First-tier Tribunal Decides Service Charges for Building Insurance

OUTCOME: Allowed

© CROWN COPYRIGHT

FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON/00BJ/LSC/2020/0210 HMCTS code (paper, video, audio) : V: CVPREMOTE Property : [ADDRESS] [POSTCODE] Applicant : [redacted] : In person Respondent : [redacted] (Freeholder) (2) [NAME_1], [NAME_31] (substituted for [NAME_28]), [NAME_10] and [NAME_65] ([NAME_15]) Representative : [NAME_16] (of [NAME_33]) for [COMPANY_4] of application : Determination of the liability to pay service charges under section 27A of the Landlord and Tenant Act 1985 Tribunal members : Judge Nicola Rushton QC [NAME_20], [NAME_23] Venue : 10 [ADDRESS] [POSTCODE] Date of decision : XX January 2021

DECISION

2 Covid-19 pandemic: description of hearing This has been a remote video hearing which has been consented to (or, in the case of those not attending, not objected to) by the parties. The form of remote hearing was V: CVPREMOTE (video hearing, using the CVP platform). A face- to-face hearing was not held because it was not practicable and all issues could be determined in a remote hearing. The orders made are described at the start of these reasons. The electronic documents which the tribunal was referred to were: (a) the Applicant’s bundle, being an electronic folder of 10 documents (94 pages in total); (b) the First Respondent’s electronic bundle (57 pages); (c) an emailed statement from [NAME_26] (with attached office copy entries), on behalf of his son [NAME_28] and daughter [NAME_29]; (d) a response from the Applicant to Mr [NAME_8]’s statement. In addition, during the hearing the parties in attendance and the tribunal downloaded the [NAME_30] “Policy Wording” document from the link http://broker.[NAME_30].co.uk/integrated/RPI/Combined/PolicyWording/BCOPO 14489092019/ on page 2 of the [NAME_30] Schedule in the Applicant’s bundle. The tribunal has noted the contents of all of these documents. Decisions of the tribunal (1) [NAME_31] is substituted for [NAME_28] as a Head-Lessee and Respondent. (2) The tribunal determines that the following sums were/are payable to the Freeholder, in respect of service charges for building insurance, by the four [NAME_15] jointly, for the following years: 2014/2015 £1,070.32 2015/2016 £956.71 2016/2017 £1,008.82 2017/2018 £1,071.85 2018/2019 £1,013.66 2019/2020 £1,020.33 2020/2021 £1,058.31 (3) The tribunal does not make any order under section 20C of the Landlord and Tenant Act 1985, the First Respondent having stated at the hearing through Mr [NAME_18] that it will not be passing on any of its costs

3 of these tribunal proceedings to the [NAME_15], whether through service charges or otherwise. (4) The tribunal makes no order that any Respondent shall reimburse the Applicant in respect of the tribunal fees paid by him. (5) The tribunal makes further determinations as set out under the various headings in this Decision. The application 1. The Applicant seeks a determination pursuant to s.27A of the Landlord and Tenant Act 1985 (“the 1985 Act”) as to the amount of service charges for building insurance payable by the four [NAME_15] in respect of the service charge years 2014/2015 to 2020/21.

2. The application is dated 22 May 2020. The Applicant is one of the four [NAME_15]. Each Head-Lessee is also the sub-lessee of one of four flats, as detailed further below. The hearing 3. The Applicant appeared in person at the hearing. The Freeholder, [COMPANY_4] (“[NAME_32]”) was represented by [NAME_16], an employee of [NAME_33] (“[NAME_19]”), who have been engaged by [NAME_32] to manage its property assets. Mr [NAME_18] is also a chartered surveyor.

4. The hearing was also attended by [NAME_34], the father of [NAME_9] and [NAME_29]. He clarified that while Flat 3 had previously been registered in the names of [NAME_9] and [NAME_6] jointly, it was now solely owned by [NAME_6]. He produced office copy entries for the leasehold flat, which record that she was registered as sole owner on 14 September 2020. The tribunal has not seen any office copy entries for the Head Leasehold title, but on the assumption that [NAME_28]’s interest in that has also been transferred (or will shortly be transferred) to [NAME_29], she is substituted as the relevant Respondent to these proceedings.

5. The other two [NAME_15] ([NAME_35] and [NAME_36]) did not attend the hearing and were not represented.

6. The hearing was also attended by [NAME_37], an insurance broker engaged by [NAME_19] who was a witness for [NAME_32], and by [NAME_40], a colleague of Mr [NAME_18].

4 7. The tribunal heard live witness evidence from Mr [NAME_18], [NAME_43] and [NAME_44]. It also heard oral submissions on the issues from Mr [NAME_18] on behalf of [NAME_32] and from [NAME_44].

8. Prior to the hearing, the tribunal was sent the electronic bundles described above. The tribunal and the parties also downloaded the [NAME_30] policy wording, as described above, and considered this during an adjournment.

