Landlord and tenant – Service charge – Insurance – Appellant landlord obliged to insure building and flats against usual comprehensive risks in accordance with CML recommendations and such other risks as it might “in its reasonable discretion think fit to insure against” – Respondent lessees of flats challenging certain items of service charge levied by appellant – Whether entitled to recover cost of insuring building against terrorism – Whether this falling within obligation in lease to insure against “explosion” under CML recommendations or representing exercise of reasonable discretion – Appeal allowed
The appellant was the freehold owner of a four-storey building containing 13 flats let on leases in respect of which it was the current landlord. The landlord’s obligations under the leases included an obligation to “keep the Building including the Demised Premises insured to its full reinstatement value against loss or damage by fire and the usual comprehensive risks in accordance with the CML recommendations in that respect from time to time and such other risks as the Landlord may in its reasonable discretion think fit to insure against”. The first respondent management company was responsible for providing certain services to the flats while the second respondents were the lessees of 11 of the flats.
On an application to the leasehold valuation tribunal (LVT) under section 27A of the Landlord and Tenant Act 1985, the respondents challenged a number of items of expenditure that the appellant sought to recover through the service charge payable under the terms of the leases. One of the items in dispute was the cost of terrorism insurance for the years 2010/2011, 2011/2012 and 2012/2013; the LVT disallowed that item on the ground that terrorism insurance was not a matter covered by the insuring obligations in the leases or in respect of which the appellant had exercised its “reasonable discretion”.
The appellant appealed. It contended that it was obliged to procure terrorism insurance as part of its obligation to insure the building or, if not, it had in any event exercised its reasonable discretion in procuring such insurance in accordance with the terms of the leases. It pointed out that the risks to be insured against, in accordance with the relevant CML guidance produced by the Council of Mortgage Lenders, included ”explosion” and submitted that the ordinary meaning of that word included terrorism or terrorist activities.
Held: The appeal was allowed.
The LVT had erred in its analysis of the relevant provisions of the leases so far as they concerned the obligation of the landlord to insure against terrorism. The “usual comprehensive risks” against which the landlord was obliged to insure the building, including each of the flats therein, included terrorism in accordance with the CML recommendations. The reference in those recommendations to insuring against explosion included insuring against a terrorist attack; the ordinary meaning of the word “explosion” included explosions caused by terrorism. The obligation was to insure against explosion, not against any particular method by which an explosion might be caused: Commonwealth Smelting Ltd v Guardian Royal Exchange Assurance Ltd [1984] 2 Lloyd’s Rep 608; affd [1986] 1 Lloyd’s Rep 121 and Enlayde Ltd v Roberts [1917] 1 Ch 109 applied.
If the court were wrong in that conclusion, the appellant was none the less entitled to insure against terrorism in the exercise of its reasonable discretion, so far as the insuring obligation in the leases extended to “such other risks as the Landlord may in its reasonable discretion think fit to insure against”. The appellant had exercised discretion in taking out insurance against terrorism and it had been reasonable for it to do so. The test was whether a lawful decision had been reached in the circumstances, falling within the range of reasonable decisions as opposed to being perverse. The LVT had erred in considering that the absence of any particular terrorist threat rendered the appellant’s decision to insure against terrorism unreasonable by definition. There was unchallenged evidence that the insurance obtained by the appellant’s insurance broker placed the building in “Zone B”, which carried the same risk of exposure as to central London and other such places. Moreover, the RICS Code, the guidance in which was to be afforded great respect, provided that serious consideration should be directed to the taking out of terrorism insurance. The exercise of a discretion so as to accord with the RICS Code was a reasonable exercise of discretion.
It followed that the appellant was entitled to recover the cost of insuring against terrorism, either because it was required to obtain such insurance under the provisions of the leases or because it had properly and reasonably exercised its discretion in obtaining such insurance.
Justin Bates (instructed by Hazelvine Ltd, of Bourne End) appeared for the appellant; the first respondent appeared in person through its director, Martin Whale; the second respondents did not appear and were not represented.
Sally Dobson, barrister
