In triple net leases, the tenant is obligated to pay the rent, as well as the maintenance, insurance and applicable taxes of the leased property, basically the property tax.
With respect to the insurance clause, and depending on the agreed terms, insurance may be contracted by the landlord and reimbursed by the tenant, or it may be contracted or included in the tenant’s global policies, providing evidence and validity of such to the landlord.
For the proper fulfillment of this obligation, it is important that the policy recognizes the policyholder and, if applicable, the landlord or tenant as applicable, as additional insured.
The general rule is that the landlord requires the following insurances from the tenant:
1. All-risk insurance, which covers the property against damages and total or partial destruction, seeking that the coverage amount is for the total replacement value of the improvements of the property. This insurance is known as comprehensive or all-risk coverage.
It is important to verify that the insurance policy includes a clause waiving subrogation by the insurer in favor of landlord and tenant, which may require an endorsement by the insurer. The absence of this clause may result in the insurer covering the damage, but allowing the insurer to claim damages against the landlord or tenant, in the event that the damage is attributable to any of said parties.
2. Rent interruption insurance, which seeks to cover the continuity of rental payments to the landlord during the time the property is being repaired, it being common to amount of up to 12 months of rent.
3. Tenant’s third party liability insurance, which seeks to provide additional coverage for any civil liability that may be attributable to tenant for the use of the property.
It is common for tenants to confuse and consider that the aforementioned insurance policies cover the risks of their own property or contents located in the leased property, such as machinery, equipment and furniture. However, this is not the case. It is also common for lease agreements to expressly require the tenant to insure its personal property located in the property, to avoid any liability of the landlord in case of destruction or damage that could be attributable to landlord.
The tenant, even if not required to do so by landlord, should seek advice on the proper coverage of its property located within the leased property and also consider obtaining business interruption insurance in case it is prevented from carrying out its activities in the property within the event of a casualty.
Therefore, as a tenant, it is important to provide the insurance agent with the insurance clause contained in the lease agreement, to verify its compliance and assess the additional insurances to be contracted for the adequate protection of the tenant, the property and the assets located therein.
