Loss of Rent Insurance for a Commercial Building or Commercial Strata Lot
Quick answerLoss of rent insurance replaces the rental income a commercial building or commercial strata lot stops earning when insured damage stops it being used. It's for commercial property owners, not residential landlords, and your own cover pays for a set number of months you choose. Ring Consolidated Insurance Brokers on 07 3292 1111.
Your commercial building burns on a Tuesday. Under most commercial leases the rent stops that week, and the loan repayment does not.
This page is about commercial property: a shop, an office, a warehouse, an industrial unit or a commercial strata lot leased to a business tenant. If you rent out a house or a residential unit, this isn't the cover you're looking for.
What is loss of rent insurance on a commercial property?
Quick answerLoss of rent insurance is the commercial property owner's version of business interruption cover. It responds to damage the policy covers, not to a tenant who stops paying, and it pays for a set number of months called the indemnity period.
The short version
- Consolidated Insurance Brokers' practice on that number is settled: our default is 18 months, we recommend 24 wherever we can, and 12 is the floor we place only on a client's express instruction. The final period is always yours.
What has to happen before a loss of rent claim pays anything?
Quick answerThree things, in order. The building has to suffer damage the policy covers. That damage has to make the premises unusable or partly unusable. And the lease has to let the tenant stop or reduce the rent while that's true. If any one of the three is missing, there's usually no claim, even where the lost income is completely real.
First, the damage has to be insured. Where the property damage claim responds, the rent section is available; where it doesn't, there's normally nothing for the rent section to attach to. This isn't an accident of drafting. Income cover of this kind is normally written with a condition: the damaged property must itself be insured under a property policy before the income section can pay anything. And where the owner declined a peril on the building, the income wording will usually exclude that same peril in its own right as well. The building section itself is set out on commercial building insurance, and what sits inside the building is on commercial property insurance.
Second, the damage has to stop the building being used. Damage that's ugly but doesn't interrupt occupation usually produces a repair claim and no rent claim. Partial interruption is the common real-world case. Three tenancies in a strip of five are unusable, so part of the income stops and part of it doesn't. The claim follows the part that stopped.
Third, the rent has to legally stop.
Why your lease decides whether you have a loss at all
Quick answerLoss of rent cover exists because most commercial leases let the tenant stop paying while damage makes the premises unusable. That clause turns damaged bricks into lost income. It commonly carves out two situations where the rent doesn't abate, and usually gives one or both sides a right to end the lease if the repair drags on.
The clause is called rent abatement. In the three Queensland commercial leases we hold it works the same way. The rent abates while damage makes the premises unusable, and reduces proportionately while the premises are usable but diminished. There's an exit for either side where the landlord notifies that repair is impractical, and an exit for the tenant where the landlord hasn't repaired in time. Those are the leases in front of us rather than a statement about every lease in the country. The full clause-by-clause treatment is on what a commercial lease requires you to insure.
The abatement is the loss. If your lease abates the rent, your insurable loss is real from the day the building becomes unusable. If your lease doesn't, the tenant keeps paying and there may be no rent loss to claim.
The abatement can be switched off by your tenant's conduct. In the leases we hold the rent does NOT abate where the damage was caused or contributed to by the tenant's negligence, default or wilful act. Nor does it abate where the landlord's own insurer refuses indemnity or reduces what it pays because of something the tenant did. That second limb matters: a decision your insurer makes about your policy can decide whether your tenant owes you rent.
A tenant who can walk is a longer claim, not a shorter one. A bad rebuild doesn't just cost you months of rent, it can cost you the tenant. The cover then has to carry you through the rebuild and through finding somebody new, which is the single most common reason a loss of rent limit runs out. Who insures what under a lease more generally is on who pays for building insurance on a commercial property.
Give us the lease with the schedule and we read the two together, which is how you find out whether your cover matches the clause you've signed.
And here's the honest limit of that. We read the lease as insurance brokers. We tell you what it obliges you to insure, what it obliges your tenant to insure, whose interest has to be noted where, and whether your policy actually matches. We do not give you a legal opinion on the damage and destruction clause. Whether your particular abatement wording bites in your particular situation is a question for your solicitor. If it matters to a decision you're making, that's exactly where we'll send you rather than guess at it.
