Insurance provisions in the law association (previously ADLS) deed of lease
The Law Association (which was previously ADLS) Deed of Lease is a common form of commercial lease used throughout New Zealand. It outlines the relationship between the Landlord and Tenant. In particular, the insurance obligations of both Landlords and Tenants. It is important that the parties understand how these clauses operate and where costs may ultimately fall.
Landlord’s Insurance Obligations
Under the Deed of Lease, the landlord is generally required to insure the building on either:
- Full replacement and reinstatement;
- Indemnity of full insurable value.
The Landlord must specify this in the first schedule of the Deed of Lease.
While the Landlord arranges the insurance policy, the cost of insurance premium can be recoverable from the Tenant as an outgoing payable in addition to the rent.
As the Landlord can pass along the direct costs of insurance as an outgoing, Tenants should be aware that increases in insurance can therefore have a direct impact on the operating expenses of their business.
If it is payable in addition to the rent, it will be listed as an outgoing in clause 18 of the first schedule.
Accordingly, when reviewing a Lease provided by a Landlord the Tenant should check whether or not the insurance excess is included as an outgoing in the first schedule of the Lease.
Tenant’s Insurance Obligations
Tenants are required to maintain their own insurance policies, including insurance cover for their fit out, chattels and contents.
Insurance Excesses
If a claim is made by a Landlord under their insurance policy in respect of damage to the premises, then the cost of the insurance excess could be payable by a Tenant.
Under clause 17 of the first schedule of the Deed of Lease, the outgoing in relation to the insurance premiums is not merely limited to insurance premiums. It also covers any related valuation fees, and any excess applied to the cost of repairs under clause 24.4 of the Deed of Lease”.
As such if this is included in the outgoing in the Deed of Lease, then if the Landlord makes any claim against its insurance for any destruction or damage to the premise, then the Tenant will have to pay the Landlord’s insurance excess. This is regardless of whether or not the destruction or damage was caused by an act or omission of the Tenant.
The amount of insurance excess will be set out in clause 21 First Schedule of the Deed of Lease and the maximum payable by the Tenant is the insurance excess set out in the Deed of Lease or the actual cost of repairs whichever is less.
The Tenants will need to be aware that if insurance premiums and excesses are included as an outgoing in the Deed of Lease, then if any claim is made, the Tenant will pay the insurance excess.
If insurance excesses are not included as an outgoing, then under clause 24.3 of the Deed of Lease, the Tenant will only pay the insurance excess payable by the Landlord if the claim by the Landlord is for any destruction or damage caused by an act or omission of the Tenant. As above, the amount payable will be the amount of the excess or the cost of the repairs whichever is lesser.
Accordingly, both Landlords and Tenants have to be aware of what is being included as an outgoing under the Deed of Lease and should also take note of the insurance excess payable. The Landlord should make sure the insurance excess amount included in the Deed of Lease does reflect the actual insurance excess payable, and the Tenant should look at the amount of the insurance excess as sometimes this amount can be significantly disproportionate to the annual rent payable under the Lease. In some instances there have been Leases where the insurance excess is equal to or greater than the annual rent payable by the Tenant.
