If you are the landlord or tenant of a commercial let property, you may well be familiar with the law of Privity.
The law basically says that a third party cannot be held responsible under the terms of a contract drawn up between two other parties. The reality of this can be best described in the following example:
A landlord agrees a 25 lease with a new tenant for a high street shop.
The shop owner tenant trades successfully for a number of years before he decides to retire and sell the shop.
A purchaser is found and the new owners take over the existing lease and start paying the rent for the balance of the 25 years.
A year or so later, the new shop owner starts to struggle with the business, default on their rent payments and ultimately go bust.
The commercial landlord approaches his original tenant and holds him to the terms of the original lease. The first tenant, now retired, suddenly has to find rental payments for the rest of the 25 years, unless of course, he can find someone else to take on the lease.
This is not a pleasant outcome for the first tenant, but what the landlord may be unaware, is that the same law can also come back to bite him in reverse:
A landlord agrees a 25 lease with a new tenant for a high street shop.
The shop owner tenant starts trading successfully
After a few years, the landlord spots another property that gives a higher yield and decides to sell this building to release the capital.
The new landlord takes over the balance of the 25 year lease. Unfortunately he neglects to insure the building, which is later destroyed in a fire. His lenders foreclose and he is made bankrupt.
The shop tenant was making a good income from this location and demands his original landlord to make good on the lease and reinstate the building. The first landlord has of course already cancelled his old policy and suddenly has to re-build a property that he sold some time before.
Whilst this second situation is very rare, it has happened and even some large professional property investment firms have been caught out. If you buy and sell on a portfolio of properties, speak to your insurance advisor today. Assuming you are paying already paying a large premium, many insurers will throw this cover in for a token charge, or sometimes even for free.
The law basically says that a third party cannot be held responsible under the terms of a contract drawn up between two other parties. The reality of this can be best described in the following example:
A landlord agrees a 25 lease with a new tenant for a high street shop.
The shop owner tenant trades successfully for a number of years before he decides to retire and sell the shop.
A purchaser is found and the new owners take over the existing lease and start paying the rent for the balance of the 25 years.
A year or so later, the new shop owner starts to struggle with the business, default on their rent payments and ultimately go bust.
The commercial landlord approaches his original tenant and holds him to the terms of the original lease. The first tenant, now retired, suddenly has to find rental payments for the rest of the 25 years, unless of course, he can find someone else to take on the lease.
This is not a pleasant outcome for the first tenant, but what the landlord may be unaware, is that the same law can also come back to bite him in reverse:
A landlord agrees a 25 lease with a new tenant for a high street shop.
The shop owner tenant starts trading successfully
After a few years, the landlord spots another property that gives a higher yield and decides to sell this building to release the capital.
The new landlord takes over the balance of the 25 year lease. Unfortunately he neglects to insure the building, which is later destroyed in a fire. His lenders foreclose and he is made bankrupt.
The shop tenant was making a good income from this location and demands his original landlord to make good on the lease and reinstate the building. The first landlord has of course already cancelled his old policy and suddenly has to re-build a property that he sold some time before.
Whilst this second situation is very rare, it has happened and even some large professional property investment firms have been caught out. If you buy and sell on a portfolio of properties, speak to your insurance advisor today. Assuming you are paying already paying a large premium, many insurers will throw this cover in for a token charge, or sometimes even for free.
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