Landlords have recently become more aggressive in trying to shift some of the costs of insurance that they traditionally carried onto their tenants. In a large commercial building, the cost of all of these policies can be significant. Essentially, the insurance requirements increase the cost of leasing space. Tenants should be wary of the extra costs these insurance requirements can impose.
A lease renewal I’m currently involved with showcases this new approach. Under its existing lease, the tenant was required to carry standard liability insurance covering the leased premises, as well as property losses for the tenant’s furniture and equipment. Now, however, the landlord is also requiring all-risk business interruption insurance, in an amount equal to at least all the minimum rent and additional rent payable under the lease for 12 months; workers compensation, employers liability and liquor liability policies. Plus, the landlord is requiring a $5 million umbrella policy. To ensure that a tenant complies with these new lease requirements, the landlord will require that tenant provide the landlord with certificates of insurance naming the landlord as an additional insured under the applicable policy(ies).
Before reflexively suggesting that the tenant fights the new insurance requirements, I suggested that the tenant price the new policies. If the new policies significantly increase the tenant’s costs, the tenant may try to renegotiate the rent per square foot to balance out the increased cost of insurance.
The other side of this issue is that having additional insurance can also be of value to the tenant too. An attorney friend was required to carry business interruption insurance by her landlord. A steam pipe burst in front of her building causing a cloud of asbestos to go in the air which was sucked into her building by the AC system. The street in front of her building was closed as well as her building. If not for the business interruption insurance, she would have had a major financial shock. The point is you may want to buy this type of insurance, but your landlord shouldn’t be the one requiring it.
Larger tenants can use their leverage to negotiate concerning the new insurance requirements. However, because they may already carry certain types of newly required insurance (such as business interruption insurance), these requirements may not actually increase a larger tenant’s costs.
The bottom line is that, while the landlord bears costs associated with the risks of owning property, it also reaps the rewards. If you would like to learn more about how Mohr Partners helps keep the risk of ownership where it belongs—with the owner, not with the tenant—contact me.
George E. Grace
G.E. Grace & Company, Inc.
232 Madison Avenue
New York, NY 10016