If you own a commercial strata lot, who is insuring the building?
Quick answerIt depends on the plan your scheme was created under, and a lot owner cannot assume the body corporate has it covered. On a building format or volumetric format plan the body corporate must insure the building. On a standard format plan in a basic scheme, where the buildings are detached, there is no compulsory body corporate building cover at all. Either way the scheme's rent cover is capped, so the gap above it is yours.
Where the body corporate must insure the building. Under the Queensland regulation modules, where a lot is created under a building format plan (the scheme is defined by the floors, walls and ceilings of a building, which is what most multi-tenanted commercial buildings are) or under a volumetric format plan (an air-space parcel, which is what a commercial lot in a mixed-use tower commonly is), the body corporate must insure each building in which a scheme lot sits, for full replacement value. A standard format plan where a building on one lot shares a common wall with a building on an adjoining lot is also compulsory.
Where nobody has to. Where the scheme is a basic scheme, the lots are on a standard format plan, and the buildings are detached, there is no compulsory body corporate building cover at all. The body corporate may set up a voluntary insurance scheme over those buildings, and taking part in it is optional. That is the case where a commercial lot owner is carrying the building as well as the rent, often without being told.
One thing does not depend on the plan. The body corporate must insure the common property and its own assets in every scheme, and it must carry public risk insurance on the common property of at least $10 million. That is a floor, not a recommendation, and it says nothing about your building or your rent.
The body corporate policy caps what it pays for your rent. This is the part lot owners assume wrongly. On the wordings we place, a strata scheme's policy carries a capped loss of rent benefit for lot owners: a set limit, usually a percentage of the building sum insured, commonly paid until the lot is re-let after an insured loss. If your rent is worth more than that cap, the gap is yours to insure under your own landlord cover. The cap is also there for all of the lot owners together, not for you and your tenant.
So a commercial strata lot owner needs their own loss of rent for the gap. In our experience it belongs alongside two other covers the body corporate's policy doesn't reach: the fitout inside your own lot, and your own property owners liability as the owner of that lot.
The test to apply to your own scheme. Read your own policy and the body corporate's together, which we can do with you on the call. What the body corporate's policy does and does not reach sits on commercial strata insurance. The lease side is on who pays for building insurance on a commercial property.
How the rent figure is set, and the number most owners get wrong
Quick answerThe figure to insure is your annual rent excluding GST, plus the outgoings your lease lets you recover from the tenant. Rates, water, land tax and the insurance premium itself stop arriving when the rent stops, and they keep falling due regardless. A policy carrying rent alone replaces the rent and leaves you funding every one of those out of your own pocket.
Gross leases and net leases treat outgoings completely differently, so "the rent" means two different amounts depending on which one you're on. The number in your head is usually the one that arrives in your account rather than the one the lease entitles you to.
So we never take the first figure. When an owner gives us a number, we read it back as a question: is that your annual rent excluding GST but including outgoings? The wider gross-versus-net difference is explained in the commercial landlord's insurance guide, and how the question fits the rest of the policy is on commercial landlord insurance.
Review the figure when the rent reviews, and tell us when the tenant changes. A rent figure set at the start of a five year lease and never touched falls quietly behind. Unlike the building sum insured, there's no annual index nudging it along. We ask for an updated rent figure every year for that reason.
What that costs, from a real claim of ours. A commercial owner insured for $36,000 a year of loss of rent, excluding GST. That figure belonged to a tenant who had moved out two years earlier. The tenant then in the building was paying $60,000 a year, and the policy had never been told. Storm damage closed the building. Because the sum insured was well under the real annual rent, the underinsurance provision applied and the insurer reduced what it paid on the claim. Bringing the cover from $36,000 excluding GST up to $60,000 would have cost about $65 more for the year, because the policy was already close to the insurer's minimum premium. (One real claim on one building, described with the owner's details removed. The $65 is what that change cost on that policy on that day, not a price list. On your building it will be a different number, and the only way to know it is to get a quote against your actual risk.)
There's a separate underinsurance test on income sections, and it isn't the same test as the one on the building. It's set out, wording by wording, in the business interruption underinsurance trap, and the building-side version is in the co-insurance clause explained.
How long should the cover run?
