Commercial property is a complex investment at the best of times. But when disaster strikes, commercial landlords have to deal with the challenges associated with things such as vacant buildings, and from that point on it's a think-quick approach to move forward to reap the rewards of the asset.
Vacant buildings pose a multitude of risks and are one of the biggest commercial property insurance challenges that exist, and this continues to force landlords to invest in safeguards to protect their assets.
Commercial property insurance is absolutely imperative for landlords and for obvious reasons, of course: if disaster strikes, the asset is protected. Many people view commercial property as a means of passive income, and while it does present a steady flow of income to investors, that’s not necessarily the whole truth. There is a lot of active work that goes into a successful portfolio of commercial assets.
Modern landlords should view their commercial property investments as needing responsible owners and accountability – or in other words, landlords must take ownership of doing necessary things to make sure their properties maintain their integrity.
What does that mean?
Commercial landlords must maintain the property to make sure that it is in a pristine, leasable condition at all times, and this includes things such as that all leasable spaces should present well so that tenants can operate in a great environment and that their customers can have a good experience when they are on site. Be it tenants of business parks, customers of brick and mortar retailers, and so on. So it’s very much the idea of doing everything necessary to create clean, functional spaces that benefit all concerned parties.
Although it is the responsibility of the commercial landlord to have insurance on their buildings, it is also the responsibility of the tenant to have business insurance, too.
At this stage of the relationship, and typically at the initial stages of the landlord-tenant relationship, it is the landlord’s job to take ownership to make sure there are no gaps in the policy. In addition to this, it’s imperative for commercial landlords to adhere to any leasing conditions that legislation may require, as well as safety certifications. We will run through this a little deeper later on in the article.
But first what are the rights of a commercial landlord? As a commercial landlord, just like tenants, you have rights and your renters need to abide by them. The main one, of course, is paying rent on time. Commercial landlords should have their rent paid on time as a fair, fundamental expectation but finding the right tenants can be difficult (here’s a bit of insight on that).
And ultimately, for commercial property tenants, an adherence to lease conditions agreed upon is key. For commercial landlords there are a number of things to take note of to make sure you minimise risks with your leases, which should be stipulated clearly in the Commercial Lease documentation, according to industry lawyers and conveyancers. These are listed below:
Integrity maintenance. It is the responsibility of the tenant to maintain the integrity of the building and the grounds around the building, if applicable.
Property rates and body corporate fees. The commercial landlord is responsible for paying rates and/or body corporate fees, which is pertinent in AU markets. It is a preference that sufficient rent is charged by the landlord so that the landlord will make these payments without a deficit in place.
Property insurance. The landlord is responsible for the insurance on the property (which we outlined earlier in the piece), and then therefore the landlord should arrange that the rent fee incorporates a figure for insurance, which in other words means the tenant covers it in their rent bill.
Tenant insurance. Landlords should require the tenant to insure their own fittings and have appropriate public liability insurance. So once they occupy the building, this means that they’re legally liable for the happenings on the premises they’re leasing.
Bond collection. The landlord must obtain an appropriate monetary bond figure for at least three months of rental, which can be negotiated otherwise with the potential tenant.
Establish terms and conditions. There must be terms and conditions (Ts & Cs) outlined, as well as a method for regular payment of rent at a specific time each month, quarter or year, depending on the preferred method of payment.
Inspection schedule. Landlords should conduct necessary, regular inspections need to be performed on the premises to ensure that the leased space remains in a good state.
Fire safety equipment. The leases premises must contain appropriate fire safety equipment and this is the landlord's responsibility for ensuring this is in place from the beginning of the agreement.
Now that we’ve covered common commercial lease stipulations, what are some common items that are included in commercial landlords insurance policies? Here’s a list below of what to expect to be, or what should be, covered:
The commercial property. So this covers the costs associated with repairing or replacing assets if they are damaged by fire, flood, storms, or the tenant.
Loss of rent. For example, if the tenant has moved out and has left the space in need of appropriate repairs before the space can be rented out to new, prospective tenants, then commercial landlords insurance will cover that period of loss rent while the repairs are getting done.
Theft. This covers commercial landlords in the event that fixtures, fittings or furnishing on the property are stolen.
Replacement of damaged glass. Commercial property glass is an expensive asset to replace. This coverage will cover commercial landlords for the accidental (or deliberate) damage of the building’s glass.
Liability, or otherwise known as public liability in some global regions. With this coverage, commercial landlords are covered for the legal liability that may occur from the ownership of a property that causes personal injury to a third party or damage to property owned by a third party.
Notice of cancellation. This stipulation outlines that the tenant’s insurance policy must state that the landlord is to be notified before the policy is to be cancelled.
Premium increases. This allows the commercial landlord to recuperate any increases in their policy from the tenant due to actions made by the tenant. What does this entail? For example, things such as hazardous items used in the office kitchen that could increase the risk of a fire or other disasters.
General business interruption. And finally, commercial landlords insurance covers the loss of rent if the property can’t be rented out at all due to fire, storm or other natural disasters. This typically comes into effect when repairs are slated to follow a lengthy timeline before the property can be rented out again.
Up Next: What Is WALE And Why Is It Important For Commercial Property Investors?