the landlord’s perspective. However, if the lease does contain a rent cessation clause (common in modern leases), the potential for an uninsured loss of rent may exist. The reduction in Rent would only be payable if the business activity specified in the schedule has been expanded appropriately. This applies equally to freeholders and tenants who sublet.
If the landlord insures Rent Receivable, this may raise the question as to the need for the tenant to effect insurance for Rent Payable, ostensibly insuring the same income stream twice.
There is frequently a mismatch between the basis of the insurance of Rent Receivable and the underlying lease.
The term ‘Rent’ as defined above may be insufficiently wide to address losses presenting themselves. Related income streams such as service charges, advance rent and ancillary charges may all be at risk and should potentially be brought within the ambit of the cover.
Where there is a minimum period stipulated by the lease, this may well exceed the Maximum Indemnity Period provided under the businesses’ BI policy. It would be costly to increase an indemnity period solely to cater for Rent Receivable when it is incidental to the main business.
Rent losses are more likely than Gross Profit losses to exceed the limit of 133.33%. This is because significant step increases in Rent Receivable may accrue within the Maximum Indemnity Period, compounded with the absence of \significant savings to deduct from the income loss.
1.5.2.3What are the consequences?
If the description of the business has not been appropriately expanded to include the receipt of rent and related income streams, a reduction thereof after an incident will not be payable.
Rent may be insured more than once; if the lease contains a rent cessation clause it is usual for the landlord to arrange loss of rent cover (and re-charge the premium to the tenant as part of the rent). If the tenant is funding the landlord’s rent premium by way of a re-charge, and is additionally insuring it as a constituent element of his Gross Profit, they are in effect paying twice for the same thing.
Where there is a mismatch between the insurance cover and the underlying lease, an under-recovery might arise.
In one case, a large retail chain discovered that it was insuring Rent three times. The landlord was insuring Rent (with a rent cessation clause in the leases) and charging the retailer its cost; Rent was not deducted from the Gross Profit calculation and so was included within the sum insured for the full three-year indemnity period; and, further, there was a separate Rent Payable sum insured on the business interruption policy. It was discovered that approximately £20,000 was being spent on unnecessary rent cover each year.
1.5.2.4Potential solutions
Rent Receivable may be insured if the description of the business is appropriately framed.
For the avoidance of doubt, a departmental clause should be incorporated to provide a true indemnity if different parts of the business likely to be affected by a loss earn differential rates of profit or revenue.
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