Lessees beware - Insurance proceeds are not enough!

25 September 2017

It is not unusual to see in a long Lease of a residential flat, a Landlord's right to terminate or for the Lease to automatically determine, in the event of damage or destruction of the flat or block where it is not possible to reinstate the block within a certain period, usually 3 years. The lease will then provide for  the insurance proceeds  to be divided between the Landlord, the Tenant and the other  lessees of the block in such proportions as the parties agree, having regard to their respective interests.

This is potentially a windfall for the Landlord, since it gets to retain its reversionary interest free of the leasehold interest.  Although 3 years may seem a long time, it may not be sufficient time to get planning permission and to rebuild within that period particularly if the building contained a significant number of flats or is a tall building.

These sorts of clauses can still be seen in Leases for new build flats and therefore it is important to try and agree the following changes:-

Firstly: the period should be increased to say 5 years for a tall building;

Secondly: such a clause is incompatible with CML 5.14.14 which is:-

"5.14.14     We will accept Leases which require the property to be sold on the open market if rebuilding or reinstatement is frustrated provided the insurance proceeds and the proceeds of sale are shared between the Landlord and Tenant in proportion to their respective interest"

Therefore, it is crucial to either negotiate the removal of the termination right or the automatic termination of the Lease, or, if the Landlord is to have a right to terminate, it should be subject to the Landlord paying the Tenant the market value of its Lease in its damaged or destroyed state.  In the former case, although a Landlord may be relieved of its obligation to reinstate after 3 years it means that it cannot redevelop or dispose of the site without the Landlord having to buy out the Tenant's interest.

If a buyer is acquiring an existing Lease and it is not possible to vary that Lease then defective title indemnity insurance is likely to be available and we have been able to obtain quotes for the following insured event in the past:

"Your Lease is terminated because the Property and/or building cannot be reinstated within the timescales set out in your Lease".

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We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

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