The Effect of the Rising UK Flood Risk on Commercial Property

The UK flood risk is increasing and, 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 years.

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 business owners.

Impact of flooding on commercial property values

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 at risk.

And thirdly, lenders may be more reluctant to grant commercial loans on property which is at significant risk of flooding.

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.

Final words

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.

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