Retaining vs demolishing existing buildings and the risks

Updated planning guidance issued by the Mayor of London earlier this year makes clear that retaining existing buildings, rather than demolishing them, is now the preferred option. The revised guidance is meant to help London meet embodied carbon targets and achieve its goal of net-zero emissions by 2030. This new guidance reflects a decisive preference towards retaining existing structures. From an insurance perspective, however, this creates some challenges of which developers need to be aware.

Released in March this year, the new two-part London Plan Guidance package essentially calls for existing structures to be reused, in part or in whole, when redeveloping any major property in the capital. Any planning applications that involve demolishing an existing structure are now required to demonstrate that the sustainability benefits of demolition and new building clearly outweigh those of retaining the buildings in question.

A number of high-profile developments have recently been put on hold over concerns about the environmental impact of demolition. On 20 April, redevelopment of Marks & Spencer’s flagship Oxford Street store was put on hold when Michael Gove, in his former role as Minister for Levelling Up, Housing and Communities, used his powers to intervene. Ironically, this came days after planning permission had been granted, after a review by the Mayor’s office accepted that demolishing and replacing the existing structure would result in a lower carbon footprint over the building’s lifetime. A couple of weeks later, on 10 May, Gove intervened again to put a hold on the demolition and redevelopment of ITV’s Southbank Studios, previously approved by Lambeth planning authorities.

The growing official antipathy to demolition - and corresponding enthusiasm for re-use-across major London development sites is causing some friction in the insurance space. Before the market hardened in around 2018, there was a fairly straightforward insurance solution for redeveloping existing buildings. This typically involved cancelling the existing property insurance and transferring cover to a Construction All Risks (CAR) policy which also insured any new works.

This approach had a number of advantages. It included collapse cover (excluded under a property policy), ring-fenced claims from the owner’s annually renewable property policy, and made it easy to provide the employer and contractor with the joint-names insurance required under most building contracts. This solution was normally available, regardless of the value of an existing building and the nature and value of the new works proposed.

In the current market conditions, however, both construction and property insurers are reluctant to insure large existing buildings where significant redevelopment is taking place. Construction insurers will want to see a contract value that exceeds the value of the existing structure. If not, they will argue that the property risk should remain with the property insurance market.

Conversely, if the value of the construction works is too high, property insurers will argue that the risk belongs in the construction market –because a property being redeveloped presents a higher level of risk than a standard operational asset. Even if a property insurer will agree to continue insuring an existing building, they may not agree to include the contractor as a joint-named insured - which could put the developer in breach of contract.

So where do such risks belong? In our view, the best solution is to create a bespoke insurance program that includes both the construction and property insurance markets retaining a proportion of the existing structure risk. With a specialist combined real estate and construction division, Lockton can offer a proven solution. Even in the current market conditions, we’ve shown we can leverage our relationships with both property and construction insurers to create tailored insurance programs that provide a best-of-both-worlds solution.

Retaining substantial elements of existing structures in development not only challenges your construction-phase insurance arrangements, but also your post-PC latent defects insurance (LDI). The intended purpose of LDI policies is to provide cover for new build developments-not for structures built some years previously. A key part of any LDI policy is the insurer’s ability to inspect all key stages of construction - something that is clearly not possible when there are completed buildings already on site.

Tenants considering a significant pre-let on a large London development will, more often than not, require an LDI policy. In reality, those expectations may not be realistic for reused buildings. We would recommend you speak to your insurance adviser right at the outset of any lease negotiations to assess whether any such request from prospective tenants will be achievable. If not, it’s important that any agreement for lease clearly states what is and isn’t achievable.

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