Passing the costs of insurance on to your tenants?

Have the premiums been reasonably incurred?

Until now, landlords of residential property have been able to satisfy their obligations under statute and under their lease terms by insuring their property "at arm's length in the market place". The courts have previously decided that the possibility of obtaining lower premiums elsewhere was not relevant, and there was no implied term in the lease that the premiums recoverable from the tenants should be fair and reasonable.

However, this area of the law was considered recently in the Upper Tribunal (Lands Chamber) case of COS Services Ltd v Nicholson and another [2017].

This case has clarified that, in order to satisfy their statutory obligations, residential landlords do need to make sure that the insurance premiums are reasonably incurred. This means that landlords will need to 'shop around' for the most suitable policy, conduct the decision-making process rationally and reasonably, and make sure that it doesn't result in costs to the tenants which are unreasonably high when compared to other available policies.

Otherwise, those costs might be vulnerable to a challenge by the tenants under Section 27A of the Landlord and Tenant Act 1985. This section allows either a landlord or a tenant to apply to the tribunal to determine whether a service charge is payable and, if it is, the amount which is payable. For the purposes of this act, a service charge includes the costs of insurance.

Tips for Landlords

As a landlord, you do not need to show that the insurance premiums are the lowest that could be obtained in the market.

However, best practice requires that you can provide evidence to show that:

  • you properly 'tested the market' (i.e. shopped around) to find the most suitable policy for your needs
  • the policy was obtained at arm's length
  • you complied with the terms of the relevant leases and the RICS Code
  • the decision was made in good faith and consistently with its contractual purpose
  • the result of the decision-making process is not so unreasonable that no reasonable decision-maker could have reached it
  • the costs to the tenants are not unreasonably high when compared to other policies.

If the costs are higher, you can still substantiate why that particular policy was chosen over the others on offer. Explain which terms are only available in this policy and why that matters with regards to the relevant property.

Unfortunately for the landlords in the COS Services Ltd case mentioned above, they believed it was reasonable to have an 'all encompassing' policy for their very large portfolio. Despite the fact that they had employed reputable insurance brokers and tested the market, their appeal failed because they relied on certain "advantageous terms" in their block insurance policy (for example, that the insurance would not be invalidated due to late payment of the premiums, or if a leasehold was sublet without the freeholder's consent) to justify premiums which amounted to more than £12,000 per annum. The tenants were each liable to pay one-sixteenth of those premiums.

Whilst in principle it might be reasonable to have a single block policy, the tenants produced witness evidence to show that the advantageous terms were similar if not identical to the terms of other insurance policies with much lower premiums (closer to £3,000 per annum) and, crucially, the landlords did not provide any witness evidence to counter this.

The judges will always decide each case on the strength of the evidence in front of them.

For more information, contact Katherine, Hugo, or a member of our Real Estate team.