9. Directions in this matter were given by Judge Donegan on 22 September 2020, which were substantially complied with, except as noted below. The background 10. The property which is the subject of this application, 328-[ADDRESS], Wandsworth, is a 3-storey masonry building constructed in about 1920 (“the Property”). The ground floor is a retail area, presently tenanted by [NAME_45]. The first and second floors are divided into four flats, each floor having a one-bedroom flat and a two-bedroom flat. The flats are accessed by stairs from a single street-level front door.

11. The Property is located at the point of a triangle where [ADDRESS] meets [ADDRESS]. Immediately next door is another property also owned by [NAME_32] and known as [ADDRESS]. This also has a retail area on the ground floor which is let to [NAME_46]. While there was some dispute about this, it appears this property also includes a flat on the first floor, albeit probably only used for storage by the cleaning company.

12. The undisputed practice of [NAME_32], as confirmed in the evidence, has been to treat the Property and [ADDRESS] as a single unit for building insurance purposes (until about 2013/2014 the retail parts formed a single shop). Any quotations obtained by [NAME_32] and premiums paid have been for both properties taken together.

13. There were no photographs of the Property in the bundle (despite an order of Judge Donegan for these) but the tribunal had the benefit of lease plans and it was also described by the parties. No party requested an inspection and the tribunal did not consider that one was necessary or proportionate to the issues in dispute, nor realistically possible given Covid-19 restrictions.

14. The first and second floors (and street level entrance) of the Property were demised under a 99 year Head-Lease dated 29 September 1985, at a nominal ground rent1. The freehold was subsequently acquired by [NAME_32]. Each of the four flats has been sublet on a on a long lease. The tribunal

1 From a letter of 1 April 2020 from [NAME_48] to [NAME_44], it appears the title number is TGL181687.

5 has only seen a copy of [NAME_44]’s sub-lease of Flat 4 (the one- bedroom flat on the second floor), which is also a 99-year lease from 29 September 1985. It appears likely that all 4 subleases were on essentially identical terms. Each of the four sub-lessees is also a Head-Lessee (or will be once [NAME_28]’s interest is transferred to [NAME_29], as necessary). The current [NAME_15] are all assignees who took on obligations under the Head-Lease when each acquired their interest in it.

15. The Head-Lease requires the landlord to provide services and the Head- Lessees to contribute towards their costs by way of a variable service charge, including in respect of building insurance. Paragraph 4 of the Head-Lease sets out covenants given by the [NAME_15], including sub-paragraph 4(8), by which they covenant: “(8) To repay to the [NAME_49] on demand two thirds of the sums which the [NAME_49] shall from time to time pay by way of premiums for keeping the Building insured under the covenants on the part of the [NAME_49] contained in paragraph 5 hereof.” Other provisions of the lease will be referred to below where appropriate.

16. The tribunal has seen invoices from [NAME_32] to the [NAME_15] for the years 2016-2017, 2017-2018, 2019-2020 and 2020-2021. From these it appears the insurance premium year runs from 23 June to 22 June.

17. The evidence of Mr [NAME_18], which was not disputed by [NAME_44], is that although the Head-Lease provides for the [NAME_15] to pay two- thirds of the costs of the building insurance for the Property, since 2013/2014 [NAME_32] has in fact invoiced the [NAME_15] for one third of the total insurance premium it has paid for both the Property and [ADDRESS] together. Mr [NAME_18] said that an informal agreement had been reached at that time with [NAME_45] and [NAME_46] under which each of them would pay one third of the insurance premium. That has been the arrangement ever since. (Mr [NAME_18] also said that prior to 2013/2014, the commercial tenant occupying all the ground floor of the Property and [ADDRESS] had paid 100% of the building insurance.)

18. In relation to the division of the premium, [NAME_32] also relied on a Reinstatement Cost Assessment Report from [NAME_50] of [NAME_53], dated September 2020. This advised at paragraph 2.7 that the gross internal area of the Property was 828 m2, of 1 Ferrier St was 330 m2, and the combined area of both was 1,158 m2. The Property therefore comprises 72% of the combined unit, by area, and 1 Ferrier St comprises 28%. At paragraph 4.2, the report advised on the separate reinstatement costs for the two properties. This also divided 72% to the Property and 28% to 1 Ferrier St.

6 19. [NAME_32]’s position is that the [NAME_15] have therefore benefitted by being charged only one third of the total insurance premium for the Property and [ADDRESS]. If the premium had been split between the two properties by reference to either reinstatement cost or floor area, the [NAME_15] would have been obliged under the terms of the Head- Lease to pay two thirds of 72% of the premium, i.e. 48% of the premium for the two properties together. 20. [NAME_32] does not argue that the amount payable for insurance for the years in question is any more than the one third which was invoiced. However, Mr [NAME_18] said he could make no commitment that [NAME_32] would continue to charge the [NAME_15] only one third of the total premium in the future.

