Coping in a crisis

What firms should expect in the event of a fire

Iain M Smith Auctioneers at Perth Airport experienced a devastating blaze in March, while a recent fire in Sauchiehall Street in Glasgow was also serious.

Unexpected and severe incidents like these bring into sharp focus the financial implications for both tenants and landlords of business premises if they were to be similarly hit.

Tenants are mainly concerned with two critical things – if I’m forced to move out, do I have to continue paying rent and when can I move back in and start operating again?

If we assume the landlord insures the property, there are some key considerations for both parties:

First – the cause. Has any damage been caused by an insured risk?

Fire tends to be covered, but it is important all normal risks are covered.

Second – extent. What has actually been damaged?

Is it the commercial unit itself or the common parts of a larger property on which the unit depends for support or access?

Third – payment suspension.

Rent and service charges should be suspended in the case of insured risk damage and increasingly nowadays also in the event of uninsured risk damage.

Tenants will not appreciate being liable for ongoing lease costs if they’re unable to occupy, and rather than linking payment suspension provisions to actual damage, it can be more appropriate to link to the inability to occupy.

Fourth – reinstatement.

If it is insured risk damage, the landlord should be obliged to obtain all necessary consents and permissions and to reinstate as soon as is practicable.

Generally, a landlord will have three years to reinstate after which the tenant should have the ability to end the lease. This isn’t ideal for a tenant – do they lease new premises in the interim?

But, equally, it might be an issue for the landlord who, in the event of material damage or destruction, is keen to use the opportunity to develop something completely different.

A good working relationship and early dialogue between landlord and tenant is vital as, in some cases, the best option for both parties may be to shake hands, rip up the lease and walk away.

The aftermath of the fire at Iain M Smith Auctioneers in Perth in March.