As many properties remain unoccupied after the lockdown, what does the future hold for housebuilders and developers?

21st September 2020

When lockdown came into force on 23 March 2020, the majority of the UK’s commercial properties immediately became unoccupied. This created significant difficulties for businesses and a hurried review of insurance policy conditions by insurers.

Insurers take a flexible approach to lockdown challenges

Insurers apply specific clauses within their policy wordings, commonly referred to as unoccupancy clauses or conditions. These clauses or conditions are enforceable once a property becomes vacant and remains so for an extended period – usually 30 consecutive days or more. It is also likely that cover will be restricted after this initial period.

During the COVID pandemic, it would have been extremely unfair of insurers to apply these same clauses and conditions to property owners whose premises became vacant as a result of the Government’s lockdown. Consequently, insurers extended the standard period after which such clauses would apply from 30 days to 90 days, and in some cases for a longer period.

The fallout from the pandemic affects businesses large and small

Unfortunately, COVID has had a devastating effect on businesses and many firms continue to make huge changes to their workforce as they restructure to deal with the effects of the crisis. Indeed, a number of household names have failed to survive the lockdown and the subsequent easing of restrictions.

Before lockdown, the retail presence on our high streets had been slowly reducing. Now, with the recent acceleration of store closures, we are seeing many more properties become permanently unoccupied.

Additionally, other commercial premises – typically offices – have met with a similar fate. Many commercial tenants are now reviewing their need for city addresses and the expensive rental cost that often comes with them.

As working from home becomes the ‘new normal’, more businesses will look to desk-sharing and splitting the working week between home and office. These solutions will ultimately reduce the amount of office space that companies require. Vacant premises will become more expensive to insure as a result, with the situation made worse by the likelihood that insurers will offer reduced cover and expect more onerous unoccupied policy conditions to be fulfilled.

A changing landscape

Faced with these headwinds, commercial properties now appear to offer a far less attractive investment opportunity than they once did. This scenario, in turn, is likely to create a shift in commercial to residential conversions. The Government has already recognised the importance of this change by announcing radical reforms to the planning laws to boost construction. They recently launched a new Class ZA Permitted Development Right, allowing developers to demolish unused commercial premises and build residential units. The benefit of this scheme is that it restricts the powers of local councils to prevent developments going ahead and expedites property conversions.

Historically, we have seen considerable numbers of commercial properties – which tend to have good access to amenities and transportation – converted into residential apartments. And with the Permitted Development scheme now in place, this is likely to accelerate. Consequently, our high streets and commercial centres may soon take on a more residential look and feel.

So, if you are planning to convert unoccupied commercial properties into residential accommodations, speak to your insurance broker from the outset, as there are project insurance policies available.

Single project insurance

Single project insurance programmes are an increasingly popular risk management technique used by property owners, developers and contractors for construction projects to reduce total construction costs whilst controlling the scope of risks to be insured.

This type of policy typically consolidates insurance coverage for main contractors and subcontractors working on a project into one programme negotiated, purchased and managed by a single sponsor. That sponsor can either be the owner or developer (owner-developer controlled insurance programme) or the contractor (contractor-controlled insurance programme).

Construction project arrangements may include insurance of the works, public liability insurance, excess liability insurance, non-negligence insurance, existing structures buildings insurance, advanced loss of rent and additional cost of interest business interruption cover, professional indemnity insurance, environmental impairment insurance and buildings defects insurance.

Speak to your insurance broker

If you are engaging with a specialist construction insurance broker, they should be able to review your building contract provisions to ensure the correct JCT provisions are put in place to protect your assets and upcoming works. They can also ensure that the proposed provisions can be fulfilled to avoid a breach of contract. Furthermore, depending on the complexity of the construction works programme, there may be various types of insurance cover required throughout, and at different phases, of the building project.

Colin Donnellon is Development Director at CLEAR MPW. You can get in touch with him via colin.donnellon@mpwbrokers.com or 01622 656142.