21. The tribunal is only concerned on this application with the liability for insurance costs as between [NAME_32] and the [NAME_15] (jointly). It is not concerned with the division of the costs as between the [NAME_15]. It is nevertheless noted that paragraph 2(2) of [NAME_44]’s sublease requires him to pay the [NAME_49] (i.e. the four [NAME_15], jointly) 25% of the expenses and outgoings incurred by the [NAME_49], including in relation to insurance of the building. However, the undisputed evidence of [NAME_44] was that the [NAME_15] had informally agreed between themselves that the tenants of the two-bedroom flats would contribute 30% and those of the one-bedroom flats 20% of any expenses incurred.

22. It appears separate part-payments in respect of insurance costs were made by the [NAME_15] individually to [NAME_32]’s managing agents (who until March 2020 were [NAME_54]), rather than as a single annual payment. Surprisingly, no records have been produced by [NAME_32] of the payments received by it from the [NAME_15]: Mr [NAME_18] said he had not yet been able to obtain the records from [NAME_54]. However, he said he did not believe there were any sums outstanding, at least prior to the 2020/2021 year. There were also no documentary records (such as copy bank statements) from [NAME_44] as to the payments he has made. These included a cheque for £1,020.32 which he paid to [NAME_48] in about February 2020. He also said he had been unable to obtain details from the other three [NAME_15] of what they had paid. This lack of cooperation appears to stem mainly from a concern on the part of the other [NAME_15] that [NAME_44]’s application might result in their insurance service charges being increased rather than reduced.

23. One consequence of all of this has been a great deal of confusion and lack of clarity as to what has actually been paid by the [NAME_15], and for what. The tribunal has been wholly unable to resolve this on the evidence available. This decision therefore deals only with what is payable, and expresses no view as to what has been paid or by whom. It is however recorded that Mr [NAME_18] said during the hearing that [NAME_32] would be getting a full reconciliation of payments from [NAME_54] and that if there had been any overpayment, this would be repaid to the [NAME_15].

7 The issues 24. The issue for determination by the tribunal is the payability and reasonableness of service charges in respect of building insurance costs, for each of the years from 2014-2015 to 2020-2021.

25. The relevant statutory provisions are contained in sections 18, 19 and 27A of the Landlord and Tenant Act 1985 (“the 1985 Act”). Extracts from the 1985 Act are set out in an appendix to this decision.

26. Having heard evidence and submissions from the parties and considered all of the documents provided, the tribunal has made determinations on the various issues as follows. The tribunal’s decision on payability 27. The following sums were/are payable to [NAME_32] in respect of building insurance, by the four [NAME_15] jointly, for the following years: 2014/2015 £1,070.32 2015/2016 £956.71 2016/2017 £1,008.82 2017/2018 £1,071.85 2018/2019 £1,013.66 2019/2020 £1,020.33 2020/2021 £1,058.31 Reasons for the tribunal’s decision 28. Section 27A of the 1985 Act provides that the tribunal has the power to determine whether a service charge is payable; and if so, the amount payable, by whom and to whom. Section 18(1) provides that “service charge” means (a) an amount payable by a tenant for, among other things, insurance, which (b) may vary according to the relevant costs.

29. Section 19 provides (so far as material) that relevant costs shall be taken into account only to the extent that they are reasonably incurred.

8 30. It should be noted that the tribunal therefore has to determine whether the costs have been reasonably incurred; not whether the amount of the service charge is reasonable.

31. In [NAME_32]’s written evidence, Mr [NAME_18] set out two tables of the sums for insurance charged to the Head-Lessees2, together with hypothetical alternative charges at either 48% or 66% (approximately) of the total premiums. These were intended to demonstrate the extent to which the [NAME_15] were said have been treated advantageously, by being charged less than they would have been charged if [NAME_32] had enforced what it said were its strict legal rights. However, this does not address the correct question, which is whether the insurance costs themselves have been reasonably incurred.

32. What it does suggest is an awareness that charging the [NAME_15] 48% of the premiums incurred seemed excessive, possibly because the two-thirds fixed by the Head Lease appears unfairly high. However, as the tribunal explained during the hearing, it has no power to alter the proportions fixed by the lease: this is not a case where the lease has provided for the tenants to pay a “fair proportion” of the costs, which the tribunal could review3.

33. In addition of course, since [NAME_32] has been receiving two thirds of the premium from the commercial tenants, it could not have justified demanding more than one third from the [NAME_15]. Insofar as [NAME_32] has received two thirds of the total premium for any year from [NAME_45] and [NAME_46], the tribunal considers that no more than one third of the premiums paid by it can be payable by the [NAME_15], under s.27A(1) of the 1985 Act, in any event. 34. [NAME_44]’s position was that these sums were still not fair because in absolute terms he said the amount charged to the [NAME_15] (and in particular to him) was still too high. He said that the benchmark should be that one could get a quote for building insurance for a one-bedroom flat in London for £100-£200 p.a.. However that approach is clearly wrong for several reasons: first, the tribunal has to consider the whole demise of all four flats, not a single one alone; second, one has to consider the particular property, so any alternative quotes obtained are genuinely comparable; third, there was no proper evidence before the tribunal of a quote of £100-£200, simply [NAME_44]’s statement that he had obtained such quotes through websites.

