The landlord usually gives fewer covenants than the tenant, typically dealing with the following areas:

• quiet enjoyment of the Property by the tenant;
• insurance of the Property;
• reinstatement of the Property following damage or destruction; and
• provision of services (including repair and maintenance of the parts of the Property not let to the tenant).

The covenant for quiet enjoyment is usually in standard form and is rarely the subject of negotiation. Covenants in relation to the other areas are more keenly debated and are dealt with here in separate sections.

Insurance

Landlord’s objective:

To make sure that if the Property is damaged or destroyed, there will be sufficient money to rebuild it (or redevelop the site), while maintaining a constant income stream.

Tenant’s objective:

To make sure that if the Property is damaged or destroyed, it will be rebuilt promptly, so the tenant can carry on with its business; and

to avoid paying rent while the Property cannot be used.

The general position

The usual arrangement in relation to insurance is as follows:

• The landlord covenants to insure the Property against an agreed list of risks, for the full reinstatement cost, together with three (or more) years’ loss of rent.
• The tenant covenants to pay the whole (or an appropriate proportion) of the cost of insuring (the insurance rent).
• If the Property is damaged by one of the insured risks, the tenant’s repairing obligation does not apply and the landlord is obliged to reinstate.
• The tenant’s obligation to pay rent is suspended for the period during which loss of rent insurance is payable.
• If the Property has not been reinstated (or reinstatement at least begun) by the end of an agreed period (usually the loss of rent period), one or both parties will be entitled to bring the lease to an end.

Insured risks

Most draft leases set out a fairly standard list of risks against which the landlord is to insure, although the landlord should discuss the list with its insurers, to make sure that everything on it is actually covered. There should always be a general clause, referring to “any other risks against which the landlord reasonably decides to insure”, to make sure the landlord can recover the costs of insuring any additional risks not included in the initial list.

Full reinstatement cost

Both parties will want to be sure that any insurance monies will be enough to cover the complete costs of reinstatement, including preliminary site clearance and it is usually the responsibility of the landlord to make an appropriate estimate.

What is to be reinstated?

As the tenant has been paying insurance rent throughout the term of the lease, it will usually be keen for the Property to be reinstated as soon as possible, so the tenant can resume its business. The landlord may not always want to reinstate – it may have other plans for the site. The extent of the landlord’s obligation to reinstate will depend in part on the nature of the Property. If it is a free-standing building, there should be little argument. However, where the Property is part of a larger development, the landlord may want to keep some flexibility about how much it is obliged to reinstate and may try to limit its obligation to the Property itself.

Rent cesser

The purpose of paying for loss of rent insurance is so that the tenant is can be given a break from paying rent (a rent cesser) if it is not able to use the Property following damage by an insured risk. The loss of rent cover ensures that the landlord still gets a regular income. Loss of rent insurance should cover a period equivalent to the length of time it is likely to take for the Property to be reinstated (or for it to become clear that reinstatement is not possible). Three or four years is the norm, although a longer period may be appropriate for a very complex building. The rent cesser will usually start on the date of the damage and end at the end of the loss of rent period or, if earlier, the date on which the Property is once more capable of being used by the tenant .

Right to break if Property not reinstated

If it proves impossible to reinstate the Property (for example because planning permission cannot be obtained) neither party will want to be tied to a lease that no longer serves any useful purpose. The tenant will be particularly keen to walk away once the rent cesser period comes to an end, to avoid paying rent for unusable premises. The lease should include a right for either or both parties to bring it to an end by serving notice on the other party if the Property has not been reinstated by the end of an agreed period. The landlord may also want the right to break without attempting to reinstate if damage occurs during the last few years of the term .

Uninsured loss

Not all risks can be covered by insurance. Changes in circumstances may mean that insurance that was once easy to obtain is no longer automatically available (for example, cover against terrorist damage or flooding). The tenant’s repairing obligation is usually qualified so that it does not apply where there is damage by an insured risk. The tenant’s rent cesser and the landlord’s obligation to reinstate and right to break are generally triggered by damage by an insured risk. Until recently, few leases addressed specifically what would happen where the damage was the result of an uninsured risk, so the parties were left in a stalemate position, with neither party obliged to reinstate but with the tenant still paying rent and neither party able to walk away.

Publicity surrounding terrorism and flooding mean that tenants are increasingly insisting on some explicit sharing of risk in relation to uninsured loss. The Code recommends that the tenant should have the right to break following damage by an uninsured risk, unless the landlord agrees to reinstate at its own expense. In practice, the provisions being negotiated are more complicated than this and depend very much on the bargaining position of the parties. Typically, the parties will agree a period during which the landlord must decide whether or not to reinstate at its own expense. If it decides not to, either party may bring the lease to an end by notice. If the landlord decides to reinstate, the tenant will be required to carry on paying rent for at least part of the period. Whether or not the tenant carries on paying rent while the landlord makes up its mind is a matter of negotiation.