Loss of Rent Insurance for a Commercial Building or Commercial Strata Lot

Your commercial building burns on a Tuesday. Under most commercial leases the rent stops that week, and the loan repayment does not.

Written by Debbie Blanco, Account Manager · 25 min read · Reviewed by William Paull, Co-Founder & Account Director

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 is not the cover you are looking for.

What is loss of rent insurance on a commercial property?

Quick answerLoss of rent insurance replaces the rental income you lose when insured damage stops a commercial building, or a commercial strata lot, being used. It 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 keeps paying for a set number of months called the indemnity period, which you choose when the policy is written.

The short version

• It is triggered by damage the policy covers, not by an empty building and not by an unpaid invoice. No property damage claim, no rent claim.
• The rent figure you insure should be your annual rent excluding GST, plus the outgoings your lease lets you recover, because those stop with the rent while the rates and the insurance keep arriving.
• The number of months matters more than most owners expect, because the cover has to survive the rebuild and the time it takes to get a tenant back in afterwards.
• 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.
• Most owners hold this cover as part of the commercial property owners insurance that already covers the building, and that is how we write it in almost every case. Where a situation calls for it, we can also approach an underwriting agency, underwritten by Lloyd's, that will write loss of rent on a commercial property on its own.
• If you own a commercial strata lot the picture is different again, because whether anyone else is insuring the building at all depends on the plan your scheme was created under. That has its own section below.
• Your lease is where the loss actually comes from. If the lease lets your tenant stop paying while the building is unusable, you have an income to insure. There are situations in a standard lease where the rent does not abate at all, and then the picture changes.

This page is not about rent default. If your building is standing, undamaged, and your tenant has simply stopped paying, that is a different product and a different conversation, and we have written our honest view of it on commercial landlord insurance.

Most commercial owners land here at one of four moments: a fire or a storm has just closed the building, a renewal has asked them to pick 12 months or 24 and nobody explained the difference, a bank or a body corporate has asked what cover is in place, or they have just bought a tenanted building or a tenanted strata lot and are working out what they are actually carrying.

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 is true. If any one of the three is missing, there is usually no claim, even where the lost income is completely real.

This is the part of the cover most owners have never had explained to them, and it is the reason two owners with identical policies can get completely different answers.

First, the damage has to be insured. The rent section sits on top of the property damage claim rather than beside it. Where the property damage claim responds, the rent section is available; where it does not, there is normally nothing for the rent section to attach to. This is not an accident of drafting: income cover of this kind is normally written with a condition that 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. So the covers you did or did not take on the building itself decide what your rent cover can do. An owner who declined flood on the building has usually declined it on the rent as well, without ever being told that in those words. What the building section itself does is set out on commercial building insurance, and the wider view including what sits inside the building is on commercial property insurance.

Second, the damage has to actually stop the building being used. Damage that is ugly but does not 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 does not, and the claim follows the part that stopped.

Third, the rent has to legally stop. This is the one nobody reads until they need it, and it is the next section.

There is a fourth thing worth knowing before you need it. On some wordings the excess on this section is not a dollar amount at all, it is a period of time, so a very short interruption can fall inside the excess and produce nothing. Yours is written on your own schedule, and it is worth knowing which kind you have before an event tells you.

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 is what turns damaged bricks into lost income. The same clause commonly carves out two situations where the rent does not abate, and it usually gives one or both sides a right to walk away from the lease altogether if the repair drags on.

The clause is called rent abatement, and 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 is an exit for either side where the landlord notifies that repair is impractical, and an exit for the tenant where the landlord has not repaired in time. Those are the leases in front of us rather than a statement about every lease in the country, and the full clause-by-clause treatment is on what a commercial lease requires you to insure.

Three consequences follow for an owner, and each one changes a number on your policy.

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 does not, the tenant keeps paying and there may be no rent loss to claim. Owners are often surprised by which of the two they are on, because nobody reads the damage and destruction clause at signing.

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, and it does not abate where the landlord's own insurer refuses indemnity or reduces what it pays because of something the tenant did. That second limb is the one worth reading twice: a decision made by your insurer, about your policy, can decide whether your tenant owes you rent.

A tenant who can walk is a longer claim, not a shorter one. Where the lease lets the tenant end it because the landlord has not repaired within a set time, a bad rebuild does not 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.

You do not have to work this out on your own. Give us the lease with the schedule and we read the two together, which is how you find out whether the cover you are paying for matches the clause you have signed.

And here is the honest limit of that, because you should know it before you rely on it. 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, and if it matters to a decision you are making, that is exactly where we will 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. Your rent is your own exposure either way.

