Every well drafted lease should contain covenants to insure and reinstate, a suspension of rent provision and a clause that deals with the parties’ respective rights if reinstatement is impossible.
Colt Group Ltd v Unicourt Wandsworth LLP [2020] EWHC 2549 (Ch) concerned a 99-year lease of commercial premises in London. The lease required the tenant to keep the property insured in the names of the landlord and tenant. If the property or any part of it were to be destroyed or damaged by an insured risk, the tenant was under an obligation to reinstate or rebuild to the satisfaction and under the supervision of the landlord’s surveyor – and was also obliged to make good any shortfall in the insurance cover.
The tenant wanted to assign the lease to a prospective assignee – who raised concerns about the possibility that, because the insurance policy was required to be in the names of both the landlord and the tenant, the insurance monies might be paid to the landlord, who might refuse to make it available to the tenant for reinstatement. But, when the tenant asked the landlord to vary the lease to remedy the defect, the landlord refused.
So the tenant sought a declaration from the court that if either party to the lease were to receive any payment as a result of claiming on the insurance policy, the proceeds were to be paid to the tenant and used for reinstatement. In cases where this was impossible, or if the parties were to agree not to reinstate, the tenant sought a declaration that it was entitled to the proceeds of insurance.
The judge agreed with the tenant that the landlord had failed to make its position clear in correspondence between the parties. And he did not consider the fact that the issue had been raised in the absence of any insurance claim rendered it academic or hypothetical.
Although it might seem obvious that the landlord could not retain the insurance money for its own purposes, as well as requiring the tenant to reinstate, the landlord was not under an express obligation – corresponding with the obligations imposed on the tenant – to apply all monies received for reinstatement for that purpose, where reinstatement was possible. So the tenant had a legitimate concern that the landlord might try to retain at least part of the insurance proceeds on the ground that they represented its insurable interest in the property.
However, the judge did refuse to grant declaratory relief as to the position if reinstatement were to be impossible. The tenant had drawn the judge’s attention to In Re King Deceased [1963] Ch 459 (CA), where the tenant insured and the Court of Appeal decided that the insurance proceeds belonged to the tenant. But the landlord insured in Beacon Carpets v Kirby [1984] QB 755 (CA) and the Court of Appeal divided the insurance proceeds between the parties proportionately, according to the value of their respective interests at the time when the premises were damaged. Consequently, the judge took the view that the proper application of insurance moneys where reinstatement is impossible is highly fact-sensitive and, in the absence of a set of concrete facts, refused to opine.
The moral of the story is that the parties to a lease should expressly state who owns insurance proceeds where neither party wants to reinstate, or where reinstatement is impossible.
Allyson Colby, property law consultant
