Most landlords reserve the right to insure their buildings with an insurance company of their own choice, at the cost of their tenants. However, the cost of insurance varies enormously and tenants often complain that their landlord could have insured elsewhere, at more competitive rates.
COS Services Ltd v Nicholson [2017] UKUT 382 (LC); [2017] PLSCS 182 concerned the reasonableness of insurance premiums charged to tenants over a three-year period. Section 19 of the Landlord and Tenant Act 1985 limits residential service charges to amounts that are reasonably incurred – and the tenants argued that it would have been reasonable to pay a total of just under £9,000, as opposed to the amount that the landlord had charged, which was just under £39,000.
In Avon Estates (London) Ltd v Sinclair Gardens Investments (Kensington) Ltd [2013] UKUT 0264 (LC); [2013] PLSCS 168, the Upper Tribunal ruled that, so long as the rate charged was representative of the market rate, or that the contract was negotiated at arm’s length and in the market place, then the premium was reasonably incurred. On the other hand, Forcelux Ltd v Sweetman [2001] 2 EGLR 173 suggests that, interpreted correctly, “reasonably incurred” cannot be a licence to charge a figure that is out of line with the market norm.
How did the tribunal in COS resolve any conflict between these decisions? Enter, stage left, the decision in London Borough Council of Hounslow v Waaler [2017] EWCA Civ 45; [2017] PLSCS 25. Although the case did not concern the cost of insurance, it establishes that part of the context for deciding whether costs have been reasonably incurred is that they are to be borne by the tenants. In the context of repairs, section 19 was intended to protect tenants against charges that are contractually recoverable, failing which it would serve little useful purpose. It must follow that the tribunal is required to go beyond the issue of the 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. Therefore, whether costs have been reasonably incurred is not simply a question of process. It is also a question of outcome.
Context is everything, and every decision will be based on its own facts. Landlords with multiple properties are entitled to negotiate block policies for their portfolios (provided that this does not result in substantially higher premiums being passed on to tenants without any significant compensating advantages). Furthermore, a landlord need not show that an insurance premium is the lowest that can be obtained in the market. However, the tribunal must be satisfied that the charge was reasonably incurred; it must consider the terms of the lease and the liabilities that are to be insured against and, when considering rival quotations, must compare “like with like”.
The landlord’s insurer was charging over four times the amount of other insurers for similar, albeit not identical, terms. The reason for the discrepancy was a mystery that the landlord had been wholly unable to explain – and, although there were certain advantages to the landlord’s policy, they were so insubstantial that they could not justify the amount being charged.
Allyson Colby is a property law consultant
