Sorting out the insurance responsibilities for a commercial rental property can be a tricky affair. In Australia, commercial leases generally dictate that tenants cover outgoings like council rates, water rates, and building insurances. However, the specific terms of the lease can vary, so it’s crucial to review them carefully to understand each party’s responsibilities.
When it comes to commercial rental leases, there are generally two types; gross and net leases. With a gross lease, the tenant pays a fixed commercial rent amount which includes all the property’s operating expenses, property taxes, insurance and maintenance costs. Contrary to a net lease, where a portion of the property’s operating expenses are in addition to the rent. The advantage of a gross lease is that it provides predictability for the tenant whereas with a net lease the tenant will have to budget in additional costs.
As a commercial property owner, you must ensure the building insurance is adequate for full replacement value, it is part of your commercial lease landlord obligations. The property owner is responsible for the building insurance as they are the one with an insurable interest in the building. Basically, they are the ones that will suffer a loss of investment if it’s not adequately insured and they are also the ones that will benefit from a successful claim.
Even though the landlord is responsible for insuring the building itself, tenants are responsible for insuring their own contents. Besides taking out an appropriate home and contents insurance policy, they might also want to take out tenant’s improvements cover. This allows the tenant to be covered for any permanent alterations they made which wouldn’t be covered under the building insurance policy. Examples are a new kitchen, special flooring, air conditioning etc. The tenant is the one with the insurable interest, which is why they are responsible for taking out an appropriate insurance.
The costs of commercial building insurance is often passed on to the tenants. This is often detailed under the terms of the commercial lease agreement, however this can get more
complex when multiple tenants are involved. Different tenants may significantly impact the insurance premium, making it challenging to determine a fair and reasonable share.
Consider, for example, an industrial duplex with a mechanic on one side and an office on the other. The building insurance cost will be influenced by the highest risk tenant (the mechanic), resulting in a higher premium than if there were two office tenancies. In such a situation, is it fair for the office tenant to pay half the insurance? Should it be split based on floor space or by another formula?
There is no set answer to this dilemma. While the lease may offer some guidance, it’s essential to set expectations upfront for tenants and keep them informed of any changes in tenancy that could alter their premiums.
One way to ensure fairness and streamline the process is to work with an insurance broker who can prepare a “split invoice” for passing costs onto tenants individually. This approach helps maintain transparency, as each tenant receives their own invoice rather than being told to pay a specific percentage of the total bill.
Consolidated Insurance Brokers (CIB) can provide this service for our property owner clientele, making it easier for them to manage their properties. With CIB, you’ll have the support and expertise needed to navigate the complexities of commercial property insurance, ensuring that both you and your tenants are satisfied with the arrangements in place.
FAQs
- What is commercial building insurance?
Commercial building insurance provides coverage for the physical structure of the building. It also allows commercial property owners to be covered for losses caused by events such as fire and malicious damage. For more information please visit our ‘Commercial Building Insurance’ page.
- Who is responsible for Commercial Building Insurance
The property owner is responsible for the building insurance as they are the one with an insurable interest in the building. Basically, they are the ones that will suffer a loss of investment if it’s not adequately insured and they are also the ones that will benefit from a successful claim.
- What is the difference between gross and net commercial lease
With a gross lease, the rent is a fixed amount which includes all the property’s operating expenses, property taxes, insurance and maintenance costs. Contrary to a net lease, where a portion of the property’s operating expenses are in addition to the rent.
- What should a tenant insure
Tenants are responsible for the insurance of their contents. Besides an appropriate contents insurance policy, they might want to consider a tenant’s improvements cover. This allows the tenant to cover any permanent alterations they made, such as a new kitchen, special flooring, air conditioning etc.
- How do I split the building insurance between tenants?
There is no set answer to this. One way to ensure fairness and streamline the process is to work with an insurance broker who can prepare a “split invoice” for passing costs onto tenants individually. This approach helps maintain transparency, as each tenant receives their own invoice rather than being told to pay a specific percentage of the total bill.
At CIB we provide the support and expertise needed to navigate the complexities of commercial property insurance, ensuring that both you and your tenants are satisfied with the arrangements in place.
