Insurance Premiums and Service Charges – when does an insurance premium become ‘unreasonable’?

A recent case, Cos Services Limited v Nicholson and Williams [2017] UK UT389 (LC) has looks at the question of insurance premiums and whether these are ‘reasonably incurred’ within the meaning of the service charge legislation.

The case is potentially good news for those looking to challenge their insurance premiums.

Generally, the FTT will not look in too much detail at the amount been charged in respect of an insurance premium provided that the Lease allows the Landlord to insure.

It is certainly not the case that the Landlord is generally bound to choose the cheapest insurer that is available.

The case is interesting as it shows a willingness to widen the scope of interpretation of Section 19 (1) of the Landlord and Tenant Act 1985 to include the amount paid by way of a premium for an insurance policy, particularly when as in the particular case the tenant was able to produce evidence of comparable premiums that were some £10,000.00 cheaper.

Where properties are in multiple ownership, it is not uncommon for the Landlord to place a block policy and to allocate the costs of obtaining such cover to the particular blocks under management.  The case shows that the Landlord needs to consider the level of premium that is going to be charged against other equivalent quotes obtained in the market.

Although in each case the facts will need to bear out the argument being made, this does show a willingness on the part of the Upper Tribunal to encourage the First Tier Tribunal to look more closely at whether insurance costs have been reasonably incurred.

Clearly, if the discrepancy is not as extreme as was shown on the facts in this case then the scope for redress will be reduced.

However, this case may well cause flat owners to consider having an independent review of the likely cost of obtaining cover and putting this to the landlord and in appropriate cases bringing a challenge in the First Tier Tribunal.

Mark Chick
14 November2017

https://www.google.co.uk/amp/www.chesterchronicle.co.uk/news/chester-cheshire-news/ellesmere-port-mp-takes-leasehold-13855716.amp

Justin Madders MP will table a private members bill today aimed at reforming leasehold and the approach to valuation.

The bill is not likely to make it into the statute books but will serve to stimulate discussion in this area. Mr Madders is the MP for Ellesmere Port and had constituents who have been affected by the issue of leasehold houses.

7th November 2017

Commonhold – a panel discussion

Below is a note if some of the key points from the panel debate at the ARMA Conference 2017

The panel comprised 5 industry experts and looked at a number of issues. Appearing on the panel were; Philip Rainey QC, Professor James Driscoll, Jennifer Bourne of U.K.Finance (formerly the CML), Martin Boyd of the Leasehold Knowledge Partnership (LKP), David Clark of the Mainstay Group and Alison McDiarmid of the Property Managers Association Scotland.

The broad conclusion was that Commonhold was a good thing and that its introduction couldn't come soon enough! (I know that this is not a view that everyone will share).

Some of the key points are picked out below:

The lenders' concern – redevelopment

Under Commonhold if 75% of the unit owners vote in favour, then the building can be re-developed. This would mean that the property interests would come to an end. The position of a secured lender with a mortgage over a unit is not clear.

If they aren't in favour of the same and / or fear a shortfall for instance, how will they be protected?

Jennifer Bourne of U.K. Finance expressed concern on this.

Valuation issues – a two-tier market?

Another concern – which would be more of an issue perhaps for existing leaseholders, would be what if suddenly Commonhold units have more value (or conversely less) than leaseholds?

Why or how would this happen? – I have commented before that if there were to be a sunset clause on leasehold then at some point investors in ground rent might well 'pile in' to the remaining freehold reversions – and the price of these would be driven up. This would have a knock on effect on leaseholders who would have to pay more to enfranchise and as a result might if matters became extreme, have less valuable properties.

Not a problem for Commonhold itself, but something of the law of unintended consequences.

The Scottish position

Freehold in Scotland works for shared units like flats because there are no restrictions on passing on positive covenants with a transfer of the land.

Would that be a solution here? Well, perhaps up to a point, but the Scottish take on this is that the system is far from ideal, because in order to get major works etc. progressed, everyone has to agree and, we all know how difficult that can be.

This was the view of Alison Mc Diarmid of Property Managers Scotland who says that she would prefer Commonhold.

What about the position of investors? Is ground rent sometimes a good thing?

David Clark of the Mainstay Group commented that we need to keep ground rents reasonable but what about the needs of pension funds etc. depending on this income.

Whilst not immediately popular, ground rents at an acceptable level do provide a valuable source of fixed income. The impact of losing this should be assessed and there are numerous large funds that have invested in the sector.

How to make it happen?

What about changing the requirement for unanimity to get conversion to Commonhold?

This has been mooted before. As matters stand 100% of the flats would have to agree to be able to convert. That means only one person can block a conversion of they want to.

The threshold could be reduced, but this would also require lender consent.

James Driscoll commented that the threshold should be reduced. His view was that says long term it would be far better if we offered Commonhold as an alternative.

There are after all, 4m leaseholders – possibly 8m voters if the flats are co-owned. They will all have something to say about these issues.

All in all there is lots to discuss if Commonhold is to become a reality and a key question will have to be how this issue can and will compete for the available parliamentary time.

Mark Chick
18.10.2017

Philip Rainey's suggestions to help Commonhold take hold

• Get rid of ground rent
• Make leases very long
• Provide an SDLT incentive for Commonholds

Add it to the PHSE lessons at school?!

From the ARMA conference 18.10.2017