35. The Upper Tribunal case of [NAME_55] v. [NAME_56] confirms that where a property is mixed-use commercial and residential, an appropriate insurance premium is one calculated by reference to the

2 pages 3 and 5 of [NAME_32]’s bundle 3 Unlike e.g. Sadeh v. Mirhan and Azzniv [2015] UKUT 0428 (LC), considered further below.

9 building being as it is, i.e. mixed use, and not as if it were a 100% residential building4.

36. Much the better and more relevant evidence put in by [NAME_44] was the building insurance quotations which he had obtained from [NAME_30] and [NAME_57], both dated 2 October 2020, through [COMPANY_58] and for the purposes of this application. He said he had done this by sending Allianz/[NAME_30]/[NAME_57] a copy of the policy schedule for the [NAME_59] policy. The quotation from [NAME_30] was £1,667.47 before tax, or £1,867.57 after Insurance Premium Tax. The quotation from [NAME_57] was £1,902.16 before tax and £2,130.42 after tax. The comparability of these quotations is considered in more detail below. The tribunal records that it has not in fact seen the [NAME_59] policy, as no party put it in evidence, although [NAME_32] included at Appendix III to its evidence details of the “Basis of Cover” on which [NAME_60] carried out its market testing and instruction.

37. The total premiums actually paid by [NAME_32] for building insurance5 were set out in the first line of Mr [NAME_18]’s tables, and (with a breakdown into component parts) in Appendix II to [NAME_32]’s written evidence. The same figures (or 1p different) are stated by [NAME_44] in his evidence. The tribunal therefore accepts these figures. No evidence was given by [NAME_32] as to the premium paid in 2014/2015. [NAME_44] stated in his evidence at p.4 that the total premium paid in that year was £3,210.95, and the tribunal accepts that evidence. Accordingly it finds the total premiums paid by [NAME_32] were: 2014/2015 £3,210.95 2015/2016 £2,870.12 2016/2017 £3,026.50 2017/2018 £3,215.59 2018/2019 £3,040.97 2019/2020 £3,061.03 2020/2021 £3,174.93 38. [NAME_44] also referred in his evidence to the decision of Judge Stuart Bridge in the Upper Tribunal in Cos Services Ltd v Nicholson6, which is directly relevant to this application. That decision concerned the approach which the tribunal should take to determining whether

4 [2015] UKUT 0428 (LC) at [41] 5 i.e. for the Property and [ADDRESS] together 6 [2017] UKUT 382 (LC)

10 insurance costs which had been charged to tenants through a service charge, had been reasonably incurred. The judge held this had to be considered in the light of the decision of the Court of Appeal in Waaler v. Hounslow LBC7, as to the proper approach to applying the reasonableness test in s.19 to service charges more generally.

39. In particular, both cases confirm that this is a two-stage test: the tribunal must consider (a) whether the landlord’s decision-making process was reasonable and (b) whether the amount actually incurred was reasonable in the light of market evidence, or outside the market norm. In deciding what is reasonable, the tribunal must also take into account relevant circumstances, including the fact it is the tenant who will ultimately be paying the charge. Finally, the question is whether the option selected by the landlord was a reasonable one, even if other reasonable decisions could also have been made. The tribunal cannot substitute its own preference if the landlord’s decision was a reasonable one. 40. [ADDRESS] of Appeal in Waaler confirmed that the test is not simply whether the landlord has followed a rational process. If it had not acted rationally, then the charge would not be recoverable at all under the lease at common law, even without s.19. That section must have been intended to add something more to the common law position. That something was that the outcome also needed to be reasonable, in the light of market evidence. It was not enough that the landlord followed a reasonable process, if that had led to a clearly unreasonable outcome. In Cos, the insurance premium incurred was four times the level which market evidence indicated was the norm. In the absence of any good explanation from the landlord, this was held to be unreasonable.

