November 2017
By Mark Loveday, a barrister at Tanfield Chambers and Ibraheem Dulmeer, solicitor at Leasehold Advisory Service
A version of this article was first published in the Estates Gazette November 2017.
Background law:
Residential leaseholders have statutory rights in relation to insurance, importantly they have an ability to challenge the costs in the First-tier Tribunal (Property Chamber) (“the FtT”) in England, or the Leasehold Valuation Tribunal in Wales.
In particular, the law (section 19(1) Landlord and Tenant Act 1985) requires two things. Under the law, a service charge must be “reasonable in amount”. In addition, a charge relating to expenditure already undertaken requires the relevant insurance costs to have been “reasonably incurred”.
The Upper Tribunal (Lands Chamber) considered the tests to establish whether the relevant insurance costs were “reasonably incurred” in the case of COS Services Limited v (1) Irene M Nicholson (2) Wendy E Willans [2017] UKUT 0382 (LC) (“COS”).
What is “reasonably incurred”?
In the appeal, the landlord’s argument (the only party with legal represented at the appeal) focussed on the issue of whether the insurance premiums incurred by the landlord had been “reasonably incurred”.
The lease at issue required the landlord to “…insure and keep insured the said Building against loss or damage by fire and such other risks (if any) as the Lessor thinks fit…”
In his decision, His Honour Judge Stuart Bridge highlights the crucial point in determining whether a cost has been reasonably incurred, following Waaler v Hounslow LBC [2017] EWCA Civ 45. Such assessment should go “beyond the issue of rationality of the landlord’s decision making and to consider in addition whether the sum being charged is, in all the circumstances, a reasonable charge.” In other words, it is not limited to the landlord’s decision making process, but also whether the sum is indeed, a reasonable one.
Moreover, he added “Context is, as always, everything, and every decision will be based upon its own facts” and of course that it will not be “necessary for the landlord to show that the insurance premium sought to be recovered from the tenant is the lowest that can be obtained in the market.” He went on to provide a list of considerations that a court or tribunal would have to consider in answering the question as to whether insurance costs were “reasonably incurred”:
- Consider the terms of the lease and the potential liabilities that are to be insured against.
- The court or tribunal should require the landlord to explain the process by which the particular policy and premium have been selected, with reference to the steps taken to assess the current market.
- Leaseholders may be able to provide evidence of alternative quotations for insurance cover, provided those quotations compare “like with like”, in the sense that the risks being covered [by the alternative quotations] properly reflect the risks being undertaken pursuant to the covenants contained in the lease”. In other words, the ‘like for like’ comparison is between any alternative quotations and the lease, and not between the alternative quotations and the actual policy taken out by the landlord.
- It is open to the landlord with a portfolio to negotiate a block policy, but it is “necessary” (the actual words used by HHJ Bridge) for the landlord to satisfy the tribunal or court that this “has not resulted in a substantially higher premium that has been passed on to the tenants of a particular building without any significant advantages” to the leaseholders.
The ruling of the Upper Tribunal:
In COS, the landlord was unable to explain how many properties were covered under the block policy or how the agreement had been negotiated. However, they provided evidence to the Upper Tribunal showing that they had taken out a block insurance policy which covered all eventualities..
The leaseholders relied on an insurance broker who obtained quotes from two other insurers, which covered similar risks, yet at a quarter of the premium charged by the incumbent insurer. In particular, both policies required the freeholder to inform the insurer as soon as they became aware of changes in tenancy or occupation of the property. Even though the lessee’s broker was not treated as a formal expert, the Upper Tribunal found his evidence to be “impressive and truthful”.
The broker had suggested it was difficult to understand how one insurer could be charging over four times the amount of other insurers for similar terms. Furthermore, he believed the landlord in obtaining a block policy would lower premiums, not increase them to leaseholders.
His Honour Judge Stuart Bridge agreed with this view. He concluded “It [is] a mystery which the landlord has been wholly unable to explain” why there was such a discrepancy between premiums charged under the landlord’s policy when compared to premiums found in the open market. The judge applied the precedent set by Waaler (above), and found the insurance premiums were excessive, in the sense that “considerably lower premiums for similar protection could be obtained elsewhere”. Therefore, the landlord failed (as it did in the F-t T) to show that the charges levied on the leaseholders were “reasonably incurred”.
Takeaways:
- Leaseholders’ satisfaction with the reasonableness of insurance requires that the landlord is transparent with their policy choice. This is particularly the case with ‘block’ or ‘portfolio’ insurance policies, where it is frequently difficult to explain the rationale for allocating part of the overall premium to an individual estate or property. As can be seen in COS, this problem can rightfully undermine the legitimacy of insurance charges where the lessee can show that cover can be obtained more cheaply elsewhere. It illustrates that transparency is key.
- The telling evidence in this case was properly thought out quotations from alternative insurers which satisfied the test for “like for like” comparable. If that evidence is missing, courts and tribunals are still unlikely to disturb insurance costs.
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