When the end is just the beginning…

When the end is just the beginning…

10 May, 2018 by Gilson Gray in Blog

 

With one of Glasgow’s busiest retail areas on lockdown for nearly three months following the well-publicised fire damage, business-owners need to be aware of their liabilities when disaster strikes.

The recent fire, which took hold of Victoria’s nightclub at the end of March, caused extensive damage not only to the nightclub unit itself, but also to the surrounding properties. Unlike the high-profile damage to Glasgow School of Art’s Mackintosh Building, where an extensive and painstaking restoration project is now under way, structural damage to the Sauchiehall Street properties has been severe. Unprecedented in recent years, the result is that one whole block of properties is now slated for demolition, paralysing a section of one of the city’s renowned pedestrian shopping areas.

Working in extremely complicated conditions, the Fire Service contained the damage to just five buildings – comprising the north frontage of one entire city block. However, a quick search of the Land Register shows around fifteen registered titles within the affected area. A tenemented property may be a single structure, but it incorporates many different ownerships. In addition, the various properties (and in particular the ground floor retail units), will likely be occupied under a commercial lease – doubling the number of parties affected.

Tenants

Modern commercial leases will almost always provide that the lease survives damage or destruction to the premises. The landlord-tenant relationship therefore continues even where the tenant cannot occupy the unit.

We would expect the lease to provide that rent is suspended if the damage is so bad that the tenant cannot occupy the unit. The tenant therefore does not have to pay out for a unit they can’t use. This frees them up to seek alternative premises to carry on their business whilst repairs are carried out.

However, it is important to remember that the lease continues. Once the landlord has made the premises fit for use, the rent will resume and the Tenant will be obliged to pay. So if the tenant chooses to move to another building on anything other than a temporary basis, they may find themselves liable for rent payments on two different properties once the first is repaired.

Ordinarily, the lease will also state that if the premises aren’t repaired within three years, the tenant can choose to end the lease. Whilst this may appear to assist the decision to relocate (e.g. if there is a short time left on the lease), it is important to remember that the works will not necessarily take those full three years. So if fire damage occurs in year 7 of a 10 year lease, the tenant is not necessarily free from the need to pay rent. The building could well be repaired the following year, with two years rent still to pay.

Tenants should never assume that they are free of liability if the building burns down and should always check the lease document to find out what happens next.

Landlords

The landlord normally insures the premises and recovers the premium from the tenant. The landlord also receives the insurance proceeds and has the responsibility to repair and rebuild the premises.

Importantly the landlord should also be obliged to insure against loss of rent. This means that when the rent is suspended (for the tenant’s benefit), the insurance will pay out the lost rent. The income stream from the property investment is then preserved (which will be critical if the rental income services any debt which has been secured over the property).

However, the loss of rent insurance will not be indefinite. It will usually cover a period of three years only. Leases also generally provide that if the premises haven’t been repaired within three years, the tenant may elect to terminate the lease. The landlord should therefore always try and ensure that the premises are repaired within three years from the date of damage.

The landlord’s obligation also commonly extends to rebuilding, not just to repairs. So in the case of the Sauchiehall Street properties where demolition has been ordered on safety grounds, the reinstatement obligations will be extensive. Safe demolition must be carried out. A new building must be proposed/designed (giving the existing tenants substantially similar areas for use as before the damage). The new proposals will need planning and building control consent, and once those consents are obtained construction works need to be carried out. Those construction works will likely involve engagement of a suitable professional team and an associated set of warranty documents being granted for the tenants.

If different floors of a building are owned by different landlords, the owners will need to work together to ensure the rebuilding works are carried out for their respective tenants. In an ideal world, the building will be factored by a managing agent. If the managing agent arranges a block insurance for the building, they should also be able to co-ordinate the rebuilding works amongst the different owners.

Sadly, it is not uncommon for city centre properties to be self-managed with no factor, and each owner insures their own property. In that case, the owners will have to find a way to work together to rebuild the property or else be in breach of their existing leases. With a three year window for all of the work to be carried out that can be a tall order indeed.

If you are affected by material damage to your property, please do not hesitate to contact a member of the Gilson Gray real estate team for advice on the options open to you.

 

For More Information Contact:

Gregor Duthie
Mobile: 07841 022651
Direct Dial: 0141 433 7753
Email: gduthie@gilsongray.co.uk 

Murray Stewart
Mobile: 07920 866 998
Direct Dial: 0131 516 5370
Email: mstewart@gilsongray.co.uk

Donna Kelly-Gilmour
Mobile: 07956 177 541
Direct Dial: 0141 530 2043
Email: dkellygilmour@gilsongray.co.uk

John Fulton
Mobile: 07487 801 616
Direct Dial: 0141 433 7759
Email: jfulton@gilsongray.co.uk 

Iain Witheyman
Direct Dial: 0131 516 5358
Email: iwitheyman@gilsongray.co.uk 

The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.