Landlords could face an insurance battle against tenants with FRI leases that are paying rent for premises closed under the government lockdown.
Lawyers tell EG that landlords that have collected rent during the lockdown could see tenants demand money back under the “rent cesser” clause in their leases.
The rent cesser provision traditionally applies when a property sustains physical damage. If a tenant cannot occupy the premises, the clause lets the landlord claim rent from its insurer rather than the tenant.
Paul Henson, partner at law firm Irwin Mitchell, says an issue could arise if tenants review their lease and believe the landlord could have claimed for lost rent under the clause.
In that instance, occupiers may be able to ask for their rent to be returned. Tenants could also refuse to pay further sums under the clause; by which time the landlord may have also then missed the notification date to inform the insurer of the claim, resulting in “double exposure”.
“Let’s pose the question that there was cover available but the tenant has paid the last March quarter and the landlord has been chasing the tenant for [rent] but hasn’t considered or looked at the rent cesser clause in the policy wording,” Henson says.
“The issue might be that clearly the landlord might not then notify the insurer in time to make that claim and the tenant turns around and says: ‘I paid my rent when I shouldn’t have. Can I have it back please, as it’s your fault that you didn’t notify the insurer’. That’s where I see a potential issue.”
Insurers under fire
Landlords may in turn struggle to claim payments from insurers, which are facing heavy criticism for avoiding payouts on coronavirus-related claims, made by companies affected by the pandemic.
Hiscox is among those arguing that its business interruption policy does not “provide cover for business interruption as a result of the general measures taken by the UK government in response to a pandemic”.
The policy says it will pay out it if a company is unable to use its insured premises “due to restrictions imposed by a public authority during the period of insurance following… an occurrence of any human infectious or human contagion disease, an outbreak of which must be notified to the local authority”.
But some companies that took out the insurer’s policy have launched legal action, including Raymond Blanc’s restaurant business Brasserie Bar Co. The group has had to close 37 pubs and restaurants.
Brasserie Bar Co is headquartered in Twickenham, Liberal Democrat MP Munira Wilson’s west London constituency, and the company also has another pub located in the area. Wilson says it is one of many businesses affected.
CMS Cameron McKenna Insurance partner Simon Kilgour predicts most insurance policies will now exclude pandemics and will be seen classed as scenarios that cause as much damage to property as war, nuclear incidents and terrorism.
“Those three exclusions are slapped on to nearly every single policy by insurers because the idea behind that is there would be so much damage caused that insurers wouldn’t be able to pay for it,” he says.
“The bizarre thing is that no one has ever thought it would be appropriate to slap on a pandemic blanket exclusion. The industry never thought it was necessary. They will be on every single policy moving forwards.”
£1bn outstanding claims
According to the Association of British Insurers, UK insurers are expecting to pay more than £1bn in all Covid-19 related claims. However, experts say insurers are severely underestimating the amount they need to pay out to companies filing claims due to coronavirus-related disruption, and expect claims to rise as companies continue to lose out on business while properties remain closed under lockdown.
One real estate partner at a major law firm, who wished to remain anonymous, says this estimate “seems tiny”. He also believes the amount of business disruption insurance claims related to property shut down due to coronavirus could be “many times the number cited by the ABI.”
How insurance might look post-lockdown
Beyond the lockdown, Kilgour says the “bigger issue” for property is the disruption to businesses that social distancing will pose.
Once the lockdown ends, no insurance claims can be submitted by companies for loss of income, even though, he says, businesses are “going to go through a painful period of adjustment where things aren’t going to be alright for a while”.
“Once government lifts those restrictions and you are entitled to open the front door of that property again, the insurance would switch off. When the lockdown is over, it’s not an insurance matter, it’s an ‘I’ve lost my market’ matter.”
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