Quick answerLong enough to cover the rebuild and the re-letting that follows it, not long enough to cover the rebuild alone. The number is called the indemnity period. Consolidated Insurance Brokers' default is 18 months, we recommend 24 wherever we can, and 12 is the floor we place only on a client's express instruction. The final period is always the owner's call.
Make safe, and get an assessment. Nothing starts until the site is safe and somebody has decided what is repaired and what is replaced.
Design and approvals. A building that has to be rebuilt rather than patched needs a current approval, and a current approval means current building standards, which isn't always what is standing there today. Where the building sits under a heritage or character overlay, what may be rebuilt is constrained by the approval rather than chosen by the owner. That adds time before a single trade turns up.
Tender and contractor availability. After a widespread event the builders in your area are quoting on hundreds of jobs at once, and the queue is longest exactly when you're in it with everybody else.
Construction. The part people think of as the whole job.
Then the re-letting. The building is finished and the rent is still zero until somebody signs. In a soft market, or where the previous tenant has settled somewhere else, that tail can run for months.
And the months matter here for a reason that doesn't apply to a standalone building. If the body corporate is running the rebuild, the pace of the repair isn't in your hands, and your indemnity period has to survive a timetable somebody else controls.
On a commercial building the step up from 12 months to 18 is usually not a large premium movement. That is why 18 is where most of our commercial landlord clients sit. What the section costs and what moves it is on what commercial landlord insurance costs.
We have watched this from both ends on our own files. On one claim a commercial landlord's cover paid month after month exactly as designed, until the limit was exhausted about a week before a tenant was finally found. On another we argued a rental entitlement the insurer first questioned, and got it paid. Both are told properly, with the figures, in the commercial landlord's insurance guide.
What loss of rent does not cover
Quick answerIt doesn't cover a tenant who stops paying while the building is undamaged, it doesn't cover a tenancy that simply ends, and it doesn't cover damage your policy doesn't cover in the first place. Each of those is a real gap in an owner's income and none of them is fixed by buying more of this cover.
A tenant who stops paying while the building stands. That's a lease-enforcement problem rather than an insurance one, and what protects you there is your lease, your bond or bank guarantee, and your property manager.
A lease that ends. A tenant who reaches the end of the term, or exercises a break right, hasn't caused an insured event. Vacancy between tenants is a business risk and a policy issue in its own right, because most commercial wordings change once a building sits substantially empty. Tell us as a tenancy is ending, not after.
An interruption shorter than the excess. On some wordings the excess on this section isn't a dollar amount at all. It's a period of time, so a very short interruption can fall inside the excess and produce nothing. Yours is written on your own schedule.
More time than you bought. When the indemnity period ends, the payments stop, whether or not the building is earning again. There's no retrospective extension after an event.
Where the cover sits, and whether it can be bought on its own
Quick answerMost commercial owners hold loss of rent as a section of the policy that already insures the building, with its own sum insured and its own indemnity period, and that's how we place it in almost every case. Where a situation calls for it we can also approach an underwriting agency, underwritten at Lloyd's, that will write loss of rent on a commercial property on its own.
If we're insuring your building, your loss of rent sits inside your commercial property owners insurance with us. That keeps one insurer answering for the damage and for the income that stopped because of it. There's also a standalone market, and most owners don't know it exists. We have access to an underwriting agency, underwritten at Lloyd's, that will write loss of rent on a commercial property on its own, away from the building policy. We hold a small number of policies there today. It is not where we start. Some situations do require the two to be separated, and that's when we go to the standalone market. Where the building policy's own section won't stretch far enough, or where the building is insured somewhere we cannot change and the income cover needs fixing on its own.
A worked example, with made-up numbers
Quick answerOn an income of $300,000 a year, a rent-only sum insured of $250,000 and a 12 month indemnity period open two gaps: the wrong figure while the cover pays, and no cover from month 13. Insuring $300,000 for 24 months closes both.
This is an illustration, not a claim about your building, not a quote, and not a statement about how long a rebuild takes. The numbers are round so the mechanism is visible.
An owner leases a small commercial building to one tenant. The rent is $250,000 a year excluding GST. The lease is a net lease and lets the owner recover $50,000 a year of outgoings: rates, water and the insurance premium. So the income that actually stops if the building stops is $300,000 a year, not $250,000.
