In uncertain economic times some people may contemplate starting their own business and once the initial romanticisation of the idea gives way to pragmatism, considerations such as insurance in regards to the leasing of commercial property must be one of the issues that ought to be contemplated. Some of the questions that may arise may include the following, such as: ‘Must a lessee take out their own insurance when entering into a commercial lease?’ Or ‘whose obligation is it to insure the premises if the property is located in a shopping centre?’ Are just some of the potential questions that may be asked and, yes, insurance in relation to commercial leases is an unsexy area of contemplation if you are about to throw off the corporate shackles and go out on your own, however, it is one of the many areas of consideration when starting a business.
Must a lessee take out insurance if they are renting a commercial premises?
Generally speaking, if someone enters into a commercial lease in a shopping centre, the lessor (landlord) will in most instances, be the one who will take out an insurance policy on the building. The only real situation where a lessee may need to take out insurance is in single occupation buildings and even then, the lessor may still undertake the insurance obligations for the building.
How do commercial leases interact with the covenant to repair?
Commercial leases usually have a covenant to repair by either the lessee or lessor depending on the type of repair to the premises which is required, although, insurance will usually cover damages from fire, storm, tempest or any other natural disaster.
However, readers should keep in mind that under certain circumstances, the covenant to repair will still exist even if the a event is insured against, and of course, the general obligation to keep the premises in good repair is still evident.
What are the general types of insurance that a lessee should take out?
For a lessee of a commercial premises, the standard insurance obligations that will form most commercial leases are obligations to insure items such as plate glass windows, doors and to maintain public liability insurance.
Furthermore, under the common law where a lessee is required to undertake insurance against certain risks, a lessee may only engage with insurers approved by the lessor – even if the premium charged by the recommended insurer is greater when compared with other insurers.
The common law has also stated that lessors who have an absolute right to choose an insurer, are also afforded the right to withhold approval if a lessee chooses the services of another insurer, whilst having no obligation to inform a lessee as to the reasons behind the exercising of the right.
However, the Australian Competition and Consumer Act (the Act) prevents corporations, in this case a lessor, from engaging in exclusive dealing, and as a consequence statute law may have an effect on the ability of the lessor to direct which insurer a lessee must engage with and any similar clauses of such a nature must contemplate the effects of the Act on a lessor’s requirement that the lessee only insure with an improved insurer.
What is exclusive dealing?
Exclusive dealing for the purposes of this article, is when the lessor stipulates which insurer a lessee must deal with under the terms of the lease and such actions under s 47(8) and (9) of the Act, prohibits a lessor from engaging in exclusive dealing, unless the lessor informs the Australian Competition and Consumer Commission (ACCC) of such clauses and the lessor is immune from third line forcing.
Anyone who has any questions or concerns regarding commercial leases can seek the help of a lawyer who will be able to advise you on your rights and obligations.