This is the part of a commercial strata lot that surprises owners, and it changes what your loss of rent cover has to do.

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 does not carry your rent. This is the part lot owners assume wrongly, and it is worth being blunt about: a commercial body corporate policy does not include loss of rent. Where it does respond to lost income at all, it does so only on a total loss, and it does so for all of the lot owners together rather than for you and your tenant. Your rent from your own lot is your income, not the body corporate's, and there is no version of the body corporate's cover that quietly replaces it.

So a commercial strata lot owner needs their own loss of rent. In our experience it belongs alongside two other covers that the body corporate's policy also does not reach: the fitout inside your own lot, and your own property owners liability as the owner of that lot. Those three together are the lot owner's side of the picture, and none of them is optional just because the building itself is insured by somebody else.

And the months matter here for a reason that does not apply to a standalone building. If the body corporate is running the rebuild, the pace of the repair is not in your hands, and your indemnity period has to survive a timetable somebody else controls.

The test to apply to your own scheme. Ask which plan format your scheme is on, and whether the buildings are detached. Then read your own policy and the body corporate's together, which is a thing we can do with you on the call. What the body corporate's policy does and does not reach more generally is set out on commercial strata insurance and in 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.

Ask a commercial landlord what their annual rent is and the answer is often wrong, and it is not carelessness. Gross leases and net leases treat outgoings completely differently, so "the rent" means two different amounts depending on which one you are on, and 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? It is a plain question and it takes ten seconds, and it exists because gross rent and net rent are a long way apart. Getting that one wrong is not a rounding error on a loss of rent sum insured, it is the difference between a claim that pays your costs and one that leaves you funding them. 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.

Two further things travel with the figure.

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 is a figure that has been quietly falling behind every year since, and unlike the building sum insured there is no annual index nudging it along. We ask for an updated rent figure every year for exactly this reason.

What that costs, from a real claim of ours. A commercial owner insured for $36,000 a year of loss of rent. 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 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 is a separate underinsurance test on income sections, and it is not the same test as the one on the building. Some wordings switch it off where the figure is calculated properly, some switch it off for part of the income and not for the rest, and you cannot tell which from a schedule. This page does not try to teach that mechanic. It is 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.

Twelve months sounds generous until you write out what actually has to happen.

Make safe, and get an assessment. Nothing starts until the site is safe and somebody has decided what is being repaired and what is being replaced.

Design and approvals. This is the step owners never budget for. A building that has to be rebuilt rather than patched needs a current approval, and a current approval means current building standards, which is not 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, and 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. The queue itself is part of your timeline, and it is longest exactly when you are 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 moved on and settled somewhere else, that tail can run for months.

Add those up honestly for your own building and the reason we push for 24 months becomes plain arithmetic rather than an upsell. On a commercial building the step up from 12 months to 18 is usually not a large premium movement, which 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: one claim where 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, and another where 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 does not cover a tenant who stops paying while the building is undamaged, it does not cover a tenancy that simply ends, and it does not cover damage your policy does not 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 is rent default, a different product with a different name, and our view of it is on commercial landlord insurance, which sets out what does work instead.

A lease that ends. A tenant who reaches the end of the term and does not renew, or who exercises a break right, has not caused an insured event. Vacancy between tenants is a business risk and it is also 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 it has ended.

Damage the policy does not cover. Where the property damage claim fails, the rent section normally has nothing to attach to. A declined claim, an excluded peril, or a cover the owner chose not to take all land the same way.

More time than you bought. When the indemnity period ends, the payments stop, whether or not the building is earning again. There is no retrospective extension after an event, which is why the number is worth arguing about before you need it and not after.

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 is how we place it in almost every case. Where a situation calls for it we can also approach an underwriting agency, underwritten by Lloyd's, that will write loss of rent on a commercial property on its own. That is the exception rather than the starting point, and whether it is worth it depends on what the rest of your cover already does.

On a normal commercial landlord's policy this is one of three or four sections, each with its own number: the building, the rent, your own liability as the owner, and often glass and machinery breakdown depending on what the lease puts where. That anatomy is set out on commercial landlord insurance.

Almost every owner holds this inside the policy that already insures the building, and that is where we place it. If we are insuring your building, your loss of rent sits inside your commercial property owners insurance with us, which keeps one insurer answering for the damage and for the income that stopped because of it. There is also a standalone market, and most owners do not know it exists. We have access to an underwriting agency, underwritten by Lloyd's, that will write loss of rent on a commercial property on its own, away from the building policy, and 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 is when we go to the standalone market: where the building policy's own section will not stretch far enough, or where the building is insured somewhere we cannot change and the income cover needs fixing on its own. Either way it is a conversation, not a product on a shelf, and it starts with your current schedule.

