Owners of residential buildings in multiple occupation may choose not to insure against acts of terrorism in the belief that their buildings are unlikely to be a terrorist target. In addition, landlords who do purchase such cover may face legal challenges from tenants who consider it to be an unnecessary expense. On the other hand, insurers recommend terrorism insurance on the grounds that terrorists and their targets must live somewhere. In addition, buildings situated in low-risk areas could be damaged if a bomb were to explode while being transported to its target.
The issue that arose in Qdime Ltd v Bath Building (Swindon) Management Co Ltd [2014] UKUT 261 (LC); [2014] PLSCS 188 was whether the costs of insurance against a terrorist incident were a recoverable head of expenditure under the leases of flats in a building in Swindon. The landlord had covenanted to insure against “loss or damage by fire and the usual comprehensive risks in accordance with the CML recommendations in that respect from time to time”.
The landlord claimed to be entitled to recover the costs of insuring against acts of terrorism because the CML Handbook lists “explosion” as one of the risks against which lenders may require to be insured. The landlord argued that this must mean insurance against explosions no matter how they are caused and claimed that it was, as a result, obliged to insure against acts of terrorism.
Alternatively, the landlord claimed to be entitled to recover its costs because it had also covenanted to insure against “such other risks as the landlord may in its reasonable discretion think fit”. The landlord relied on the RICS Service Charge Residential Management Code, which has been approved under section 87 of the Leasehold Reform, Housing and Urban Development Act 1993 as promoting desirable practices in relation to residential property management. The code recommends that “serious consideration” should be given to terrorism insurance and the landlord’s insurance brokers had indicated that Swindon was in the same risk category as central London. Consequently, the landlord argued that it had been reasonable to buy terrorism insurance.
The Upper Tribunal accepted both the landlord’s arguments and upheld its claim. The decision that the landlord was under an obligation to insure against acts of terrorism because the CML Handbook lists an explosion as a potentially insurable risk may cause surprise and dismay in some quarters. Lenders and insurers are more likely to welcome the decision.
Draftsmen have become accustomed to seeing specific references to terrorism insurance in commercial leases, since it has become common to state whether landlords can, or should, or need not, insure against acts of terrorism. However, it is unusual to include such provisions in leases of residential accommodation. Consequently, some landlords could fail to appreciate that they may need to buy terrorism insurance, while tenants may feel that they are being asked to pay more than they had bargained for, because their leases do not mention acts of terrorism. It will be interesting to see whether draftsmen update residential leases, going forward, in the light of this decision.
Allyson Colby is a property law consultant
