|
|
Guidance Notes
2) Rental Income:
The purpose of owning commercial/industrial property is to maximise it's potential earnings to
produce healthy profits on your investment. To ensure your investment continues to pay in the event of loss or damage to the property it is essential to fully assess the loss of income that may be incurred. Where the terms of a lease do not include a cessor clause, a loss of rental income may still be incurred should a tenant's own insurance not be adequate or trading is made difficult when alternative premises are required. Dependance on the terms of the lease in these circumstances will not provide satisfactory protection against loss of rent, insurance cover is therefore still advisable.
The Steps to Take:
- Establish the "base" sum insured. This is the actual annual rental income as at the commencement of the insurance. Add to this any service charges to be included (please see the note below). Add any annual increases in rent and service charges expected during the insurance year. Then multiply the total by the number of years required for the indemnity period.
- To allow for future rent reviews an immediate "uplift" is necessary. This is added to the base sum insured. This method avoids the need to estimate future projections of increases in rent and substantially reduces the risk of underinsurance.
- We recommend that service charges are in included. If your property is partially
damaged, loss of service charges will be incurred from those tenants who have vacated the damaged portion of the property. However expenditure on services is unlikely to reduce to the same extent for other parts of the premises and full costs will not be recoverable from the remaining tenants.
- If rent charged includes VAT to tenants who cannot recover VAT this element should be considered.
Choosing an Adequate Indemnity Period.
The length of the indemnity period chosen should represent the maximum period that the rental income will be effected following material damage to the property. It is important to consider the "worst scenario"i.e total destruction of the premises by fire or a other catastrophe (admittedly this is not a pleasant thought, but it is important to ensure that should disaster strike, adequate cover is in place!). The following factors are a brief guide to the main areas to consider. Each property will have its own particular circumstances that affect these factors.
- The anticipated rebuilding period of the property, this will need to include time taken to demolish and clear the site, pre-construction planning and design, the availability of building materials ( a listed building will have particular requirements for materials) and of course the fitting out once the structure is completed. Where the previous tenant is to reoccupy the building, the fitting out time will need to take into account the tenants own fixtures and fittings. Whilst the cost of these items will either be met by the tenant or their insurers the time factor must not be overlooked when assessing the loss of rent.
- The time it will take to re-let the buildings and restore the rent to the previous levels. This point is particularly important and also raises one area to check closely when reviewing an insurance cover. If the loss of rent cover is under a "material damage" section of a policy, protection will only be afforded up to the time a building is ready for occupation. If the original tenants are not returning it may take many months or longer to find a replacement tenant and restore the rental income. The time taken to re-let a property/unit will depend on many economic factors at the time of a loss and rebuilding period. In certain economic climates the time taken to fill an unoccupied property can exceed the repair time. It is essential that any cover arranged provides protection upto when income is restored and not merely to completion of repair/reconstruction. The indemnity period arranged must therefore take this into account. All loss of rent cover arranged by ourselves will automatically be on the wider basis.
Note: The terms of a lease may state the period for loss of rent where the premium can be recovered from a tenant. Further cover can of course be arranged to provide better protection but if a lease cannot be ammended costs may not be recovered from tenants. You may wish to consult your legal advisers.
Terms Of Business
|
Master Cover Insurance Ltd. are authorised and regulated by the Financial Services Authority to conduct the sales and administration of General Insurance.
|
|
