An amendment to the Building Act provides insurance savings for builders of tenanted properties.

The amendment came into force on 1 July 2016 The rules exempt tenanted property builders from the mandatory building damage insurance; the only requirement being that an application for a building permit must have been filed on 1 July 2016 or later.

Less need for consumer protection

Originally, the requirement for building damage insurance was introduced to ensure the quality of the building so that no damage would arise in the building after the construction and resale for which the buyers might be liable. The insurance therefore to a wide extent still serves as a consumer protection system.

As the person covered by the building damage insurance is the owner of the property, there is no need for any consumer protection considerations as regards properties, which are only used for rental purposes. The scheme is therefore voluntary for the owner, who will be liable to the lessees of the property under the rules of the Rent Act.

Division into owner-occupied flats is not out of the question

The use of the property decides whether there is an obligation to take out insurance at the time of construction of the building. If the property is parcelled out into owner-occupied flats, which are all leased, there is thus no requirement for insurance.

How do you become exempt from the duty to take out building damage insurance

The requirements for not having to take out the expensive building damage insurance is:

  • That the application for a building permit has been filed on 1 July 2016 or later.
  • That the owner signs a solemn declaration vis-á-vis the municipality that the property is constructed for rental purposes. 
  • That a restrictive covenant is registered in the property with a term of 10 years stating that the existing owner shall take out building damage insurance covering the remaining period if the property is no longer a rental property, but is resold as cooperative flats or owner-occupied flats. The restrictive covenant is laid down in the Executive Order on building damage insurance.

If the property is parcelled out into owner-occupied flats, the restrictive covenant must be registered on each flat.

The restrictive covenant will be supervised by the municipal council in connection with the notification of completion of the building. You should therefore plan the notification of completion as early as possible and no later than three months' prior to the completion of the building. In this way, the operating permit is not postponed due to a failure to register the restrictive covenant.

Resale of the property

The duty to take out insurance does not apply if the entire property is sold to another lessor, but it should be noted that a sale of some of the flats at the property as owner-occupied or cooperative flats will result in a duty to take out insurance for the whole of the property in the proportionate period remaining until 10 years after the handing over of the building.

It does not appear from the Act or the comments to the Act how to construe the concept "property", including whether reference is made to the cadrastral boundary or the actual building. Until this definition has been laid down, we recommend to consider the relation between the cadastral plot and the use of the building in relation to the insurance requirement as early as possible.

In connection with a legal due diligence, a buyer must pay special attention to the seller's observance of the insurance obligation in relation to the restrictive covenant in connection with a sale as the municipality is only responsible for the documentation in connection with the construction and to cancel the restrictive covenant if documentation of insurance is provided.


Michael Neumann

Partner (H)