If the building is destroyed, when do the leaseholders get the money?

The lease delays sharing out the insurance money

Later than you would want, in this lease. Where a building is destroyed and cannot be rebuilt, you would expect the landlord to be obliged to distribute the insurance proceeds to the leaseholders once that is clear. A lease that makes everyone wait a fixed number of years first is a defect — one whose practical risk is remote and whose transactional nuisance is real.

From the e-ROT archive

This scenario is drawn from Report on Title material dealing with this specific circumstance.

Lexsure Report on Title paragraph: Defective Lease - Delayed apportionment of insurance monies if property can not be reinstated · See the wording

What the provision is supposed to say

The insurance proceeds on a block are held by whoever insures it, usually the landlord, and are applied to rebuilding. If rebuilding is impossible — the site is lost, consent cannot be obtained — the leases should provide for the money to be divided among the parties who have lost their interests.

The defect here is in the timing rather than the principle: the lease makes you wait a stated number of years after it becomes clear the building will not be reinstated before you can claim your share.

Why the real risk is small

Total destruction without reinstatement is rare. Where it happens, a landlord holding money with no further use for it is likely to distribute it, and leaseholders who are kept waiting can apply to the court and would be likely to succeed.

This is the honest assessment and it is the one the Lexsure wording below makes. It is a defect that is very unlikely to be tested.

Why it is still worth dealing with

Because it is on the file. The wording states the practical point exactly: unlikely to be a major problem, but may be picked up by a future buyer. A defect identified once is identified every time the lease is read.

The standard answer is an indemnity policy covering financial loss arising from the defect. It is inexpensive, it runs with the property, and it closes the point for whoever reads the lease next.

Where a lender will lend without it, taking the policy is genuinely a choice. The argument for taking it is about your sale rather than about your risk — and the seller may be willing to pay for it if asked before the price is settled.

Defective Lease - Delayed apportionment of insurance monies if property can not be reinstated

Archive Lexsure e-ROTScope Delayed apportionmentWord count 151Published April 2019

The lease is defective in that in that there is a provision that states that only after a number of years of the property not being reinstated can you claim your right to an apportionment of the insurance monies. Usually, one would expect to see an obligation on the part of the landlord to distribute the insurance monies to the tenants as soon as it is clear the property can not be reinstated. Clearly, the chances of the property not being able to be reinstated are remote and furthermore, the chances are the landlord would pay out the monies to the tenants. In the worst case scenario, the tenants would apply to the court and would probably be successful in having the monies distributed to them. Once again, from a practical point of view this is unlikely to be a major problem but may be picked up by a future buyer. …

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