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What Happens to Your Cover When a Commercial Tenant Changes

When a commercial tenant changes, your insurance cover does not automatically change with it. Your commercial landlord insurance was arranged on the basis of the previous tenant and what they did in the building. You need to tell your insurer or broker about the new tenant, because the premium, the terms or even whether the insurer will continue cover may change.

A tenant change can quickly leave a commercial landlord insurance policy out of step with the property it insures. The building looks the same from the outside, but the risk inside can be very different. A unit that has been an accountant's office for ten years is not the same risk once a restaurant, a gym or a vehicle repair business moves in.

This guide sets out what changes, what you need to tell your insurer, and the checks to make before the new tenant collects the keys.

Key Takeaways

  • Your cover is based on the tenant and the commercial use you told the insurer about. A new tenant can change the risk, so the insurer needs to know.
  • Business policyholders must make a fair presentation of the risk under the Insurance Act 2015, including when the policy is varied mid-term.
  • The gap between tenants matters too. Many policies restrict cover once a property has been empty for a set number of days.
  • Check the insurance clause in the new lease against your policy wording before it is signed.
  • Update the loss of rent sum insured if the new rent is different, and apply afresh if you want rent guarantee cover for the new tenant.
  • In buildings with residential flats, landlord duties such as annual gas safety checks still apply, whoever the commercial tenant is.

Why the Tenant Matters to Your Insurer

Insurers price commercial property insurance on more than the bricks and mortar. They look at how the building is used, because the use affects how likely a claim is and how large it could be.

The main factors that change with a new tenant are:

  • The trade. Cooking, heat processes, spraying, storing flammable goods or charging vehicles all present a higher fire risk than office work.
  • Footfall. A tenant that welcomes the public, such as a shop, café or clinic, brings more visitors onto the premises and increases the liability exposure.
  • Opening hours. Late-night trading or 24-hour operation changes both the security risk and the fire risk.
  • Alterations. New tenants often fit out the unit, adding extraction systems, partitions or plant.

The same building can therefore attract a very different premium and set of terms depending on who the tenant is and what the tenant runs from the premises.

Commercial Landlord Insurance and a Tenant Change: Your Duty to Tell the Insurer

Under the Insurance Act 2015, anyone buying business insurance must make a fair presentation of the risk before the contract is entered into. That means disclosing every material circumstance you know or ought to know. A circumstance is material if it would influence the judgement of a prudent insurer.

The Act applies the same duty to variations of a policy. So when you contact your insurer mid-term to add a new tenant or change the description of the property's use, you need to give a fair presentation of the changes relevant to that variation.

Many commercial landlord insurance policies also include a condition asking you to tell the insurer about changes that increase the risk during the policy period. The exact wording varies, so check your own policy wording or ask your broker what it requires.

What Happens If You Don't Tell Them

If a material change isn't disclosed and you then make a claim, the insurer's remedy depends on what it would have done had it known. In practice that might mean:

  • The claim is paid in proportion to the premium that should have been charged.
  • Terms the insurer would have applied are treated as part of the policy.
  • "Where the failure was deliberate or reckless, or the insurer would not have agreed to the change on any terms, it may refuse the claim. Depending on the circumstances, it may be able to treat the policy, or the change, as never having been made.

Any of these can leave a landlord paying for damage to their property out of their own pocket. A short phone call when the tenant changes is far less costly.

What Can Change on Your Policy

Once your insurer knows about the new tenant, the outcome depends on how the risk compares with the old one. The policy may simply continue on the same terms. Otherwise, the insurer might:

  • Adjust the premium, up or down, to reflect the new commercial use.
  • Add conditions, for example about the maintenance of extraction systems, fire alarms or security.
  • Change the excess on certain types of claim.
  • Restrict or exclude some covers, such as malicious damage or accidental damage, for higher-risk uses.
  • Decline to continue, if the new trade falls outside what that insurer is willing to cover.

