If you are going out of business or lease workspace in a building that is in foreclosure, you may wonder what to do about your commercial property insurance. We will look at two scenarios to help you understand your obligations: When you own the property that is being foreclosed When you lease the property from a landlord in foreclosure When you own the property that is being foreclosed If your company is in financial trouble and you are delinquent on your mortgage, your lender may seek to foreclose and sell your property. During your period of delinquency, you may still be operating or renting portions of your premises. This may be allowable under your mortgage and insurance policy. In such cases, you must keep paying your commercial property insurance until otherwise instructed or the transfer of the property ownership is completed.
Even if it is assured that you are losing your building due to nonpayment of a mortgage or other obligations, you may be required to continue paying for property insurance. This is because fires, vandalism and other perils can still cause great loss to the value of the building and its built-in contents.
You may be required to maintain flood insurance, earthquake insurance, or hail and windstorm coverage, depending on your location and mortgage contract.
If your business no longer occupies the site, you may also have to get vacancy insurance. This is a special type of coverage meant for buildings that are no longer in use and don’t have any contents. You will need to work closely with your insurance broker and lender regarding your risk mitigation responsibilities as well. For example, you may be required to keep all security devices, HVAC systems, and refrigeration components in working order at the right settings to prevent damage to the building and its equipment.
If you have business property inside the premises, you will need to work out coverage for or removal of those items. This is especially important if the equipment is leased. Your insurance company may exclude coverage for installed or movable equipment in a vacant or unused building.
If your company has refrigerants, chemicals, biological specimens, fuel, lubricants or any other pollutants, you will have special environmental or pollution concerns. Degradation of containers or holding systems, such as tanks or pipes, could lead to a leak that causes environmental damage. These can be extremely expensive to deal with.
If your current insurer will no longer cover you because the property is in foreclosure, it may be possible to acquire coverage from a specialist in this area. Your insurance broker can help you find a company that handles distressed properties.
When you lease space from a landlord in foreclosure
You may not even know that your landlord is delinquent on the mortgage for the commercial building your business occupies or leases. Operations could be going on as normal while all sorts of legal proceedings are underway. These situations can be very problematic for tenants.
If your lease contains a clause on subordination, non-disturbance and attorney agreement (SDNA), that usually means you have agreed to cooperate with a lender’s actions in a foreclosure and recognize any new owner as your landlord. These clauses typically contain an important protection for the lessee: You, the tenant, may continue using the leased property as long as you follow the terms of the original lease and pay your rent. Consult your legal counsel and insurance professional to ensure you fully understand your rights.
The SDNA likely also protects you from lockout by the lender, landlord in default or new owner.
Whatever the status of your landlord’s mortgage, maintain the insurance you are required to have under the terms of your property rental contract. But as soon as you get word of any delinquency or default by your landlord, contact your insurance broker to discuss what steps to take regarding your commercial property insurance. This is especially important when you are insured for betterments to the property.
If you have a “gross lease” under which your landlord pays for property insurance, they may have stopped paying their mortgage and their property policy. This could leave your business in dire straits if a fire or another disaster occurs. Know the insurance provisions of your lease contract and ask your insurance broker about steps you need to take if your landlord ceases payment on insurance. If an eviction occurs, you usually must move your business equipment and inventory out within a certain amount of time. This is typically specified in the eviction notice. Sadly, commercial property insurance usually doesn’t cover the costs of moving and finding a new property. If your landlord fails to pay the mortgage and the building must be emptied so the lender can sell it, you may have to bear the costs and secure coverage for your new location.
Seek the help of professionals
Defaults and foreclosures are complicated issues that can create insurance coverage problems. If you’re involved in mortgage impairment, foreclosure or eviction, notify your insurance broker and legal counsel as soon as you learn of the problem. They may be able to help you avoid the worst of the pitfalls and protect you from surprise financial setbacks.
Remember to consider foreclosure whenever you are negotiating a lease or securing commercial property insurance. You may be able to prevent or mitigate problems in the long run with tightly negotiated contract language.
