A landlord who agreed to accept a reduced rate of rent from his hotel-operator tenant when COVID restrictions ate into guest bookings has lost a claim dispute with his insurer.

The tenant invoked their right under the lease to reduce the amount of rent being paid, saying the government restrictions meant the property could not be used to its full capacity as a hotel.

The landlord accepted this and negotiated a reduced rate of rent for a period of time. He then lodged a claim under a ‘short stay’ landlord policy held with Terri Scheer Insurance for the rent shortfall.

The insurer declined the claim on the basis there had not been a default in payment of rent, which the policy covered, and so there was no claimable loss.

The Australian Financial Complaints Authority (AFCA) said there was no dispute the hotel owner suffered a reduction in rent from that which would ordinarily have been payable and the issue was whether that loss, arising in very particular circumstances, was covered under the policy.

It ruled in favour of Terri Scheer.

“The complainant’s agreement with the tenant to reduce the rent for a period was in response to the tenant exercising a right provided for in the lease agreement,” AFCA said. “The resulting shortfall in what would have been the rent otherwise payable does not represent a rent default or a ‘loss of rent’ covered under the insurance policy.”

The landlord “was in a position to have satisfied himself as to whether the policy provided the cover he needed, or whether he should seek alternative cover from another insurer”, it added.

The lease allowed the tenant to cease or proportionately reduce payment of rent in certain circumstances, including if a "force majeure" event occurred which made the premises unusable for letting purposes.

The insurance policy, meanwhile, covered rent “default” by a tenant in certain circumstances, which AFCA said would usually mean “an unauthorised act or omission”.

“I do not consider the tenant’s exercise of that right under the lease agreement, coupled with the hotel owner’s acceptance of it, represents a ‘default’,” the AFCA ombudsman said.

“The tenant was entitled to invoke the terms of the tenancy agreement to seek a rent reduction in response to the impact of COVID-19 on the tenant’s business. The hotel owner agreed to that, and the parties negotiated appropriate arrangements.

“The insurer is not liable for the loss of rent.”

The hotel owner also expressed concern that the denial and handling of the claim was unfair but AFCA said the evidence did not establish the insurer acted inappropriately and its policy wording was “clear and unambiguous”.

“The insurer has declined the claim in accordance with the policy terms, as it was entitled to do,” AFCA said.

“The insurer was under no obligation to specifically explain or go through all elements of the PDS (Product Disclosure Statement) with the hotel owner. It has not been shown the insurer acted unfairly or inappropriately, nor that there is any basis upon which it should not be entitled to decline the claim.”

See the full ruling here.