Landlord and tenant – Service charges – Insurance premiums – Respondent leaseholders challenging amount of insurance premiums claimed by appellant landlord – First-tier Tribunal determining premiums in lower amount – Appellant appealing – Whether premiums claimed being “reasonably incurred” – Appeal dismissed
The appellant was the freeholder of a purpose-built block of flats in its own grounds known as Chiltern Court, Milton Road, Harpenden, Hertfordshire. The building was four storeys high and comprised 16 flats and a separate garage area of two blocks containing eight garages in each block. The respondents were the registered leasehold proprietors of one of the flats. Their lease had been granted for a term of 999 years from 29 September 1967 at a rent of £15 per annum together with the service charge.
The respondents challenged insurance premiums claimed by the appellant through its agents for the years 2014, 2015 and 2016 by an application to the First-tier Tribunal (FTT) under section 27A of the Landlord and Tenant Act 1985. The appellant sought to justify, as payable under the terms of the respondents’ lease, insurance premiums for the building as follows: 2014/15: £12,598.20 and 2016/17: £13,561.94. Having heard evidence from the parties’ experts, the FTT determined that the insurance premiums payable for the building should be: 2014/15: £2,803.10, 2015/16: £2,819.08 and 2016/17: £3,017.65. The respondents were each liable to pay one-sixteenth of those premiums under the terms of their lease.
The appellant appealed. It was agreed that the appeal should proceed by way of re-hearing. Section 19 of the 1985 Act provided that relevant costs should be taken into account in determining the amount of a service charge payable for a period only to the extent that they were reasonably incurred. The principal issue was whether the insurance premiums claimed by the appellant from the respondents had been “reasonably incurred”.
Held: The appeal was dismissed.
(1) The burden was on the landlord to satisfy the tribunal, on the balance of probabilities, that the costs in question had been reasonably incurred. Where a contract, such as a lease, had empowered one party to make discretionary decisions which imposed financial liability on another, the law would restrict the exercise of that discretion to what was rational. However, rationality was not the only criteria to be applied when considering whether costs were “reasonably incurred”. If the landlord incurred costs that were not justified by applying the test of rationality, then the costs in question would fall outside the scope of the contractually recoverable service charge. The Landlord and Tenant Act 1985 must have been intended to provide protection against costs which, but for its operation, would have been contractually recoverable. Merely applying a rationality test would not give effect to the purpose of the legislation. The statutory test was whether the cost of the work was reasonably incurred. Part of the context for deciding whether costs had been reasonably incurred was the fact that, in principle, the cost of the work was to be borne by the lessees. When any tribunal considered whether a cost had been reasonably incurred it would always have as its context that, if it had been reasonably incurred, the tenant would have to contribute to it: Havenridge v Boston Dyers Ltd [1994] 2 EGLR 73, Berrycroft Management Co Ltd v Sinclair Gardens Investments (Kensington) Ltd (1996) 29 HLR 444, Forcelux Ltd v Sweetman [2001] 2 EGLR 173, Williams v Southwark Borough Council (2001) 33 HLR 22, Avon Estates (London) Ltd v Sinclair Gardens Investments (Kensington) Ltd [2013] UKUT 0264 (LC) and Waaler v Hounslow London Borough Council [2017] EWCA Civ 45 considered.
(2) Whether costs had been reasonably incurred was not simply a question of process, it was also a question of outcome. The tribunal was required to go beyond the issue of the rationality of the landlord’s decision-making and to consider in addition whether the sum being charged was, in all the circumstances, a reasonable charge. That was necessarily a two-stage test. Context was everything, and every decision would be based upon its own facts. It would not be necessary for the landlord to show that the insurance premium sought to be recovered from the tenant was the lowest that could be obtained in the market. However, the tribunal had to be satisfied that the charge in question was reasonably incurred. In doing so, it had to consider the terms of the lease and the potential liabilities that were to be insured against. It would require the landlord to explain the process by which the particular policy and premium had been selected, with reference to the steps taken to assess the current market. Tenants might, as happened in this case, place before the tribunal such quotations as they had been able to obtain, but in doing so they had to ensure that the policies were genuinely comparable, in the sense that the risks being covered properly reflected the risks being undertaken pursuant to the covenants contained in the lease.
(3) It was open to any landlord with a number of properties to negotiate a block policy covering the entirety, or a significant part, of their portfolio. It was however necessary for the landlord to satisfy the tribunal that invocation of a block policy had not resulted in a substantially higher premium that had been passed on to the tenants of a particular building without any significant compensating advantages to them. In the present case, it was clear that the insurance premiums being charged were excessive, in the sense that considerably lower premiums for similar protection could have been obtained elsewhere. Moreover, insofar as there might have been certain advantages with the chosen policy, they were so insubstantial that they could not justify the amount being charged. It followed that the appellant had failed to satisfy the tribunal that the amounts sought to be charged to the respondents were reasonably incurred.
Carl Brewin (instructed by Direct Access) appeared for the appellant; The respondents appeared in person.
Eileen O’Grady, barrister
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