One of the most frequently asked questions I get from prospective shop owners is around the owner’s responsibility regarding building and public liability insurance. They include:
- Should I insure a property the moment I sign the contract?
- Should I wait until settlement, in case the vendor already has it insured?
- What are my legal obligations?
The Engines of Wealth team are pleased to provide answers to these burning questions from an industry expert, Sean Bemrose, Managing Director of Tony Bemrose Insurance Brokers (TBIB). As current or future owners of commercial retail shops you need to be aware of your rights and potential risk exposure when it comes to building and public liability insurance.
Let us start with the buyer’s responsibility for building insurance on a new shop purchase. Most understand that building insurance is needed after settlement, but what about pre-settlement? For Queensland properties the buyer assumes legal liability and responsibility for the property from 5pm on the next business day after signing the Contract of Sale for a property. This is defined in QLD Property law (Act 1974) and outlined in the standard terms of the REIQ Contract of Sale. Note, this timing differs in other states, so you need to check the contract. This timing indicates the start of the buyer’s risk and the reduction of the seller’s responsibility for the property.
Now the area of contention comes if the property is damaged between the date the contract goes unconditional and final settlement. Many are surprised to know that in this period the seller is not liable to damages, it is the buyer! Note, in this situation the buyer cannot pull out of the purchase of the property nor can they seek to reduce the contract price. Furthermore, the buyer is potentially liable to pay compensation to an injured third party should they be injured on the property.
Shaun Bemrose shared a few experiences where the property being purchased was damaged by a fire or storm event before settlement of the contract. In these cases, his clients had arranged building insurance on the signing of the contract, thus providing risk coverage for the buyers to cover the property repairs and legal costs. Given settlement can take months to finalise, this is a reassuring policy to have.
The next item of potential risk for the buyer is relating to public liability claims. Your risk and exposure begins from the day you sign the contract of sale until you sell the property, many years later. Now most of us assume that the tenant has their own public liability insurance, in most cases this is mandated in their lease. The buyer during the contracting period and after settlement is also exposed to public liability claims where a tenant or occupant of the property is injured at the property. Note such liability could be greater than the value of the property to be purchased, so insurance is highly recommended.
Digging deeper into the nuances of liability, some may feel at ease given their commercial shops are part of a strata. They believe the Body Corporate insurance plus the tenant’s liability insurance policy provides them with full insurance protection against liability claims. However, the law indicates that an injured third party can seek compensation from any party which may be connected to the property and injury event. That is the tenant, seller or buyer.
The Body Corporate would as a rule have in place property and public liability insurance that covers the building and all common areas of the property, eg. walkways and toilets. It is a standard commercial leasing requirement for the tenant to take out public liability insurance and glass insurance for the shop’s internal areas. The landlord should sight this insurance policy and have on file the tenant’s insurance certificate of currency. Also, the owner should be listed on the tenant’s policy as an interested party to maximise their coverage. For most situations of injury, the buyer is covered, but there are cases where the buyer is not coverage and should therefore have his or her own policy.
If a circumstance arises where a third party is injured in the shop and that injury arose from flooring, plumbing, air conditioner or an electrical connection supplied by the owner, then the current landlord or buyer may be the subject of a legal lawsuit for damages – not the tenant. Landlord’s public liability insurance would cover any legal costs incurred responding to a claim, payment of a legal defence and potentially cover the payment of any compensation awarded to the injured party.
Another situation is if the shop becomes vacant, obviously the landlord loses the protection of a tenant’s liability insurance cover after they depart. The only way for a shop owner to mitigate this risk is to take out a liability insurance policy in their name.
Most REIQ leases provide a legal obligation that the tenant takeout public liability insurance, this may have lapsed or not be present when you settle. As the shop purchaser and future owner, it is wise to take out insurance to protect your interest from the date you sign the Contract of Sale. Remember, in most cases the owner’s insurance costs become an outgoing and can be passed onto the tenant, so why wouldn’t you have it?
With all of this in mind, the most important takeaways are;
- Under Queensland Law, from the date you sign the contract you have a legal liability for that property and,
- Insurance for the property should be taken out on the date you sign the contract
- You need your own Public Liability Insurance regardless of the fact the tenant also has a public liability policy
Personally, I use Tony Bemrose Insurance Brokers (TBIB) to cover my properties and can thoroughly recommend them, if you need advice on your insurance needs contact Tony Bemrose Insurance Brokers on:
Phone: 07 3252 5254
Special thanks to Sean Bemrose Managing Director TBIB for his insights on this subject and for the outstanding support he has provided our Engines of Wealth customers.