Riots - Counting the costs
20 August 2011
This article was originally published in Estates Gazette, on 20 August 2011.
Authors: Charlotte Bijlani and Catherine Patterson.
Counting the costs
Riots Affected retailers will want to recoup their losses. Charlotte Bijlani and Catherine Patterson explain how they can put themselves in the best position to do so.
It has been estimated that last week’s riots have affected at least 10 percent of UK retail and leisure businesses. The owners and occupiers of the affected properties will already be assessing the huge financial consequences. The costs of repairing damaged properties and the losses suffered until retailers can resume trading will be at the top of the agenda. For some, in particular small businesses, the financial consequences will be too much to recover from, especially in an already difficult climate. This article considers how commercial property owners and occupiers may recoup their losses.
Riot (Damages) Act 1886 and insurance
The Act entitles a party that has suffered loss from a riot to claim compensation from the police authorities. The Public Order Act 1986 defines a riot as a situation where “12 or more persons acting together use or threaten unlawful violence for a common purpose”.
The Act usually requires claims to be made within 14 days of the “injury, stealing or destruction”. However, the prime minister has agreed an extension to 42 days (the maximum period allowed under the Act in special cause cases) and has confirmed that a new £20 million high-street support scheme has been set up to help affected businesses start trading again quickly. Further, the government will enable local authorities to grant business rate relief. RBS has also offered interest-free loans of up to £25,000 to affected businesses.
A claim must be made in a specified form and set out separately the sums claimed for: (i) destruction of the premises; (ii) injury to the premises (including injury to windows, fittings or fixtures); (iii) injury to other property in or on the premises; and (iv) theft or destruction of other property in or on the premises. A claim must also be supported by evidence, such as written estimates for the cost of the repairs and it should be made to the police authority of the district in which the injury, stealing or destruction took place.
The Act will not cover certain losses, most notably, business interruption. Further, causation issues may arise in demonstrating that the damage has been caused by “12 or more persons acting together”. Some damage may have been caused by opportunistic thieves who were not part of a “common purpose”.
Although the government has indicated that compensation will be paid, the compensation fund will create another squeeze on public spending.
If an affected party has insurance, it needs to claim under the insurance policy rather than against the police authority under the Act. This is because the insurer will subrogate against the police authority for the sums paid out to the insured.
Although most insurance policies in England cover riots and civil commotion as an insured risk, the policies should be checked to determine what is specifically covered, what limitations apply and the amount of the excess if a claim is made.
A well-insured party will have cover for damage to the property, loss or damage to stock, business interruption and associated costs, such as ongoing staff costs during the period when trading is impossible. However, claims cannot be made for business interruption if property has not been damaged, so there is a potential gap in cover for those who have suffered business interruption as a result of the riots but no property damage.
Leasehold properties and plate glass
Commercial leases often contain provisions that limit the insurance cover that a landlord has to provide (albeit at the tenant’s expense). A lease will also often set out the position as between a landlord and tenant if the property becomes unfit for occupation or use.
Typically, commercial leases oblige tenants to pay for or take out insurance for the costs of maintaining and replacing broken or damaged plate glass. Plate glass will have been damaged or broken in the majority of the affected properties, which is why many retailers in fear of attack installed external boarding.
Loss of rent, rent suspensions and frustration
Landlords usually have to take out cover for loss of rent owing to damage or destruction of premises by an insured risk. Such cover will apply for three or perhaps five years (for large premises or those that are difficult to reconstruct) from the date of the relevant damage or destruction.
The loss of rent cover is often tied in with rent suspension provisions in a lease. Typically, rent suspensions will apply until the earlier of the date when the premises are again fit for occupation and use and a period of around three or five years after the date of the relevant damage or destruction. Leases may also provide for a rent-free period to be suspended.
The loss of rent cover and rent suspension provisions should also cover the position if a rent review takes place during the relevant period, so that the landlord can recover an uplift in rent after the end of the rent suspension back-dated to the review date.
A well-drafted commercial lease will provide that if premises are destroyed or damaged by an insured risk such that they are unfit for occupation and use and incapable of reasonable access, the landlord or tenant may terminate the lease if the premises are not made fit for occupation and use and capable of reasonable access within, say, three or five years.
Some leases may oblige the landlord to start reinstatement works within a certain period and to carry them out expeditiously.
Squatters and prevention
As the affected properties sit empty, they may be targeted by squatters. Squatting is already a major problem: see EG 21 May 2011, p107. The recent riots may make the position worse, particularly if convicted rioters who live in council homes are to be evicted.
The Metropolitan Police and the Association of Convenience Stores have issued guidance to assist businesses in protecting their properties. Much of this is common sense, such as ensuring that CCTV and alarms are installed, high-value goods are removed from display windows and cash is not kept on the property. Carphone Warehouse in Clapham, London, recently posted a sign outside its premises stating: “All stock and money removed”. Other more costly steps, such as 24-hour security, may be practical only for larger retailers.
It remains to be seen how many retailers will make it through these difficult times and return to business quickly. Even if insurance is in place, claims will cause insurance premiums to rise. Some large retailers will bear the increase and have sufficient insurance in place but smaller retailers will not and may have to close.
Affected parties must put themselves in the best possible position to recoup their losses so far as possible by making prompt claims against the relevant police authority (where appropriate), checking insurance policies and lodging claims with their insurers, as well as checking lease provisions on loss of rent, rent suspensions and rights of termination.