Tenants sometimes have favorable building leases, paying less than market rate for the space. For example, in 2008-2010 and again in the COVID era, commercial building owners suffered from low occupancy, and were forced to offer lower rents to attract tenants. Another reason for a low rent might be to keep an anchor tenant in a multi-occupant building. For whatever reason, your client might have a good deal on building rent.

While the lower rates might have been standard at the time of lease signing, as time goes by and rents returned to new normal, the rent increases in favorability, and becomes less possible to replicate in a new location, or even in a lease renewal at the same location.

What happens if the building is damaged and the lease is cancelled? The tenant is forced to find a new building, likely for a much higher rent. Tenant has lost the value of a favorable lease, and this is not covered by Business Income. Over the course of a 5-10 year lease, the loss of the lower rate could mean hundreds of thousands in additional rent.

The tenant needs Leasehold Interest Coverage. ISO uses form CP 00 60, other carriers will have a proprietary form. The coverage insures against financial damages from the remainder of time on a lost and favorable lease. The settlement will be paid in a lump sum, rather than as monthly rent expense arises.

There are four expenses covered by the form. A policyholder may choose to cover one or all of the exposures, as needed:

1. Tenants’ Lease Interest – Difference between rate of lost lease, and new lease.
2. Bonus Payments – Money paid to acquire the lease. Does not include rent.
3. Improvements and Betterments – Not if covered elsewhere, often with Business Personal Property. The building owner may own the TIB which are now lost to the tenant.
4. Prepaid Rent – that will not be refunded by the building owner.
   
   

This coverage does not pay to rent a temporary location while repairs are made to the building. This coverage can be found in Extra Expense (see post here).

As with other forms of Property coverage, Leasehold Interest uses the chosen Causes of Loss form: Basic, Broad or Special. Just as Building may use different Causes than BPP, Leasehold Interest may use different Causes as well.