In the absence of provisions requiring them to do so, landlords are not under any obligation to shop around or to use the cheapest insurer
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.
Some leases restrict the levels and types of expenditure for which tenants are liable, but what is the position if a tenancy agreement gives the landlord a wide discretion as to the identity of the insurer and the cost of insurance? Avon Estates (London) Ltd v Sinclair Gardens Investments (Kensington) Ltd [2013] UKUT 0264 (LC); [2013] PLSCS 168 reminds us that the fact that the landlord could have obtained a lower premium from another insurer will not prevent it from charging the full cost of its insurance to its tenants.
The landlord asked the tribunal to determine the charges payable in respect of a Victorian property that had been converted into three flats. The lease did not restrict the landlord’s right to recover the cost of insurance by reference to what was “fair” or “reasonable”, so the tenants relied on section 19 of the Landlord and Tenant Act 1985. S19 limits residential service charges to amounts that are reasonably incurred, but the tribunal ruled that the landlord was not under any obligation to shop around or to use the cheapest insurer.
The judge applied the decisions in Forcelux Ltd v Sweetman [2001] 2 EGLR 173 and Havenridge v Boston Dyers Ltd [1994] 2 EGLR 73. She reminded the parties that section 19 is not concerned with whether costs are “reasonable”, but with whether they are “reasonably incurred”: Forcelux. In addition, there is no implied term that the insurance charged must be fair or reasonable and landlords are entitled to recover the amounts paid even though they could have obtained lower rates elsewhere. It will not assist tenants to show what other insurers might have charged and it is not necessary for landlords to approach more than one insurer, so long as the rate charged is representative of the market rate or the contract is negotiated at arm’s length in the market-place. If this is proved, then the premium is properly paid: Havenridge.
There was nothing to suggest that the insurance was arranged otherwise than in the normal course of business in this case. Consequently, the tribunal rejected the tenants’ complaint that the landlord could have insured at a quarter of the cost. However, the landlord had used a sister company for claims handling in circumstances where there was little, if any, evidence of market testing. The Leasehold Valuation Tribunal had reduced the cost of the insurance by the 12% handling fee charged to the tenants as a result, and the judge refused to interfere with its decision.
The dispute reflects the fact that insurance costs have become a bone of contention between landlords and tenants and reminds us that tenants will find it difficult to challenge the amounts charged, unless the lease requires the landlord to seek out competitive rates and prohibits it from recovering costs unless they are “fair and reasonable”, as opposed to being “reasonably” or “properly incurred”.
Allyson Colby is a property law consultant