If your current insurer won't cover the new use, that isn't the end of the road. A broker with access to a wider range of insurers can approach others whose appetite fits the new tenant, and rebuild your landlord cover around the new use.

The Gap Between Tenants

Between one tenant leaving and the next moving in, the property may stand empty. That void period changes the risk in its own right, because problems such as a burst pipe, a break-in or malicious damage can go unnoticed for longer.

Many policies restrict or change cover once a building has been unoccupied for a number of days set out in the policy wording, and apply conditions such as regular inspections and draining down water systems. These are often conditions of cover, so a claim may be declined if they aren't met. If a void period is likely to run for some time, unoccupied commercial property insurance is arranged for exactly that situation.

Check the Lease Before It Is Signed

A new tenant usually means a new lease, and that is the right time to make sure the lease and the landlord policy work together. Many commercial leases require the landlord to insure the building and recover the premium from the tenant as insurance rent or through the service charge, but every lease is different.

Points to check in the insurance clause include:

  • Who insures what. Is the landlord responsible for buildings cover only, or also for plant, glass or shopfronts?
  • Tenant's improvements. If the tenant fits out the unit, those improvements usually sit on the tenant's own policy. Check that the lease says this, so that they don't fall between the two policies.
  • The tenant's own insurance. Does the lease require the tenant to hold public liability, contents insurance or business interruption cover, and with a reputable insurer?
  • Rent suspension. What happens to the rent if the building is damaged by an insured event and can't be used?
  • Evidence. Can you ask the tenant for proof of their own cover at the start and at each renewal?

Reviewing these with your broker before the lease is signed is easier than trying to fix a mismatch after a claim, and helps your commercial let property insurance reflect what the new lease requires.

Mixed-Use Buildings: Commercial and Residential Tenants

Many landlords own buildings with a shop, office or restaurant on the ground floor and flats above. In these commercial and residential buildings, a change of commercial tenant can affect the residential part too.

A new restaurant below residential flats, for example, may change how an insurer views the fire risk to the whole building. The insurer needs the full picture, not just the details of the ground-floor unit.

Landlord Duties That Don't Change

Some legal requirements stay with you whoever the commercial tenant is. The HSE confirms that landlords must arrange gas safety checks on gas appliances and flues they provide for residential tenants, and specifically includes a flat above a shop. Checks must be carried out every year, and an up-to-date gas safety check record must be given to new tenants before they move in.

Alternative Accommodation

If residential tenants have to move out after an insured event, such as a fire that starts in the commercial unit below, some landlord policies include cover for alternative accommodation costs or loss of rent from the flats. Limits and conditions vary, so check your landlord policy wording. Where you own multiple properties or a mixed portfolio, these details can differ from building to building.

Loss of Rent and Rent Guarantee

Loss of rent is the landlord's equivalent of business interruption cover, and a usual part of commercial property landlord insurance. It pays rent lost while the building can't be occupied because of damage by an insured event, such as a fire, for an indemnity period chosen when the cover is arranged.

When a tenant changes, two things are worth checking:

  • The sum insured. If the new rent is higher, the loss of rent figure should rise with it. Otherwise, the landlord's loss after a claim may only be partly covered.
  • The indemnity period. Consider how long it would take to repair the building and find another tenant for this type of property.

Rent guarantee insurance is a separate, optional cover. It may respond if a tenant fails to pay, subject to tenant referencing, an excess period and policy limits. Neither rent guarantee nor loss of rent pays rent during void periods between tenants. Rent guarantee cover is underwritten on the tenant who was referenced, so it does not carry over to a new tenant. If you want it for the new tenant, they will need to pass referencing and the cover will need to be applied for again. It is not available for every commercial let, so ask your broker early.

Liability and Legal Expenses

Property owners liability covers your legal liability if someone is injured, or their property is damaged, because of the condition of your building. A tenant who brings more visitors onto the premises can change that exposure, so the insurer may want to know about footfall and how common areas are managed.

