Allyson Colby analyses a recent dispute where an insurance wrinkle affected a tenant’s prospects of assignment.
Key points
- The Fires Prevention (Metropolis) Act 1774 enables owners and occupiers to require insurers to use insurance monies to rebuild – but only before sums are paid out and only where the loss was caused by a fire
- So leases should require parties to use sums paid out for reinstatement for that purpose and should state who owns the insurance proceeds where premises are not reinstated
Most landlords prefer to insure commercial properties themselves, albeit at the tenant’s cost, in order to ensure that premises are adequately insured and to be able to control any claims and reinstatement required. So it is relatively unusual to come across a lease in which the tenant covenants to insure.
Colt Group Ltd v Unicourt Wandsworth LLP [2020] EWHC 2549(Ch); [2020] PLSCS 176 raised two interesting questions. The case concerned a 99-year lease of commercial premises in London requiring Colt, the tenant, to keep the property insured in the names of the landlord and tenant. If the premises were to be damaged by an insured risk, Colt was obliged to reinstate to the satisfaction and under the supervision of the landlord’s surveyor, and to make good any shortfall in the insurance.
Colt wanted to assign the lease to a prospective assignee, who was concerned that the insurance monies could be paid to the landlord (because the policy was in the names of both the landlord and the tenant) who might refuse to make them available to the tenant. But, when Colt asked it to address this, the landlord refused to vary the lease.
So Colt sought a declaration from the court that the landlord would use any sums received from the insurers for reinstatement for that purpose. And, if this were to be impossible, or if the parties were to agree not to reinstate, Colt sought a declaration that the tenant would be entitled to the proceeds of the policy.
Reinstatement
In Mumford Hotels Ltd v Wheler [1963] 189 EG 837, the fact that a tenant was under an express obligation to pay for the cost of the insurance effected by the landlord enabled the court to conclude that the landlord had insured the property for the benefit of both parties. Consequently, the court felt able to imply a term into the lease requiring the landlord to use the insurance proceeds to reinstate.
Even so, the prospective assignee of Colt’s lease considered it “institutionally” unacceptable that the lease did not impose an obligation on the landlord (corresponding with an obligation accepted by the tenant) to apply all moneys received from the insurers for reinstatement for that purpose.
And, although the High Court accepted that it might seem obvious that the landlord could not require the tenant to reinstate while retaining the insurance money for its own benefit, the judge agreed that the landlord’s stance had given Colt legitimate cause for concern that it might lay claim to at least part of any insurance monies paid to it, leaving the tenant with insufficient funds for reinstatement.
Insurance proceeds
There is no general principle of law dealing with the ownership of insurance monies where premises are not reinstated. But the Court of Appeal has addressed the point twice.
In Re King Deceased [1963] Ch 459, the tenant was obliged to insure and to use the proceeds of the policy to reinstate. The premises were destroyed by fire and a compulsory purchase order made it impossible to rebuild them. And, although the property was insured in the joint names of the landlord and tenant, the Court of Appeal decided, by a majority, that the tenant was entitled to the insurance proceeds. The court ascribed little importance to the fact that the policy was required to be in joint names, ruling that the insurance was effected and paid for by the tenant so that it could comply with its reinstatement obligations.
By contrast, in Beacon Carpets v Kirby [1984] QB 755, the Court of Appeal took the same line as Lord Denning MR in his dissenting judgment in Re King. In Beacon, the landlord had insured in joint names at the cost of the tenant. When the premises were destroyed by fire, five years into a 14-year term, the local authority indicated that part of the property might be needed for road widening and granted temporary planning permission for the construction of a smaller building that did not satisfy the tenant’s needs. So the tenant surrendered its lease, leaving the court to distinguish Re King – albeit not without hesitation – by reference to the parties’ conduct and because the terms of the leases and the insurance policies were different. Had it been possible to reinstate, the parties would have benefited proportionately from the reinstatement. Consequently, the proceeds should be divided between the landlord and tenant in shares proportionate to their respective interests in the property when it was damaged.
Comment
Unsurprisingly, therefore, the High Court took the view that the question of who owns insurance monies is highly fact-sensitive, and there were no concrete facts in this case on which to base a decision relating to a lease with 47 years left to run. So the judge refused to confirm to whom the insurance proceeds would belong if they were not used for reinstatement. But he did grant Colt a declaration stating that insurance monies paid out for reinstatement were, in so far as they were reasonably required to reinstate, to be used for that purpose.
The moral of the story is that leases should address the obligations of both the landlord and the tenant where insurers pay out for premises to be reinstated – and deal with the distribution of the insurance proceeds if reinstatement proves undesirable or impossible. In such circumstances, most landlords will insist that the proceeds should belong to them.
Allyson Colby is a property law consultant
