Insurance implications of changing farm building use
Q. I have been approached by a local business to see if I am willing to rent them a 5,000sq ft farm building to use for storage of building materials and equipment. What are the insurance implications of doing this?
A. Although your existing farm buildings may be insured, they will be insured for use in connection with your farming business, so you must inform insurers of your intention to alter the use of the building. Failure to do so will result in the building insurance being invalid in the event of a claim.
Your building insurers will need to know what the proposed tenant will be doing in the building. If the tenant is just storing building equipment and materials, insurers are likely to regard this as fairly low risk and charge accordingly. However, if the tenant was doing something such as paint spraying of vehicles or storage of wines and spirits then the premium charged would be higher as these are perceived as higher risks from a fire and theft point of view.
Insurers may also impose risk management conditions on the policy for what they regard as higher risks. These usually relate to good housekeeping. For example, a woodworking business may be required to sweep up and remove all shavings and sawdust once a week, and requirements for a paint spraying operation may include safe storage of paints and a booth for the paint spraying.
The usual important advice applies here, which is to discuss the implications of letting the building at an early stage in the letting discussions. It is also quite normal to incorporate a clause into the tenancy agreement that the tenant is made responsible for paying the insurance premium.
In practice, this means the landlord arranges the insurance and pays it in the first instance, then passing the cost on to the tenant in a separate invoice to that for the rent. However, the contract remains between the landlord and the insurer.
The rebuild cost for insurance purposes of the building will need reassessing to check that it is sufficient. It is important to remember that farm buildings with planning for change of use which are then destroyed in a fire will need rebuilding to a commercial specification if they are to be re-let. This can be a lot more expensive than reinstating a farm building. Loss of rent insurance should also be strongly considered.
This would need adding to your insurance policy once the building has been let and carries on paying rent to the landlord when a fire or other insured event has made the building uninhabitable. The cost of this may also be passed to the tenant.
Policies vary so payment may stop when the building has been rebuilt and re-let or at the end of 12, 24 or 36 months. I would recommend at least 24 months cover – the building may be rebuilt in a shorter timescale than this but it may then take time to get a new tenant in.
The other vital point not to overlook when letting former farm buildings is that, as the landlord, you have sufficient public liability insurance (£10m minimum) and that it is made a condition of the lease that the tenant carries tenant’s liability insurance.
This article was written by Nigel Wellings at Acres Insurance Brokers, printed and published by Farmers Weekly in October 2019 https://www.fwi.co.uk/business/business-management/business-clinic/insurance-implications-of-changing-building-use