A worked example, with made-up numbers

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. Two separate gaps open up, and they are different problems.

• 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, and 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. Nothing about the building changed. 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 is the one most likely to be wrong, but it is rarely wrong on its own. 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.

Bring the current schedule and the lease if you have it. From there the conversation is short and it covers four things.

The building. Whether the sum insured is a real rebuild figure or a number that has been indexed along for years. We commission a desktop building replacement valuation at no cost to you, so the figure is settled before a policy is written rather than after a loss. What a genuine rebuild figure includes is on how to calculate your building sum insured, and what a shortfall costs at claim time is in underinsurance in commercial buildings.

The rent. The annual figure excluding GST, whether your lease lets you recover outgoings, and whether those are inside the sum insured. Then the period, against an honest rebuild and re-let timeline for your building rather than the number on last year's renewal.

Your own liability. Your tenant's policy answers for your tenant's business. If somebody is hurt because of the building, the owner is sued as the owner, which is what property owners liability exists for.

The lease. Send it with the schedule and we read the two together and tell you who insures what, which is the fastest way to find a gap nobody has looked at.

You get one account manager across the whole portfolio, and you hear plainly which parts of your current policy are already fine.

If the building has just been damaged, the call is a different one

You are not ringing about cover any more, you are ringing about a claim, and the first conversation is about making sure it moves. Here is what we go through.

What we are 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 is the first thing we chase.

What matters right now. Keep every invoice, every piece of correspondence, the photos and the reports. And do not 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 is true. Both have to be present. Where the property damage claim is not covered there is usually nothing for the rent cover to attach to, and where the lease has no abatement clause the tenant keeps paying and there may be no loss to claim at all.

Can I buy loss of rent cover on its own, separately from my building policy?

Yes, and almost nobody knows it. We have access to an underwriting agency, underwritten by Lloyd's, that will write loss of rent on a commercial property on its own, and we hold a small number of policies there. It is not where we start: if we are insuring your building, the loss of rent forms part of your commercial property owners insurance with us. Some situations do call for the two to be separated, and where the building is insured somewhere we cannot change, or the section inside your current policy will not stretch, the standalone market is a real option. Ring 07 3292 1111 with your current schedule and we will tell you honestly whether it is worth it.

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 is what turns damaged bricks into lost income; the policy is what replaces it. It is also worth knowing that the abatement usually has carve-outs. In the leases we hold, the rent does not abate where the damage was caused or contributed to by the tenant's negligence or default, or where the landlord's own insurer refuses or reduces indemnity because of something the tenant did. The clause itself is covered on what a commercial lease requires you to insure.

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, so a re-let that runs past the rebuild is still inside the cover until the period runs out. Size the period against the rebuild plus the re-letting. That is why our default is 18 months and we recommend 24 wherever we can.

Can my tenant end the lease after the building is damaged?

Often, yes. In the three commercial leases we hold, either side may end the lease where the landlord notifies that repair is impractical, and the tenant may end it where the landlord has not repaired within the time the lease allows. That matters for your cover rather than only for your tenancy schedule: losing the tenant turns a rebuild claim into a rebuild plus a re-let, which is the longest version of the claim and the one a short indemnity period cannot survive.

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 for the loss you actually suffer, up to the number of months you bought. Finishing early simply means you did not need all of it. The asymmetry is the point. Buying more months than you need costs a modest amount of premium; buying fewer than you need costs you the whole shortfall.

Is loss of rent the same as business interruption insurance?

They are 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 will work through both on the call.

Related reading

• Commercial landlord insurance: the whole commercial landlord policy, section by section, including rent default and why we do not recommend it.
• The commercial landlord's insurance guide: the four covers, and two real loss of rent claims told with the figures.
• What commercial landlord insurance costs: what drives the premium on each section, with five real quotes.
• Who pays for building insurance on a commercial property?: commercial landlord, tenant, and what the lease actually decides.
• What a commercial lease requires you to insure: the insurance clause, clause by clause, from three real leases.
• Business interruption insurance, explained properly: the trading business's version, and the two clocks behind the indemnity period.
• The business interruption underinsurance trap: how the income sum insured is tested, wording by wording.
• Commercial building insurance: the building section itself, and where it usually falls short.
• Property owners liability: why your tenant's policy will not defend you.
• How to calculate your building sum insured: what a genuine rebuild figure includes.
• Desktop building replacement valuation: the rebuild figure, commissioned at no cost to you.
• For commercial property owners: entities, portfolios and the structure conversation.