This is the stark warning from the British Property Federation (BPF), which has added its support to the findings of a damning report from the Public Accounts Committee of MPs (PAC) into the state of the nation’s flood defences.
The PAC has slated the Department for Environment, Food and Rural Affairs (DEFRA), saying that it “had not yet adjusted its long-term investment strategy and could not tell us what the scale of the long-term funding gap would be” in the face of budget reductions, and it “did not accept ultimate responsibility for managing the risk of floods”.
The PAC also said it was very concerned that DEFRA did not accept ultimate responsibility for managing the risk of floods and that that there is no clarity about where the buck stops.
There is currently a pact between DEFRA and the insurance industry, known as the Statement of Principles, which guarantees cover to businesses and households at risk of flooding.
The pact obliges insurers to provide cover for high-risk properties while the government continues to improve flood defences – but the pact ends in 2013.
According to this report from the BBC, the Association of British Insurers (ABI) says up to 200,000 homes will face insurance problems.
The ABI wants the government to share the risk for the most vulnerable properties.
The government wants to see more funding come from local residents and businesses - including landlords.
The BPF says that whilst it broadly supports proposals to increase the amount of investment in flood defences beyond that supplied by the state, it does not believe sums the government are seeking from private contributions are realistic.
The BPF is sceptical that households and businesses would be able to make up the shortfall caused by government spending cuts, and warns the proposed system would not provide sufficient certainty to property investors – and insurers – that the risk of flooding was being managed.
Ian Fletcher, director of policy at the BPF says:
“A lot of focus is on householders, but the impact of flooding on businesses can have significant consequences, which spread into the wider economy and cause damage beyond the immediately flooded area. The UK has a great tradition of universal insurance cover, which is predicated on sufficient investment going into flood defences. We shall rue the day if that is lost.”
What are the risks for commercial property, beyond the obvious physical consequences of inundation?
If the pact is not renewed, some insurers may elect not to cover flood-prone properties. Others might continue to do so, but only in return for a much higher premium.
A property without flood risk cover might become unmortgageable since lenders normally insist on comprehensive cover.
Landlords need to review the leases in their portfolios; they might be held responsible for reinstating flood damage even if it is no longer an “insured risk” if the lease doesn’t contain a suitable exclusion.
On the other side of the coin, if the landlord is no longer responsible, the burden might fall on the tenant.
Having reviewed several large portfolios with SIAM LLP, who specialise in this area, I know from experience that many leases may have been drafted and negotiated without, in hindsight, sufficient thought being given to this important matter.