In our third blog addressing potential financial pitfalls in leases, we addressed the dangers of exercising your break right incorrectly or changing your mind after exercising it. To culminate our series of blogs, here we will consider business rates and the dangers of “uninsured risks”.
Most leases will require you either to pay the business rates for your premises or to contribute towards shared rates. This is rarely contested. However, if you claim empty rates relief during the term which prevents the landlord fully claiming that relief after the term, you might have to indemnify the landlord for lost relief.
Such a “rates relief indemnity” makes sense in a retail lease where the tenant has covenanted to keep the premises open to trade throughout the term, particularly where the rent is calculated by reference to turnover. But your office or laboratory lease likely contains no requirement for you to occupy the premises throughout the term, nor prevents you from actually claiming any available business rates relief. Therefore, the link between your obligations and your indemnity is unclear, hence a rates relief indemnity is rarely appropriate in a science park setting.
When negotiating your lease, your solicitor ought to attempt to ensure there is no rates relief indemnity. If your landlord insists upon its retention, you may be better off not claiming business rates relief even where available in order to avoid a surprise invoice from the landlord after you have vacated.
Your lease should define what risks the landlord is required to insure the science park against – the “insured risks“. But your lease most likely contains no obligation for the landlord to insure against these risks to the extent that insurance is unavailable or that the insurer imposes an exclusion.
If your premises become unusable or inaccessible due to damage by an insured risk, your rent should be suspended, the landlord should reinstate the premises and their access, and you should have a right to terminate the lease if the premises are not usable and accessible within three years.
If the premises are unusable or inaccessible due to damage by an “insured risk” that was in fact not insured against (an “uninsured risk“), any such damage will be your responsibility under your repairing covenant. You will benefit from no rent suspension or termination rights.
Uninsured risks provisions address this problem. They generally say that, where the premises are unusable or inaccessible due to damage by an uninsured risk, the landlord may elect to reinstate the premises at its own cost or terminate the lease. You benefit from a rent suspension whilst the premises are being reinstated and may terminate the lease if they’re not reinstated within three years of the damage.
The chances of experiencing damage by an uninsured risk during your lease term are – hopefully – unlikely. But the cost could be high, particularly in the context of a high specification laboratory, if you don’t have these lease protections.
Author: Giorgia Clements, Senior Associate, Penningtons Manches Cooper LLP