News & insights
As a society, we tend to quickly
forget past events such as weather-related disasters, rather than heed lessons for
the future. A timely reminder was the
recent flooding in the North Yorkshire Dales in July 2019, during which torrential rain caused 100
homes and several businesses to be underwater.
According to accounts, the weather was so violent that freak hail stones
damaged buildings caused power failures, and even injured members of the
public. Pubs, shops, and many other
commercial businesses were forced to shut up shop and divert their energies
into blocking floodwaters and moving valuable items to higher ground, and then,
once the rain stopped, cleaning up the mess and destruction wrought. In addition, roads and bridges were damaged
as a result of the heavy rain and resulting landslips. In truth, this is only one of many major
flood events which have blighted the country in the past decade. A report by the Urban Land Institute (ULI) shows that extreme weather events have
already doubled globally since the 1980s, with over 800 a year in the past ten
While flooding is nothing new, the governmental
advice and scientific consensus is that our flood risk has and will continue to increase as
global warming takes hold; hence, we must prepare in earnest. In this article, we will investigate the
effect of the rising flood risk on commercial property, and what can reasonably
be done to put in place protections to avoid disruption to landlords and
Impact of flooding on commercial
Flood risks can negatively impact the
value of commercial property for several reasons. Firstly, building owners and businesses in
locations with higher flood risk may find less availability of affordable commercial building insurance. This
has been less of a concern since 2016, however, when the British Insurance Brokers’ Association (BIBA)
launched a new commercial property insurance scheme for businesses not covered
under Flood Re (the scheme to provide affordable flood risk insurance for
residential property owners). This has
afforded SMEs greater access to commercial insurance with flood cover. In addition, flood excess insurance policies
can also be used to mitigate the high cost of flood insurance excesses in the
event of a claim.
Secondly, most businesses undertake
due diligence prior to entering into a commercial lease arrangement and, given
the option, may favour a property which does not place their business continuity
And thirdly, lenders may be more
reluctant to grant commercial loans on property which is at significant risk of
The key to protecting against the
risk of possible diminishing values on commercial property is to undertake
robust due diligence from the outset.
However, according to a report by The College of Estate Management, flood risk related due diligence is
increasingly used beyond the initial purchase decision process and is now used
to inform ‘post-acquisition adaptation and risk management’. This means that if a property is in a known
area of flood risk, if adaptations and changes can be made which mitigate the
potential for such events, this can offset the potential loss of value.
Flooding can lead to commercial property lease disputes
It is essential for landlords to
understand their contractual risk exposure when it comes to flooding. While it is typically the landlord’s duty to ensure
their land and building from flooding related damage, disputes may arise in
relation to rent payments if a tenant’s business is interrupted during a flood
event. It should be clear who is
responsible if damage has occurred to assets located within the property,
including stock, machinery, and equipment.
Any uninsured risks should also be understood by both landlord and
tenant and a prior agreement for potential liability reached.
To protect against flood-related
disputes, effective planning is essential.
Beyond putting in place the necessary insurance cover and commercial
lease arrangement, a highly useful approach is to put in place a flood plan in conjunction with your tenant. This will ensure that you both understand
your respective roles, responsibilities, and steps which will be undertaken
during and after a flood event. This
will ensure that no incorrect assumptions are made as to whether action should
be taken by landlord or tenant, hence reducing the potential disputes later. For example, if the building is near a river
at risk of breaching, who is responsible for putting in place temporary flood
barriers? Or if a pipe has burst within
the premises, whose role is it to action the repair. Likewise, following the event, who is
responsible for any clean-up?
Flooding can lead to loss of income
For any commercial landlord, one of
the biggest concerns is that in the event of a natural disaster affecting their
premises, rent payments may be delayed or even cease for a number of months,
especially if the building requires extensive repair and/or the tenant cannot
immediately resume business.
It is essential, therefore, that
landlords not only put in place the necessary loss of rent cover, they must
also understand the fine print in relation to the amount and length of cover,
and any conditions which may prevent you from bringing a claim in the event of
a flood. It is also vital to ensure you
have the correct insurance policy; loss of rent insurance will afford you
protection if your building is unusable due to flooding, but this may not apply
if your tenant defaults on your lease arrangement; in which case, rent
guarantee insurance will be required.
For any landlord whose commercial
property is at risk of flooding, the take-home message is that much can be done
to mitigate your business exposure. The
key is to act early by assessing all areas of possible risk and to put in place
measures where necessary. The main steps
to take are a) have your commercial lease agreement reviewed by a commercial
property lawyer specifically in relation to flooding events, so you understand
your risk exposure, b) review your insurance arrangements, including loss of
rent provision, and ensure these fit with those of your tenants, mitigating any
potential uninsured risk, and c) put in place a flood plan in conjunction with
your tenant. The time to act is now,
while the sun is shining, after all, you never know what is around the corner,
especially in this country.
Water Property Searches we call ourselves “the property search experts” for
good reason. We are not only a search supplier, but we also are a search
producer of the CON29DW and a partner of NLIS. Working closely with leading
suppliers we ensure that we not only sell the searches but fully understand the
detail within them.
We understand complexity and take the time to support you with issues that may arise offering that bespoke service which you normally only receive from the smaller companies and at a premium. Here at Thames Water Property Searches you get that service as standard, along with the trusted brand of Thames Water knowing that we will always be here to support you.