14 August 2018 #Real Estate
The answer is that it will depend on the terms of the sale and purchase agreement. When dealing with commercial property, the parties usually rely upon the Standard Commercial Property Conditions which provide at Condition 8 that the Property is at the risk of the buyer from the date of the Contract.
This means that risk passes to the buyer on exchange of contracts rather than at completion. As a result, if the Property is damaged or destroyed between exchange of contracts and completion, e.g. by fire or flooding, the buyer must still complete even though mortgage finance will not be available as a result of the destruction. There is no obligation on the seller to repair or reinstate the Property if it is damaged between exchange and completion.
So which party should insure the building between exchange of contracts and completion? The buyer will usually want to insure to cover the risk of damage or destruction between exchange and completion as the contract cannot be terminated by the buyer should there be damage or destruction. It is very unlikely that the contract will contain any provision for the purchase price to be reduced if the property is damaged or destroyed between exchange and completion.
Where the Seller insures
Both parties have an insurable interest in the Property between exchange and completion and it is not unusual for both parties to insure during this period. The Standard Conditions do allow either party to insure.
If it is agreed that the seller insures, it is obliged to do everything required to maintain the policy, increase the amount of cover if requested by the buyer if the insurers agree and the buyer pays the additional premium, and if a claim is made prior to or on completion of the sale, the seller is obliged to pay the buyer on completion the amount of policy monies received and which have not been used by the buyer in repairing or reinstating the Property. If no final payment has been received from the insurance company, the seller must assign to the buyer all rights to claim under the policy.
If the parties have agreed in the contract that the buyer will insure, then the seller is not obliged to maintain its insurance during this period. However, as mentioned above, the seller is also likely to keep the Property insured (in case the buyer fails to complete or fails to insure the building) which means that there will be two insurance policies in force for this period. This is not a problem if neither party has any rights under the other’s policy.
It would be usual for the parties to agree that the seller should maintain its insurance if:
The seller must of course cancel its insurance policy on the Property on completion as it will no longer have an insurable interest in the Property at that point. Such cancellation will not affect any potential claims that could arise under the policy under the cover subsisting until the date of cancellation.
There will be a problem if “double insurance” applies. Double insurance is where one person has more than one insurance policy in respect of the same risk on the same property. An example of this would be if the buyer takes out its own policy on exchange but is also covered by the Seller’s policy which has a general provision for “intending purchasers”. An insured cannot recover twice for the same loss. If the policies are silent on this matter, then the equitable doctrine of contribution will apply and whichever insurers pays out can seek a contribution from the other.
Payment of premium when there are occupational leases
An interesting issue arises where there is an investment property and the landlord/seller invoices its tenants for their share of the insurance premium when the policy is put in place. The premium paid will usually cover the whole insurance year which means that the tenants will have already paid for a full year’s insurance premium when completion takes place and that this “year” will almost certainly end later than the completion date. The tenants will not be obliged to pay, a further insurance premium for the same period when the buyer puts its new insurance policy in place on completion. How is this dealt with?
The Standard Conditions provide that the seller is obliged on completion to cancel the insurance policy and apply for a refund of the premium. This refunded premium is to be paid to the buyer immediately on receipt of any amount received which relates to a part of the premium which was paid or reimbursed by a tenant or third party. The buyer may decide to refund the part premium and charge for a full year’s premium for the new policy. However, if the part premium is not refunded to the occupational tenant, the tenant will not be willing to pay twice for the same period.
Standard Condition 8.2.3 states that the where the seller cannot recover insurance premium from a tenant but the seller insures between exchange and completion, the buyer is obliged to pay the seller a proportionate part of the premium which the seller paid in respect of the period from the date when the contract is made to the date of actual completion.
Where a third party insures
A final issue to be considered is where the seller owns a building subject to occupational leases but is itself a head lessee and not the freeholder. In such a case it is likely that the freeholder (who will not be a party to the contract) is obliged to insure the freehold. In such a case, the seller is to use reasonable endeavours to ensure that the freeholder’s insurance is maintained until completion and if before completion the building suffers loss or damage, the seller is to assign to the buyer on completion, such rights as the seller may have in the policy monies. In such a case, the buyer is likely to want to put in place its own insurance.