DAMAGE TO LEASED PREMISES

DAMAGE TO LEASED PREMISES Disclaimer The following are intended to illustrate some of the terms found in a property damage policy covering French property. As such, they are a brief summary of what is a complex matter, and the reader is recommended to investigate further for full and complete details. INDEX 1 OWNERSHIP... 2 Absolute Ownership... 2 Condominiums... 2 AFUL... 2 2 LIABILITY FOR DAMAGE TO TENANTED PROPERTY 3 Indemnity Clauses... 3 Common Law Situation... 3 Sub-tenancies, implied tenancies... 4 3 LEASES WAIVERS OF RECOURSE... 4 Variant 1... 5 Variant 2... 5 Variant 3... 5 4 LOSS OF RENT... 5 5 INSURANCE IMPLICATIONS OF WAIVERS OF RECOURSE 5 6 SPECIAL PROVISIONS IN ALSACE LORRAINE... 6 7 SPREADING FIRE, WATER OR EXPLOSION... 6 8 LEGAL REFERENCES... 7 9 INSURED VALUES... 7 10 LEASE CANCELLATION... 7 11 BRIEF GLOSSARY OF TERMS... 8 H.W.I. France - November 2010 Page 1 of 9

1 OWNERSHIP There are 3 forms of Ownership in France. a) Absolute Ownership equivalent of Freehold One entity or person owns the entire premises. b) Condominiums Copropriété The building is divided into lots. The owner of each lot: owns absolutely the airspace within that lot owns the decoration (carpets, painting, wall-paper) and any fixtures installed at his expense in that airspace owns the water / gas / electric distribution network within that space (i.e. the pipes, wires etc "downstream" from the meter) However, the structure of the entire building belongs to the "Syndicat de Co-propriétaires", and each co-owner is responsible for a percentage share of maintenance, repairs etc... of the whole structure and all "common" property within it (e.g. entry hall, stairwells, lifts serving all areas, water mains, electricity mains etc... ) It follows that in a condominium, each co-owner is not the exclusive owner of the structure of the part of the building of which he is co-owner. It is therefore impossible for each co-owner to insure his own part of the buildings separately. As a result, the "Buildings" of a copropriété are invariably insured by one single policy, in the joint names of all the copropriétaires. Such policies are arranged by the "syndic" (building manager appointed by the syndicat of copropriétaires ); follow the classic French multirisk form (i.e. Fire, Special Perils, Theft, Glass) ; include Property Owner's liability; generally speaking have low or no deductibles ; include "new for old" - replacement basis coverage ; exclude Machinery Breakdown but include Electrical Damage. In all condominiums, a Règlement de Co-propriété defines what is private (i.e. belongs to individual co-owners) and what is common (i.e. belonging to the syndicat ) property. c) AFUL ( Association Fincière Urbaine Libre ) This is a relatively rare form of ownership limited to a few larger groups of buildings. Rather like a condominium, the property is divided into private shares but each share is owned exclusively and totally by the shareholder concerned. There are usually some common parts which must be insured by the AFUL. H.W.I. France - November 2010 Page 2 of 9

2 - LIABILITY FOR DAMAGE TO TENANTED PROPERTY This is a complex subject, because whilst there is a relatively clear definition of who is liable to whom in law, commercial leases can and do modify the common law situation. French law makes a distinction between grosses reparations (i.e. major repair and maintenance of structure and weather proofing) and "menues réparations" (i.e. repair and maintenance of minor other items). Major repairs are, at law, the responsibility of the landlord; minor repairs are the responsibility of the tenant. Repair and maintenance does not directly affect the question of liability for fire etc. which falls under a separate part of the law and is dealt with under the insurance clauses of the lease. It is to the insurance clauses that reference should be made in the first instance to find out who insures what, and at whose expense. Indemnity Clauses Since the law lays clown the liabilities as between landlord and tenant, there is less need for indemnity clauses on the Anglo-Saxon model. Instead, and according to circumstances, there are usually a series of waivers of rights of recourse in a French lease. Most benefit the landlord (e.g. tenants waive right of recourse against the landlord in respect of inconvenience or damage caused by builders doing maintenance or repair work to the structure) but in commercial leases there may be mutual waivers which effectively change the common law relationship of landlord and tenant relating to fire. Common Law Situation At common law, a tenant is presumed liable for Fire, Water or Explosion damage to the tenanted property. The liability: is calculated on the indemnity ( or actual cash value ) basis. extends not just to the tenanted part of the building, but to ALL parts of the building belonging to the same landlord. The tenant can reject liability, by using one of two defences: That the damage was caused by an external cause (e.g. storm etc. or a fire starting outside the tenanted premises...). That the Fire, Water or Explosion damage was caused by the failure of the landlord to repair or maintain property (e.g. mains electricity) which it was his responsibility to repair or maintain under the law ( grosses reparations ). H.W.I. France - November 2010 Page 3 of 9

