Leases – The Dangers of Block Insurance Policies

A recent Tribunal decision vividly shows the risk for a landlord in blithely taking out a Block Insurance Policy covering a number of residential properties without giving the matter sufficient thought. When the landlord sought to recover the cost of insurance under a service charge term in a lease of a flat, the Tribunal ruled that the tenants were only obliged to pay a sum in the region of £8,600, as opposed to the £39,000-odd being claimed by the landlord. The case is a striking illustration of the difference between residential and commercial leases.

In COS Services Ltd v Nicholson, the tenants of a flat were required to pay 1/16 of the cost of insuring the building. The landlord took out a comprehensive all-cover block insurance policy covering properties spread across the country. In giving evidence to the Tribunal, the landlord’s agent explained that the landlord had wanted a single policy because it did not want to have to deal with discrepancies and it was crucial that everything was covered. However, he pointed to a number of supposed advantages provided by the policy. The Tribunal was not convinced. In fact it said that, having heard the case, it remained mystified as to why the premiums charged to the tenants under the block policy were four times those offered by other insurers.

In relation to any service charge issue, the starting point must always be the terms of the lease itself. This case concerned a lease of residential property to which the provisions of the Housing Act 1985 applied. Under that Act, the tribunal or court must itself address the issue of the reasonableness of a service charge head on, as opposed to simply asking if the landlord has acted reasonably or rationally in some generalised way.  In such cases, the landlord needs to be in a position to produce solid evidence showing that the cost of insurance was reasonably incurred.

By contrast, under a commercial lease there will normally be much less scope for the tenant to challenge the amount spent by the landlord on insurance. Everything depends on the terms of the lease. There is no such thing as a standard commercial lease, which is why it is so important that such matters are properly addressed when the lease terms are being negotiated.    

We have many years’ experience in both drafting service charge provisions and advising on service charge disputes. To find out more, please contact Martin Banham-Hall or Caroline Wilton.