41. The starting point is the terms of [NAME_32]’s obligation to insure under the Head Lease. This is set out in sub-paragraph 5(3), which states (so far as material) that the landlord covenants: “(3)(a) To insure and keep insured the Building in an insurance office of repute against loss or damage by fire and all other normal comprehensive risks and such other risks as in the opinion of the [NAME_49] are necessary to be insured against (herein referred to as “The Insured Risks”) in the full reinstatement value thereof …. (c) Whenever reasonably required by the Lessee and at the Lessee’s cost to provide a duplicate of the policy or policies of the said insurance and to produce the receipt for the last premium for the same.” 42. Notably, [NAME_32] are obliged to insure against “all other normal comprehensive risks”, and the clause also gives [NAME_32] a wide degree of discretion in determining what other risks are “necessary” to be insured against. This is relevant to determining whether the premium costs

7 [2017] EWCA 45, [2017] HLR 16

11 incurred were reasonably incurred. [NAME_32] are not obliged under the lease to provide details of the market testing they have carried out. However, such evidence is relevant to demonstrating reasonableness on this application. 43. [NAME_32] relied on the evidence of Mr [NAME_18] and of its insurance broker [NAME_43] of [COMPANY_61] (“[NAME_60]”) in support of its position that the insurance premiums were reasonably incurred.

44. Mr [NAME_18] explained that [NAME_32] owns a number of property assets and have engaged [NAME_19] to administer them. Mr [NAME_18] is employed as the direct property fund manager to undertake that work. [NAME_19] had decided to use an insurance broker to negotiate all building insurance required across all [NAME_32]’s properties. Most of [NAME_32]’s properties were commercial: the Property was unusual in being mixed residential/commercial use.

45. Mr [NAME_18] said they had chosen to use a broker rather than him obtaining insurance quotes because he was not qualified to place commercial insurance in the market. [NAME_19] had a longstanding relationship with [NAME_60] and did not consider it would be productive to change brokers from time to time – there was added value from a longstanding relationship with a broker who knew the client. [NAME_43] also said that there would be no purpose to changing brokers in an effort to get a better quote from insurers. In his experience any particular insurance company would give the same quote to different brokers if the property offering was the same. He said cost was not the only factor in choosing a broker – service and performance were a large part, and [NAME_60] had provided [NAME_19] and [NAME_32] with a good level of service, which the [NAME_15] had benefitted from, in particular in having had recent claims accepted.

46. Mr [NAME_18] said in response to cross-examination by [NAME_44] that he and [NAME_19] do not receive any commission from insurers on the insurance placed, nor do they receive any gifts or other payments. [NAME_32]’s written evidence states that the insurer pays [NAME_60] 20% of the premium before tax (this applies to both the main property insurance and the separate terrorism insurance). This is intended to cover [NAME_60]’s work in handling the account, collecting premiums, administering any claim and undertaking a broking exercise once every 3 years. [NAME_43] confirmed this in evidence.

47. Insurance for the Property/[ADDRESS] was negotiated by way of a block policy together with 4 other properties. The other properties were all commercial and not all were in London. Although insurance for the portfolio of 5 properties was arranged together, [NAME_43] said the premiums were fixed separately for each property by reference to the characteristics (including claims history) of each. However the same policy terms and conditions applied across all properties. Mr [NAME_18] and [NAME_43] considered there were advantages in terms of convenience in having the same terms apply across all the different properties. [NAME_66] also said he had been able to negotiate wider cover than would generally be available, for example for storm damage without the insured having to prove causation. 48. [NAME_43] explained that their strategy was to renegotiate premiums every three years, locking the premiums down for the intervening years so they only increased by a fixed amount. At the 3 year point, he said [NAME_60] carried out full market testing, sending details to between 10 and 20 insurance companies for quotes (which would have included [NAME_30]), asking for the best possible premium based on the level of cover required. His experience was that, in commercial building insurance, this resulted in better deals and better customer service overall than seeking to renegotiate every year, which was counterproductive because it undermined relations with the insurers. He said their sole aim in arranging insurance was to provide full and comprehensive cover for properties. [NAME_32]’s written evidence stated that all the usual large insurers were approached as part of this process, and were selected applying requirements for: financial strength, specialism in property insurance, a willingness to subscribe to [NAME_60]’s specified policy wording and a reputation for settling claims quickly and fairly.

49. In 2015 [NAME_43] said [NAME_62] had given the best quote after the market testing process, so a 3 year agreement had been made with them. In 2018 [NAME_60] had retested the market. [NAME_63] had given the most competitive quote, so a 3-year agreement had been made with them. A claim had been made in 2019 for storm damage, which had been paid even though the exact mechanism between the storm and the damage was unclear. In addition, two claims for water ingress had been paid in 2019. This claims history was likely to affect the premium charged when the market was next tested, and he noted this history had not been taken into account in the two alternative quotes obtained by [NAME_44].

50. The premium included a separate premium for terrorism cover. [NAME_32]’s written evidence states this is obtained through [NAME_64]. [NAME_44] challenged the inclusion of this cover as being unnecessary from his perspective as a flat-owner. Mr [NAME_18] and [NAME_43] said that terrorism cover was included and considered necessary because the Property was in central London, near a transport hub.