Therefore, in a common law situation: The landlord would normally insure the building for replacement as new value. The tenant insures his liability to the landlord as "tenants risk (in a French property policy, risques locatifs value calculated on the indemnity basis. In the event of a fire, the landlord's insurer would expect to pay the landlord the "as new" value of the building, then subrogate against the tenant and/or the tenant's insurers who, unless they can invoke one of the two defences, would be liable to the landlord's insurers for the indemnity value of the building. If however, it could be shown that the claim resulted from the landlord's failure to fulfil his obligations regarding grosses reparations or was caused by an "outside" event: The landlord's insurer could not exercise subrogation rights. The insurer of the contents belonging to the tenant could subrogate against the landlord (or his property insurers if, as is usual, the landlord's policy contains a liability to tenant - recours des locataires - item). In summary, although this appears to be double insurance ( multiple insurance in buildings with numerous tenants) in fact each insurance is covering a different interest in the same property. Sub-Tenants, Implied Tenancies Sub-tenants are under the same obligations as tenants; in addition, they may also be liable to the head-lease tenant as well. It is always desirable therefore to ensure that in relation to fire liabilities a sub-lease mirrors exactly the head lease - any other provision is a recipe for litigation. French law recognises implied tenancies (e.g. occupants who pay no rent, tenants who pay rent but have no leases as such). 3 - LEASES - WAIVERS OF RECOURSE The common law situation can be modified by waivers of rights of recourse (see under) but these must be properly worded to be effective. A waiver of recourse worded as "the tenant waives all rights of recovery against the landlord" does not necessarily bind their respective insurers. This example should be written as "the tenant and his insurers waive all rights of recovery against the landlord and his insurers", as otherwise it would not change the situation as regards the insurers. H.W.I. France - November 2010 Page 4 of 9

Variant No. 1 The most common variant to the common law situation is a waiver of recourse by the tenant and his insures against the landlord and his insurers. Its effect is to allow the landlord not to insure Tenant's Recourse ( recours des locataires ) but the tenant still has to insure Tenant's Liability. Variant No. 2 The next most common variant is that the landlord and the tenant and their respective insurers mutually waive rights of recourse against each other. In this instance, each party insures his own property and his own property only. Since the landlord's insurers no longer have a potential right of subrogation against the tenant, the tenant no longer needs to insure Tenant's Risk.; equally the landlord no longer needs to insure Tenant's Recourse. Variant No. 3 Important This is most uncommon and by definition is limited to sole occupancy buildings. In this case, there is a mutual waiver of rights of recourse and, in addition, the tenant undertakes to insure the building for the account of the landlord. Such an arrangement usually implies that the tenant also takes over the landlord's obligation as regards grosses reparations. Variants n 1 2 or 3 could be held to deprive the insurance company of its subrogation rights and thereby stop it recovering part of any loss. Therefore, it constitutes a material increase in risk within the terms of the Codes des Assurances (articles L113-2 and L113-4) and so MUST be declared to insurers as a material fact. Failure to do so would allow the insurers to apply sanctions in the event of a loss (article L113-9 ). 4 LOSS OF RENT There are similar liabilities as between landlord, tenant, tenant vis-a-vis other tenants or occupants, regarding rent payable or receivable - but these differ slightly and in the interests of brevity are not mentioned here. 5 INSURANCE IMPLICATIONS A properly worded waiver of recourse is binding on insurers. A one sided waiver of recourse (as in Variant No. 1) normally gives rise to a 25% premium surcharge under the policy issued by the insurer who has foregone potential subrogation rights. H.W.I. France - November 2010 Page 5 of 9

