Service charge extending to costs of performing landlords’ covenant to insure – Landlords obtaining block policy allowing for 25% discount – Policy subsequently varied by agreement providing for bulk of discount to be treated as remuneration for claims-handling services to be rendered by landlords – Whether tenants nevertheless entitled to be credited for full 25%
The defendant council, acting under the “right to buy” scheme, had sold some 6,000 flats, in each case granting a 125-year lease on standard terms that required the council to insure the relevant building. The claimants, the purchasing lessees, covenanted to pay a service charge representing a fair proportion of various expenses borne by the council, including the cost of obtaining such insurance. The charge for any given year was payable in four equal instalments that amounted to the sum, previously estimated by the council, eventually payable for that year (the finalised amount). In the event of it being shown, on finalisation, that a lessee had overpaid, it was provided that the amount of the overpayment should be credited against the next advance payment or payments due from the lessee.
The council initially insured the claimants’ building, and others, under a block insurance policy with Mutual Insurance Ltd (Mutual) that entitled the council to a discount, described as a “commission”, of 36.5% of the gross premium payable. Thereafter, insurance was, at all material times, obtained under a block policy with Zurich Insurance Co (Zurich), initially on terms entitling the council to a 25% discount. By an agreement made in 1995, those terms were retrospectively varied so that, in place of the discount, 5% would be attributed to a five-year loyalty bonus, while the balance of 20% (the Zurich balance) would be treated as consideration for the council’s undertaking to carry out “local claims handling” on behalf of Zurich.
While the two block policies were in force, the council charged the lessees the full premiums and made no allowance for the commissions and discounts received, which amounted in total to some £1.3m. The lessees challenged this practice, and the council agreed to pay the costs of a test case, to be brought by the claimants, for the determination of certain questions of construction. That determination was to be made on the assumption that no fiduciary duty was owed to the claimants and that the 1995 agreement had been properly entered into and was valid and effective. At or by the date of the hearing, the council had accepted that the claimants should have been credited with the discount obtained from Mutual and the 5% loyalty payment from Zurich. The outstanding issues related to the Zurich balance, it being assumed, for the purpose of the hearing, that about 14% of the gross premium was taken up by insurance administration costs.
Held: On the given assumptions, the council were entitled to retain the balance.
It was clear that the full premium (less the 5% loyalty payment) continued to be payable by the council under the 1995 agreement, subject to their entitlement to pay themselves 20% out of the premium as remuneration for the services that they had agreed to provide. That 20% was not, in fact or law, a rebate or deduction from the premium payable. Accordingly, the council could properly include 95% of the premium as an expense for the purpose of the service charge.
If (contrary to the above ruling) the council had been obliged to credit the 20% to the claimants, they would none the less have been entitled to include in the service charge the costs actually incurred in claims handling (agreed at £87,806 for the year 1997-8), as these were the costs of discharging the duties ordinarily assumed by the insurance company in return for the premium. Any resulting overpayment by the claimants would not give rise to a claim for reimbursement unless, following a failure by the council to give an appropriate credit, the claimants subsequently made a full payment of the sums demanded. The limitation period applicable to any action for reimbursement would run from the date of such full payment.
Christopher Maynard (instructed by Osbornes) appeared for the claimants; Andrew Arden QC and Kerry Bretherton (instructed by the solicitor to Southwark London Borough Council) appeared for the defendants.
Alan Cooklin, barrister