51. The tribunal accepts that it was reasonable for [NAME_32] to include terrorism cover, taking into account the broad discretion which [NAME_32] has under the lease to decide what risks are necessary to be insured against. 52. [NAME_43] said that for the terrorism cover, [NAME_60] was paid an additional 17.5% of the premium by the insurer to administer the policy (i.e. produce policy documents and bordereaux, invoice charges etc.). This was in addition to the 20% commission, so for 2020-2021 [NAME_60] received a £98.11 administration fee and £112.12 commission on that cover.

13 53. [NAME_44] also complains that the policy includes cover for loss of rent/alternative accommodation if the Property becomes uninhabitable, which he says is not relevant to owner occupiers such as himself. The tribunal accepts the evidence of [NAME_43] that [NAME_32] was entitled to conclude such insurance was reasonably necessary (within the terms of clause 5(3)(a)) since it would benefit both owner-occupiers and those who rented out their flats, who would benefit either from the loss of rent cover or payments for alternative accommodation. The evidence was that two flats were owner-occupied and two were sub-let by their owners, so it would be appropriate for [NAME_32] to take out insurance which covered either situation. 54. [NAME_43] also explained that the insurance obtained was “all risks” rather than covering only specified events. He said that this was considered preferable by him and Mr [NAME_18], even though this was more expensive than insurance for specified risks, because it made it simpler to make a claim and less likely that the insurer would seek to contest a claim. Given the reference in paragraph 5(3) of the lease to “all other normal comprehensive risks and such other risks as in the opinion of the [NAME_49] are necessary to be insured against”, the tribunal considers it was at the very least within the scope of [NAME_32]’s discretion to choose to take out an “all risks” building insurance policy.

55. The tribunal also considers that it was reasonable for [NAME_32] to choose to use a broker to arrange building insurance rather than [NAME_19] arranging insurance itself. The RICS Service Charge Residential Management Code (3rd edition) includes advice on insurance matters in section 12. This warns landlords and their agents (which would include [NAME_19]) that they should not carry out any insurance-related business, including placing insurance, unless they are authorised by the FCA to do so, and to do otherwise is unlawful. Since Mr [NAME_18] says he is not qualified to place commercial insurance, the tribunal considers it was plainly reasonable for [NAME_19] to use an authorised broker to do this.

56. The tribunal accepts the evidence of [NAME_43] and Mr [NAME_18] as to the process which was followed by [NAME_32], [NAME_19] and [NAME_60] in obtaining building insurance for the years from 2014/2015 to 2020/2021. The tribunal further considers that overall, this process was a reasonable one to have been followed given (a) the mixed use nature of the Property; (b) the perceived benefits of using a broker and negotiating 3-year agreements; (c) the fact that premiums were set separately for the different properties in the portfolio; and (d) the degree of discretion which [NAME_32] had under the lease to determine the risks to be covered. The RICS Code states in this regard at 12.5 that: “Insurance procured may not necessarily be the cheapest available, but should cover appropriate risks and be subject to market testing. You should regularly review the extent of cover and level of premiums for all insurances under your control.”

14 57. Where an insurer has paid commission on premiums to a landlord which is for the provision of brokerage services by the landlord, it has been held that the landlord does not have to deduct the amount of that commission from the premiums recharged to the tenants – see decision of Lightman J in Williams v. Southwark London Borough Council8. If there is no obligation to give credit for such a commission for services which is paid to the landlord, it necessarily follows that there equally cannot be an obligation to give credit where the commission is paid by the insurer direct to a broker. [NAME_60] has provided services for the commission paid, as outlined by [NAME_43], the tribunal is also satisfied that the inclusion in the premium of a 20% element representing payment for those services was reasonable.

58. As outlined above, the tribunal must also consider whether the amounts actually incurred by [NAME_32] were reasonable, in light of market evidence.

59. The tribunal accepts the evidence of [NAME_43] that [NAME_60] carried out market testing in 2015 and 2018 by submitting the required policy terms to a significant number of insurers, and accepted the lowest quote. [NAME_44] criticises [NAME_43] and Mr [NAME_18] for the fact that no minutes of the briefings between [NAME_60] and [NAME_19], nor documentary records of the market testing carried out by [NAME_60] have been produced in evidence. While it would have been good practice for [NAME_60] and [NAME_32] to have retained records of the market testing carried out, the absence of such records does not cause the tribunal to reject the oral and written evidence of [NAME_43] and Mr [NAME_18] of the market testing carried out, which it accepts.

60. On this evidence therefore, the tribunal concludes that the premiums paid were at market rates, for the scope of the “all risks” policy sought by [NAME_60] on behalf of [NAME_32]. 61. [NAME_44] relies on the two quotations referred to above, from [NAME_30] and [NAME_57], in support of his position that the insurance taken out was at an excessive premium. In their written evidence at Appendix II, [NAME_32] set out their response to the comparison. They noted that there was no policy wording which could be compared for either quote. They noted that the [NAME_30] policy included a strict claims condition which was not the case with the policies placed by [NAME_60]. [NAME_43] confirmed that [NAME_32] wished to avoid policies with tricky claims conditions, which would make putting in a claim onerous or difficult to make good, or require the insured to produce evidence which would be difficult to obtain.

