tenants. However, — the lessees still have their crucial insurance obligations.
Tenants must organise contents cover for their own business assets — protecting their enterprise from losses arising from damage to possessions such as furniture and electronics equipment.
Additionally, if the lessee has made permissible alterations to the building — for example, installed a new bathroom, fitted air conditioning, or laid new flooring — it’s wise for the tenant to arrange tenant’s improvements insurance.
Of course, the tenant should also consider any non-building insurance that relates to their business operation — such as product and public liability, business interruption insurance, and fleet insurance.
Can a Landlord Allow Tenants To Arrange Insurance on a Building?
Yes, although it’s a risky course of action.
A landlord can place a clause within the commercial building lease agreement that requires the tenant(s) to arrange — and pay for — suitable property insurance.
While this may seem like a way for the landlord to ease their workload and duties — conversely, it creates several unnecessary risks and hazards for the building owner.
Giving the tenant the responsibility of arranging commercial building insurance can cause the following issues:
- Tenant underinsures the building — meaning cover doesn’t fully meet rebuilding or repair costs.
- Providing incorrect information — if the tenant gives the insurer false information, the cover may be cancelled from its date of inception, voiding any claim.
- Choosing a high excess — the tenant might opt for a significant excess, which reduces their monthly premiums. In the event of a claim, the landlord will be required to meet the high excess.
- Omitting rent protection — if the tenant refuses this cover to reduce their premiums, the landlord has no protection if the lessee misses rental payments.
- Cancelling insurance — a dishonest tenant may arrange building cover as required in a lease clause, then cancel the protection once the lease is signed.
- Tenant uses an unauthorised foreign insurer — if the insurer refuses a claim, there are few legal options available to the landlord or tenant.
We recommend that the landlord/owner should always retain the responsibility of arranging commercial building insurance — even if the costs are allocated eventually to the tenant(s).
What if the Commercial Property Is Empty With No Tenants?
If a property is being rebuilt, renovated, or the landlord is seeking tenants — it may lie unoccupied for a while.
Typically, the existing premises insurance will continue to safeguard the property while it’s vacant — but for a limited period, generally around 30 days. After this time, insurers usually require that the policy be changed to unoccupied insurance for commercial property owners.
The reason that the insurance provider must be informed — and the policy temporarily amended — is because of the elevated risk. An unoccupied building is more susceptible to burglary, fire, vandalism, and itinerant squatters than a tenanted premises.
Therefore, to ensure your commercial building remains defended, always inform the insurer if it becomes vacant.
Do Commercial Tenants Pay Council Rates?
In most circumstances, commercial tenants are expected to pay the council rates.
The commercial lease agreement will state who is responsible, and how they will be paid. Under a gross lease, the landlord will usually pay the taxes directly to the council and recoup the money in their rent. In a net lease, the tenant might be duty-bound to pay the rates to the council themselves.
If there is any confusion surrounding who is required to pay the council taxes, speak to a respected commercial property lawyer.
Final Thoughts on Commercial Insurance Responsibilities
Whether you’re a landlord or tenant, commercial property insurance is crucial.
It’s important to understand from the commencement of the lease who is expected to arrange the cover, who is required to pay the premiums, and how those insurance costs will be collected — whether as part of, or in addition to, the rent.
At PIB, our team of experienced commercial insurance brokers can guide both landlords and tenants through the complexities of business building cover — as well as providing additional protections such as office insurance, general liability, and business interruption.
If you have more questions on who pays building insurance on commercial property — call us now! Ph: (02) 9630 8788