A fire makes the building unusable. Under the lease the rent abates from that day.
- The owner insured rent only, $250,000, and chose a 12 month indemnity period.
- Make safe, assessment, design, approvals, tender and construction take 16 months.
- The building is finished, and a new tenant signs 5 months later. Total: 21 months.
What the policy does: it pays the insured figure for 12 months and then stops.
- The wrong figure. Even during the 12 months it paid, the cover replaced $250,000 a year of a $300,000 a year loss, because the recoverable outgoings were left out of the sum insured. The owner funded the rates, the water and the premium out of their own pocket the whole time.
- The wrong period. From month 13 to month 21 there is no cover at all. That is nine months of a $300,000 a year income, with a loan still being serviced against it.
Change one number and the picture changes. The same owner insuring $300,000 for 24 months is covered for the whole 21 months at the right rate. Two decisions made at the desk, years before the fire, decided the outcome.
What we actually talk about when you ring
Quick answerNot just the rent. Loss of rent is one of four numbers on a tenanted commercial building and it's the one most likely to be wrong. We look at the building sum insured, the rent and outgoings figure, the indemnity period, your own liability as the owner, and what your lease says about all of it.
If the building has just been damaged, the call is a different one
Quick answerYou're not ringing about cover any more, you're ringing about a claim. The first call covers what you're claiming for, where the insurer has got to, what to keep, and a plan so it doesn't sit still.
What we're claiming for, all of it. The building damage itself, the time the property may be unusable, the loss of rent, make-safe costs, debris removal, professional fees, and anything else your policy may respond to. Owners commonly ring about the building damage alone and leave the rest of that list unclaimed.
Where it actually stands. Has the insurer or the loss adjuster inspected the property yet, and what have they said the next step is. If nobody can answer that, that's the first thing we chase.
What matters right now. Keep every invoice, every piece of correspondence, the photos and the reports. And don't agree to major repair work, or let damaged property be thrown out, without the insurer or the loss adjuster being part of that decision.
Then we read the policy against the claim with you, so the claim is handled properly and we are pursuing everything you are entitled to under the policy.
The biggest issue is making sure the claim does not sit still. So we want a clear plan on the table early: assessment, make-safe works, the repair or rebuild scope, and the loss of rent position. Ring 07 3292 1100.
FAQ
What actually triggers a loss of rent claim?
Insured damage that stops the building being used, plus a lease that lets your tenant stop paying while that's true. Both have to be present, or there's nothing to claim.
Can I buy loss of rent cover on its own, separately from my building policy?
Yes, but it's the exception. Almost always your loss of rent sits inside the policy that already insures your building. Where a situation calls for it, we can place it separately.
My lease says the rent abates if the building is damaged. Does that mean I am covered?
No, it means you have a loss worth insuring. The abatement clause turns damaged bricks into lost income; the policy is what replaces it. Carve-outs apply in the leases we hold.
Does the cover keep paying while I look for a new tenant, or does it stop when the builders finish?
It pays for the number of months you chose, not the number the building took to fix. A re-let running past the rebuild is still covered until the period ends.
Can my tenant end the lease after the building is damaged?
Often, yes. In the three commercial leases we hold, either side may end it where repair is impractical, and the tenant may end it where the landlord hasn't repaired in time.
What happens to the cover if the rebuild finishes early?
Nothing to claim and nothing to get back. The indemnity period is a maximum, not a budget: it pays the loss you actually suffer, up to the months you bought. Buying more months than you need costs a little premium; buying fewer costs you the shortfall.
Is loss of rent the same as business interruption insurance?
They're close cousins, not the same cover. Business interruption protects a trading business's lost profit; loss of rent protects a commercial landlord's rental income. If you own a building and trade your own business from it you may need both, sometimes through two different entities. The full comparison, and the two-clock logic behind the indemnity period, is on business interruption insurance, explained properly.
If you have your schedule and your lease in front of you, ring 07 3292 1111 and we'll work through both on the call.
Related reading
- For commercial property owners: entities, portfolios and the structure conversation.
- How to calculate your building sum insured
- Desktop building replacement valuation
- Underinsurance in commercial buildings