62. During the hearing, the parties and tribunal downloaded the [NAME_30] policy conditions referred to in the quotation, which were considered during an adjournment. [NAME_43] then observed that the [NAME_30] policy was not an “all risks” policy, but rather gave protection against specified risks, such

8 (2001) 33 H.L.R. 22

15 as property damage. He said this meant it was not comparable, especially since this made the process of submitting a claim more onerous and more likely to be contested by an insurer. There were also a number of respects in which he pointed out that the cover under the [NAME_59] policy was greater.

63. The tribunal also noted that both quotations referred only to the Property address and did not refer to [ADDRESS]. [NAME_44] said that he had simply provided the insurers with a copy of the existing schedule, it nevertheless appears more likely than not that the physical property that these quotations related to was therefore different from and smaller than the policies taken out by [NAME_60]. This was through no fault of [NAME_44], who no doubt thought that giving the Property address would be sufficient, but the policies placed by [NAME_60] all included [ADDRESS], because they knew this was necessary. One would clearly expect a quotation which did not extend to [ADDRESS] to be cheaper.

64. For all of these reasons, the tribunal concludes that the quotations obtained by [NAME_44] were not sufficiently comparable, and that overall this evidence was not sufficient to displace the conclusion that the policies taken out by [NAME_32] were at market rates, following market testing, and that their scope was within the terms of clause 5(3) of the Head Lease. Unlike in the Cos case, there is evidence in this case that full market testing was done.

65. The tribunal further accepts that allocating one third of the total premium for the Property and [ADDRESS] (together) is reasonable given that the Property makes up 72% of the whole, when assessed by either area or reinstatement value.

Accordingly, since the [NAME_15] have only been invoiced for one third of the total premiums the tribunal concludes that the sums invoiced are payable, in circumstances where the other two thirds of the premiums have been met by the commercial tenants. However, the tribunal does not consider that it necessarily follows that invoicing 48% of the total to the [NAME_15] would also have been a reasonable approach: [ADDRESS] is a commercial property for which the building insurance rate would be expected to be proportionately higher.

66. The tribunal notes that [NAME_44] has included in his bundle a letter from [NAME_46] in which they claim that there has been an overcharging of building insurance to them, and that the cover is more extensive than they consider is necessary. The present application does not relate to [ADDRESS], and [NAME_46] are not a party to it. However, this letter does indicate that there is no guarantee that [NAME_46] will continue to be willing to pay one third of a premium assessed for the combined properties.

67. One factor which clearly is and should be relevant to [NAME_32]’s decision- making process is the fact that under the terms of the Head-Lease, it is

16 the tenants of the flats who have the obligation to pay the majority (two- thirds) of the insurance premium for the Property. It is therefore necessary for [NAME_32] to ensure that the building insurance policy taken out is appropriately tailored for a property which is predominantly residential, and they do not allow the choice of policy for this Property to be driven by the fact that the remainder of their portfolio is commercial. The tribunal considers that [NAME_32] have achieved this to date by only requiring the [NAME_15] to pay one third of the combined premium. However, if the informal agreement with [NAME_45] and [NAME_46] that they will meet two thirds of the premiums for the combined unit breaks down, [NAME_32] will need to find other ways of properly allowing for the predominantly residential nature of the Property when placing the building insurance. In those circumstances and depending on the rates available in the market, it may no longer be reasonable for [NAME_32] to take out a single policy which covers [ADDRESS] as well as the Property. Any change to the proportions payable under the Head-Lease would of course require the consent of all the parties to that Head-Lease, and cannot be mandated by the tribunal. Application under s.20C and refund of fees 68. At the end of the hearing, the Applicant made an application for a refund of the fees that he had paid in respect of the application/ hearing9. Having heard the submissions from the parties and taking into account the determinations above, and in particular the fact that [NAME_32] has essentially been successful on this application, the tribunal does not order any Respondent to refund any fees paid by the Applicant.

69. In the application form, the Applicant applied for an order under section 20C of the 1985 Act. Having heard the submissions from the parties and taking into account the determinations above, the tribunal determines that no such order shall be made. However it records that Mr [NAME_18] stated on behalf of [NAME_32] that no costs would be passed on to the [NAME_15] through the service charge. Name: Judge N Rushton QC Date: XX January 2021

Rights of appeal By rule 36(2) of the Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013, the tribunal is required to notify the parties about any right of appeal they may have.

