Could a company wholly owned by the leaseholders of a block of flats recover the costs of arranging liability insurance for its directors, organising annual general meetings of the company, hiring premises for such meetings, and taking advice on the conduct of the meetings, through the service charges paid by the tenants?
The question crops up regularly in cases concerning leaseholder-owned landlords and management companies, which have no source of income other than the service charges paid by the leaseholders, and, as is the case in every dispute involving liability to pay service charges, the answer will depend on the terms of the parties’ lease.
In Chiswick Village Residents Ltd v Southey [2019] UKUT 148 (LC) the tenant’s lease stated that the landlord was entitled to recover the cost of “effecting insurance against the liability of the lessor to third parties and against such other risks and in such amount as the lessor shall think fit (but not against the liability of individual tenants as occupiers of the flats in the building)”. In addition, the leases permitted the recovery of “all costs incurred by the lessor … relating or incidental to the general administration and management of the lessor’s property”.
The First-tier Tribunal ruled in favour of the tenant. It decided that, because the directors and the landlord were separate legal persons, insurance for the benefit of the directors was not “insurance against the liability of the lessor”. Therefore, the cost of the insurance did not qualify. Furthermore, instead of being incurred “in the administration and management of the lessor’s property”, the corporate expenses were incurred in the administration and management of the company itself.
But the Upper Tribunal has overturned the decision. It noted that, without insurance against the risk of directors being sued, it might be difficult to find individuals willing to take office and for a leaseholder-owned company to function at all. Consequently, there was no policy reason why a landlord should not be entitled to charge for the cost of insuring directors who were, after all, voluntarily providing services for the benefit of their fellow leaseholders.
There were two separate limbs to the service charge provision dealing with the cost of insurance. In addition to insuring against the landlord’s own liabilities, the landlord was entitled to insure against “such other risks … as the lessor shall think fit”. And the words in brackets at the end of that clause, which prevented the landlord from insuring tenants against their liabilities “as occupiers of the flats” indicated that the landlord could insure tenants against liabilities incurred by them in other capacities.
Furthermore, the building could not be managed unless the company was managed too. The company existed for one purpose only: to administer, manage and run the building on behalf of its members. All of the corporate governance activities of the company, and its expenditure on them, contributed to the achievement of that purpose. Consequently, the judge considered it unlikely that the parties to the lease had intended to distinguish between the management of the company and its property – and ruled that the landlord was entitled to recover the company’s expenses through the service charge as well.
Allyson Colby, property law consultant
