David Whitney: Buildings Insurance Issues
David Whitney is a Solicitor at specialist Landlord and Tenant law firm PainSmith Solicitors who are described by Chambers and Partners as “a rarity in the UK as a true landlord and tenant boutique”. They are widely acknowledged as the leaders in the field, are accredited to the Law Society Lexcel and the Investors in People standards and provide training and legal services to “an impressive range of real estate clients”.
David also contributes to the PainSmith Landlord and Tenant Law Blog.
In this article he is taking an in-depth look at the particularly thorny issue of buildings insurance.
As most people reading this article will be aware, most long residential leases require the Freeholder to insure the Building. As a result they can normally recover this cost from the leaseholders.
As with all leasehold structures whilst there is statutory regulation the starting point is always to look at the lease terms. The reason for this is simple in that contractually, between the parties, each only has to do what is included in the lease. For most people there will be provision that the Insurance should be a comprehensive Buildings Insurance policy, often said to be with an insurer of repute to provide comprehensive cover including total re-build if required.
Under the statutory regime, which then comes in to play, upon request a Landlord should make available a copy of the policy. With regards to recovery of the costs from a leaseholder the freeholder must be able to demonstrate that the costs are reasonable and the Leasehold Valuation Tribunal has jurisdiction to determine the reasonableness of such charges. So what will be looked at?
Testing the Market
It is important to consider what actually is covered. Some leases are prescriptive in terms of the extent of the cover. For others they simply state that the cover should be what the Landlord considers reasonable. In this latter situation issues can arise, particularly over the provision of things like terrorism cover and whether this is reasonable. The Landlord in considering matters should look to test the market in the broadest sense. Most Landlords will look to use Brokers to do this and they should if necessary be able to produce evidence of how the market was tested and be able to explain why a policy and the extent of cover is chosen. The Landlord does not have to go for the lowest premium but a reasonable one.
Often the location etc compared with cost will be important in considering whether something such as terrorism cover should be obtained. One of the things which often gives rise to argument is over any commission which the Landlord is being paid for arranging the Insurance. This can often be a not inconsiderable amount of the premium dependant upon the size of the Landlords total portfolio. Again the LVT will consider whether this is reasonable and even on occasion has said that this part of the cost is not recoverable. In the main the LVT in reaching its decision tries to consider matters in a practical way taking account of all the evidence. Leaseholders should bear in mind that if they are seeking to challenge the insurance they will be expected to obtain an alternative quotation. To be sure that they are obtaining a like for like quotation they should ensure that they obtain both a copy of the policy and any claims history from the Landlord or to explain why their quote is comparable.
This then often leaves the thorny issue as to whether the Landlord has over/under insured the building. More often the argument will be that the building is over insured therefore inflating the premium. This however is not the end of the story given most prudent Landlords will wish to ensure that the building is fully insured in case of a disastrous claim to prevent Leaseholders alleging the Landlord has failed to comply with their own covenants under the lease. The valuation used should as with everything else be reasonable.
What is Reasonable?
By way of background when considering what is “reasonable” the LVT is considering what an ordinary person would consider (sometimes famously described as the man on the Clapham Omnibus). Often this means that there will be a percentage of give and take. It is also worth bearing in mind that for most developments the re-build cost will be less than the developments open market value as that will include the actual land value.
For many developments no particular valuation will have been undertaken since the initial valuation on the setting up of the scheme. What has happened is that since that date on successive years the sum for which the development is insured has simply been index linked (e.g. by inflation or RPI). Hence the value has risen but no real consideration has been given to the correct value.
Often modern leases of major developments will include provision in the insurance and service charge covenants that the recovery of the cost of an insurance re-valuation may be recovered. In older leases there is often no express provision relating to the cost and it will be important to consider all of the lease terms to see if a Landlord can look to reclaim this sum. Potentially (even if not recoverable under the lease) a Landlord should from time to time consider re-valuing to ensure that they are complying with their covenant to insure as they need to be satisfied that the cover arranged is reasonable and would cover the building in the event of a catastrophic claim.
What is the Rebuild Cost?
This should be undertaken by a suitably qualified professional. Many brokers or large insurers can offer this as part of the services which they provide to the client. Usually they will need to visit the site to assess. In calculating the value they will should take account of not only the actual bricks and mortar which would be involved but also a reasonable amount for professional fees which may be incurred in overseeing the works, building control and planning matters. Any report should outline how the value has been achieved and Landlords should be prepared to disclose this valuation if requested by Leaseholders or should the matter proceed to an LVT. As with all aspects of valuation this is not an exact science although it will usually be reasonable for such a valuation to include a reasonable contingency to ensure that the cover is adequate.
Insurance thus remains a thorny issue for many Landlords and Leaseholders. It is important that proper consideration and due diligence is undertaken before placing any policy to ensure that the Lease terms and statutory regulation have been fully complied with. Provided this is done and can be demonstrated it is likely that any premium charged will be considered reasonable by an LVT.
For further information on this and any other leasehold matters please contact David on:
Direct dial 01420 565319
Mobile 0792 1365654
e-mail: [email protected]