Property owners liability does not pay for damage to your own building. That is the job of your buildings cover.

If you directly employ anyone, such as a caretaker or maintenance worker, employers liability insurance is a legal requirement in most cases. GOV.UK guidance states that cover must be for at least £5 million. The rules in Northern Ireland are set separately, so landlords with property there should check the local requirements.

Legal expenses cover can help with some disputes that arise around a tenant change, such as recovering arrears from the outgoing tenant or a disagreement over dilapidations, depending on the policy terms.

Who Else Needs to Know

Your insurer isn't the only party to update when the tenant changes.

  • Your mortgage lender. Many mortgage terms require the property to be insured and may require you to tell the lender about a new letting. Check your mortgage conditions.
  • Your managing agent. If an agent manages the building, make sure they know who is responsible for passing changes to the insurer.
  • Other tenants. In a multi-let building, a new tenant's activities may affect shared areas, fire safety arrangements or access.

A Checklist for a Commercial Tenant Change

  1. Tell your broker or insurer about the new tenant, their trade and their hours before they move in.
  2. Ask whether the premium, terms or conditions will change.
  3. Check the unoccupied conditions if there is a gap between tenants.
  4. Compare the lease insurance clause with your policy before signing.
  5. Check the lease makes clear that the tenant insures their own improvements.
  6. Update the loss of rent sum insured to the new rent.
  7. Ask the tenant for evidence of their own insurance.
  8. Complete any residential landlord duties, such as gas safety checks, in mixed-use buildings.
  9. Tell your mortgage lender and managing agent where required.

How Ellis David Can Help

A new tenant is a good moment to look at your cover properly, rather than simply adding a line to the existing schedule. That is easier with a broker who takes time to understand the building, the lease and the tenant.

Ellis David has been arranging insurance for over 50 years. We're based on Essex Road in Islington, London, and our UK-based team has 150+ years' combined experience. With access to 100+ UK insurers and MGAs and 1,000+ products, we can look further afield when a new tenant's trade falls outside an insurer's appetite.

Our allegiance is with the client, not the insurer. There's no call-centre anonymity: you can meet the team who will look after your policy, and the same people help if you need to make a claim.

If you have a new commercial tenant, we can review your insurance for commercial landlords before they move in. Get in touch for commercial landlord insurance quotes tailored to your building.

Frequently Asked Questions

Do I Need to Tell My Insurer When My Commercial Tenant Changes?

Yes. Your commercial landlord insurance was arranged on the basis of the information you gave about the property and how it is used. A new tenant can change that risk, and under the Insurance Act 2015 business policyholders must make a fair presentation of the risk, including when a policy is varied. Many policies also include a condition requiring you to report changes that increase the risk.

Will My Premium Go Up With a New Commercial Tenant?

It depends on the new tenant's trade compared with the old one. A move from office use to a restaurant or workshop is likely to increase the premium or add conditions, while a lower-risk use may reduce it. The insurer will assess the new use before confirming any change.

What Happens If My Insurer Won't Cover The New Tenant's Business?

Some insurers may decline certain trades, or offer cover only on restricted terms. If your current insurer declines the new use, a broker can approach other insurers whose appetite fits the new tenant. It is best to raise this before the lease is signed, so there is time to arrange suitable cover.

Does My Landlord Insurance Cover the Tenant's Contents and Stock?

Usually not. A landlord policy covers the building, the landlord's rental income, the landlord's liability and any landlord's contents supplied with the let. The tenant's own stock, equipment and business interruption need the tenant's own insurance, and the lease should say what the tenant must hold.

Is My Property Covered While It Is Empty Between Tenants?

Cover usually continues for a limited time, but many policies restrict or change cover once a property has been unoccupied for a number of days set out in the policy. Unoccupied cover often comes with conditions, such as regular inspections, and a claim may be declined if they aren't met. Tell your insurer or broker as soon as the property becomes empty.

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