Where there are mutual waivers of subrogation (Variants 2 or 3), French insurers consider that the potential increase in hazard is cancelled out by the benefit of the waiver in the other direction, and normally no surcharge is required. In ALL cases it is a policy requirement to reveal the existence of any waivers to the insurers concerned - these are material facts in French law and failure to reveal these could allow insurers to penalise the insured in the event of a claim. 6 - SPECIAL PROVISIONS IN ALSACE LORRAINE The law in Alsace Lorraine (3 departments) is slightly different from that in the remainder of France. In practical terms, there is no presumption of liability on a tenant, the landlord has to prove liability on his part - i.e. that the tenant did something he should not have done or failed to do something he should have done. The tenant's liability to the landlord is therefore at a similar level to that relating to liability for spreading fire in the remainder of France (see under). As a result, in Alsace Lorraine, there is no need to insure Tenants Risk as such, but rather what is called "Landlord's Recourse" - invariably insured on a First Loss basis. 7 - SPREADING FIRE EXPLOSION OR WATER Liability for the spreading of Fire, Explosion or Water is also covered under a Property policy in France (including in Alsace and Lorraine). There is no presumption of liability, which has to be proved - but the liability can apply to the owner of premises or to the occupier. This risk is additional to the Landlord/Tenant liabilities outlined above and is known as Neighbours Risk. As an example, imagine a fire commencing within the tenanted premises, from a fault in the electricity distribution system in those premises; let us assume that there are no waivers of recourse: The tenant is under a presumption of liability to the landlord, for damage to the buildings and to the landlord's contents elsewhere in the building, unless there is a waiver of recourse and the tenant s risk item in his property insurance would cover this exposure. The tenant would also be liable to (a) any other occupants or tenants, as regards their contents; (b) any other co-owners of the building, for their parts thereof; (c) owners, occupants or tenants of any neighbouring buildings also suffering as a result of the damage - but only providing that these third parties (i.e. the persons in a, b, and c) could show that the incident started in the tenant's premises and was the result of a failure in the electricity distribution system which under the doctrine of minor repairs is the tenant's responsibility at law. H.W.I. France - November 2010 Page 6 of 9

8 LEGAL REFERENCES Regarding waivers of recourse - and more generally the obligation to declare material facts - articles L113-2, L113-4, L113-8 and L113-9 of the Insurance Code 9 SUMS INSURED In policies covering private houses, offices and small to medium-sized shops, the French market gives so-called unlimited cover for Tenant s Risk and the tenant therefore is not required to select a sum insured for this exposure For warehouses and industrial exposures, insurers require him to fix the relevant sum insured, and this is subject to the Condition of Average if the policy contains the Condition of Average. The same rules apply to Neighbour s Risk but this is always considered to be a first loss exposure, not subject to the Condition of Average 10 - LEASE CANCELLATION Under Articles 1722 or 1741 of the Code Civil, a lease is cancelled automatically by the destruction of the leased property. Therefore, if tenanted property is destroyed by fire, for example, the landlord is perfectly within his rights to refuse to give a new lease to the former tenant. There are two ways of dealing with this: either or The tenant insures the Market Value of the Lease against Fire and Perils. The market value is - quite simply - the sale value, based on a calculation of the actual rent as against market rent for a similar property in a similar location, and the period of time due to run until next rent review or next lease renewal date. Valuers can easily provide a suitable sum insured. There are provisions in the lease whereby it is maintained in the event of destruction of the leased premises; normally, in consideration of this, the tenant would have to agree to maintain rental payments during the period whilst the premises are being rebuilt. For retailers, obviously option 2 is preferable, since precise geographical location is vitally important for the success of their business. However, there is no standard format for any such special agreement; and the landlord is under no legal obligation to accede to any request for such an agreement. H.W.I. France - November 2010 Page 7 of 9

11 BRIEF GLOSSARY OF TERMS "Risques Locatifs" - Tenant's Risk The term used to describe the item in an insurance policy covering the tenant s liability to the landlord for damage to the tenanted premises. "Risques Locatifs" insurances are normally subject to the Condition of Average for industrial or large retail premises. Recours du Propriétaire - Landlord's Recourse The term used to describe the item in a property insurance policy covering the tenant's liability to the landlord for damage to the tenanted premises situate in Alsace Lorraine - the Condition of Average does not apply. It is usual to include this as part of the Neighbour's Risk item. The rate of premium is normally 1/3 or 1/4 of the basic fire rate, to reflect the reduced risk as against full Tenant's Risk. "Recours des Tiers et des Voisins" - Neighbours Risk The term used to describe the item in a property insurance policy covering the liability of the owner or occupier of premises for damage spreading to third party property from the source of the Fire, Explosion or Water. The insurance is not subject to the Condition of Average. This can be merged with an item on Landlord's Recourse (see above) and the rate of premium is normally 1/3 or 1/4 of the basic Fire rate. Droit au Bail Market Value of the Lease The term used to describe the insurance for the market value of the lease following automatic cancellation as a result of destruction of the leased premises. This insurance only applies to the "immaterial" value - i.e. does NOT include any physical value (e.g. fitting out at the tenant's expense) which has to be insured as part of "Frais et Pertes" (see under). Frais et Pertes Various Other Losses When a tenant leaves tenanted property following cancellation of the lease, any building work he has done automatically is left behind - but is still carried on his balance sheet as an "immobilisation". Therefore, if the lease is cancelled as a result of the destruction of the insured property, the tenant would thereby lose this investment. H.W.I. France - November 2010 Page 8 of 9

Its value can be insured as part of a French property policy, under the Various Other Losses item which also includes Debris Removal, Municipal Authorities Clause, and other similar extensions. H.W.I. France - November 2010 Page 9 of 9