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Guide to insurance and commercial lease agreements

If you’re thinking about leasing premises for your business or renting out buildings you own, the terms of your commercial lease could be even more important than you think.  

Unlike residential tenancies, where tenants’ rights are heavily protected, commercial contracts are more flexible and can be negotiated between landlord and tenant. Both parties are legally bound by the agreed terms, so tenants must understand where responsibility lies for commercial property insurance.  

To help you avoid an expensive misunderstanding, we'll explain what to expect in the insurance clauses of a commercial lease.  

11.11.26

By Ian Sadd

Understanding insurance clauses in a commercial lease 

Commercial leases are governed by contract law and should clearly set out each party's responsibilities, including property maintenance and insurance. For example, commercial landlords are usually responsible for the physical structure, while tenants’ responsibilities typically include internal health and safety.  

Nevertheless, commercial leases can include complex obligations, so it’s important to be clear about where responsibility lies.  

Who pays for commercial property insurance? 

Generally, landlords arrange to insure the building under their commercial landlord insurance, but the cost of the policy is often passed on to the tenant. Landlord policies typically cover: 

  • Damage to the physical building. 

  • Damage to permanent fixtures and fittings. 

  • Legal expenses. 

Some commercial leases are based on a Full Repairing and Insuring (FRI) agreement. Under these contracts, tenants are responsible for all insurance costs and repairs, including repairs to the physical building. Again, landlords may arrange the policy and recoup the cost from tenants (sometimes referred to as ‘insurance rent’ in contracts). FRI leases are common when it comes to leasing to a single tenant. 

If a commercial premises has several tenants (like an office building or shopping centre), tenants are usually only responsible for the space they lease. Communal areas such as foyers, lifts, and car parks are typically the landlord's responsibility. However, tenants often pay a service charge to cover this maintenance.  

Tenants should also bear in mind that commercial leases may also come with a ‘dilapidations’ clause. This essentially means that tenants are expected to cover the cost of returning the property to its original condition at the end of a tenancy. You can find out more about dilapidations from the RICS (Royal Institution of Chartered Surveyors) website. 

If the lease makes the tenant responsible for arranging the building insurance, the landlord should be listed on the policy as having an ‘insurable interest’. This ensures that, in the event of a claim, the payout is given to the person who suffers the financial loss. Sometimes, a lender or mortgage company will also be listed as having an insurable interest.  

What insurance does a commercial tenant need to buy themselves? 

The insurance a tenant needs depends on their business and activities and is often taken out as a package under a commercial combined policy. Policies tenants may need include: 

Business contents and stock insurance 

Tenants are responsible for insuring their own stock and any contents, for example, office furniture, equipment, or machinery. Tenants can also take out tenants’ improvements insurance to cover any physical changes they make to the property, such as adding a mezzanine floor. 

Many policies have a standard clause to extend stock cover for seasonal increases (such as at Christmas), but make sure you check your policy wording. You should also consider other times of the year when the business might carry more stock and whether you need to increase your cover accordingly.  

Public and employers’ liability 

If you employ staff, you must legally have employers’ liability insurance.  

Tenants should also arrange public liability insurance, which covers third parties if they’re injured or have belongings damaged because of your business. For example, if a customer trips over a display on your premises and breaks an ankle. 

Business interruption insurance 

These policies cover lost income and other expenses if you have to temporarily stop operating because of an insured event, such as a fire, flood, or theft. Expenses can include wages or rent on the premises you lease.  

Business interruption insurance can also help cover costs if you need to lease temporary premises to work from.  

Common lease terms to look out for 

While many clauses in a commercial lease are considered standard practice, it’s important that landlord and tenant understand what they mean.  

Two specific terms to be aware of from an insurance perspective are: 

Waiver of subrogation 

Subrogation is an insurance provider’s right to seek damages from a third party who is at fault. When a lease includes a waiver of subrogation, it means the insurance provider for one or both parties declines that right.  

For example: 

  • A fire destroys a premises, and the landlord’s insurer covers the cost of repairs. 

  • Once the insurer has paid out, they can attempt to recoup those costs from the party at fault, such as the tenant (this is the process of subrogation). 

  • If a waiver of subrogation is in place, the landlord’s insurer has no right to pursue costs from the tenant (or their insurer).  

Specified perils

A specified peril is an event that triggers a responsibility (for example, carrying out repairs). Events include fire, flood, or theft. In a commercial lease, specified perils may be listed to show what events are covered by insurance.  

FAQs 

Protect your assets with tailored insurance

When it comes to commercial leases, if you’re unclear about where responsibility lies, always check with a legal professional before signing any contracts.

Similarly, it’s important to be clear on exactly what your insurance policy does and doesn’t cover. To find out more about commercial property insurance or business insurance, speak to a member of the team. 

Speak to us:  01603 216387
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