Insurance premiums payable by residential leaseholders under the terms of a long lease must, like service charges, be “reasonably incurred” under Section 19 of the Landlord and Tenant Act 1985. Leaseholders can challenge insurance premiums which they consider to be unreasonable in amount in the First Tier Tribunal.

A landlord is not obliged to ‘shop around’

It had been accepted, following the decision of the Upper Tribunal in Avon Estates (London) Ltd -v- Sinclair Garden Investments (Kensington) Ltd [2013], that a landlord is not obliged to ‘shop around’ for the cheapest insurance deal, provided it has conducted a proper process in arranging cover, such that the premium charged was the market rate or that the deal was negotiated at arm’s length and in the market place. If the landlord did so, what otherwise may seem an unreasonably high premium would nonetheless be considered reasonably incurred. 

A new approach

The Upper Tribunal recently revisited the issue in Cos Services Ltd -v- Nicholson and Willans [2017], a case in which leaseholders of a block known as Chiltern Court in Harpenden challenged the renewal of the landlord’s block insurance policy.  The premiums under the block policy ranged from £12,500 to £13,500 p.a. over a three year period. The leaseholders produced evidence to the Tribunal that if their building was insured under a separate policy, the premiums would have ranged from only £2,800 to £3,000 p.a. for similar cover.

Both the First Tier Tribunal and the Upper Tribunal found the insurance premium costs had not been reasonably incurred.

In dismissing the landlord’s appeal, the Upper Tribunal adopted a two-stage approach in assessing the costs, namely :-

1. The landlord’s decision to incur cost must be a rational one; and

2. The sum charged must be, in all the circumstances, a reasonable charge; taking into account the terms of the lease and the liabilities to be insured, the landlord’s explanation of the process of selection of the policy and the steps taken to assess the market, and whether any comparable cheaper policy is genuinely comparable by reference to its terms.

Comment

The Upper Tribunal’s decision will be welcomed by leaseholders dissatisfied with the level of insurance premiums payable, and it seems clear that landlords will now be under a duty to evidence what steps were taken to genuinely test the market before placing the particular insurance policy.

Section 19 is one of the options available to residential leaseholders seeking to challenge the reasonableness of insurance premiums payable a long lease. The specific terms of the lease may provide for other causes of actions, and blocks that satisfy the relevant statutory criteria may consider exercising their right to manage under the Commonhold and Leasehold Reform Act 2002 and take on the right to place the buildings insurance. In any case, specialist legal advice should be sought on the appropriate action available in the circumstances.

For more information, please contact Kevin Lever, Solicitor, on 01435 897297 or kevin.lever@kdllaw.com.

Disclaimer

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