9 The Tribunal Procedure (First-tier Tribunal) (Property Chamber) Rules 2013

17 If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber), then a written application for permission must be made to the First- tier Tribunal at the regional office which has been dealing with the case. The application for permission to appeal must arrive at the regional office within 28 days after the tribunal sends written reasons for the decision to the person making the application. If the application is not made within the 28-day time limit, such application must include a request for an extension of time and the reason for not complying with the 28-day time limit; the tribunal will then look at such reason(s) and decide whether to allow the application for permission to appeal to proceed, despite not being within the time limit. The application for permission to appeal must identify the decision of the tribunal to which it relates (i.e. give the date, the property and the case number), state the grounds of appeal and state the result the party making the application is seeking. If the tribunal refuses to grant permission to appeal, a further application for permission may be made to the Upper Tribunal (Lands Chamber).

18 Appendix of relevant legislation

Landlord and Tenant Act 1985 (as amended) Section 18 (1) In the following provisions of this Act "service charge" means an amount payable by a tenant of a dwelling as part of or in addition to the rent - (a) which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord's costs of management, and (b) the whole or part of which varies or may vary according to the relevant costs. (2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable. (3) For this purpose - (a) "costs" includes overheads, and (b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period. Section 19 (1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period - (a) only to the extent that they are reasonably incurred, and (b) where they are incurred on the provisions of services or the carrying out of works, only if the services or works are of a reasonable standard; and the amount payable shall be limited accordingly. (2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise. Section 27A (1) An application may be made to the appropriate tribunal for a determination whether a service charge is payable and, if it is, as to - (a) the person by whom it is payable, (b) the person to whom it is payable, (c) the amount which is payable,

19 (d) the date at or by which it is payable, and (e) the manner in which it is payable. (2) Subsection (1) applies whether or not any payment has been made. (3) An application may also be made to the appropriate tribunal for a determination whether, if costs were incurred for services, repairs, maintenance, improvements, insurance or management of any specified description, a service charge would be payable for the costs and, if it would, as to - (a) the person by whom it would be payable, (b) the person to whom it would be payable, (c) the amount which would be payable, (d) the date at or by which it would be payable, and (e) the manner in which it would be payable. (4) No application under subsection (1) or (3) may be made in respect of a matter which - (a) has been agreed or admitted by the tenant, (b) has been, or is to be, referred to arbitration pursuant to a post-dispute arbitration agreement to which the tenant is a party, (c) has been the subject of determination by a court, or (d) has been the subject of determination by an arbitral tribunal pursuant to a post-dispute arbitration agreement. (5) But the tenant is not to be taken to have agreed or admitted any matter by reason only of having made any payment. Section 20 (1) Where this section applies to any qualifying works or qualifying long term agreement, the relevant contributions of tenants are limited in accordance with subsection (6) or (7) (or both) unless the consultation requirements have been either— (a) complied with in relation to the works or agreement, or (b) dispensed with in relation to the works or agreement by (or on appeal from) the appropriate tribunal . (2) In this section “relevant contribution”, in relation to a tenant and any works or agreement, is the amount which he may be required under the terms of his lease to contribute (by the payment of service charges) to relevant costs incurred on carrying out the works or under the agreement. (3) This section applies to qualifying works if relevant costs incurred on carrying out the works exceed an appropriate amount. (4) The Secretary of State may by regulations provide that this section applies to a qualifying long term agreement—

20 (a) if relevant costs incurred under the agreement exceed an appropriate amount, or (b) if relevant costs incurred under the agreement during a period prescribed by the regulations exceed an appropriate amount. (5) An appropriate amount is an amount set by regulations made by the Secretary of State; and the regulations may make provision for either or both of the following to be an appropriate amount— (a) an amount prescribed by, or determined in accordance with, the regulations, and (b) an amount which results in the relevant contribution of any one or more tenants being an amount prescribed by, or determined in accordance with, the regulations. (6) Where an appropriate amount is set by virtue of paragraph (a) of subsection (5), the amount of the relevant costs incurred on carrying out the works or under the agreement which may be taken into account in determining the relevant contributions of tenants is limited to the appropriate amount. (7) Where an appropriate amount is set by virtue of paragraph (b) of that subsection, the amount of the relevant contribution of the tenant, or each of the tenants, whose relevant contribution would otherwise exceed the amount prescribed by, or determined in accordance with, the regulations is limited to the amount so prescribed or determined.] Section 20B (1) If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge is served on the tenant, then (subject to subsection (2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred. (2) Subsection (1) shall not apply if, within the period of 18 months beginning with the date when the relevant costs in question were incurred, the tenant was notified in writing that those costs had been incurred and that he would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge. Section 20C (1) A tenant may make an application for an order that all or any of the costs incurred, or to be incurred, by the landlord in connection with proceedings before a court, residential property tribunal or the Upper Tribunal, or in connection with arbitration proceedings, are

21 not to be regarded as relevant costs to be taken into account in determining the amount of any service charge payable by the tenant or any other person or persons specified in the application. (2) The application shall be made— (a) in the case of court proceedings, to the court before which the proceedings are taking place or, if the application is made after the proceedings are concluded, to a county court; (aa) in the case of proceedings before a residential property tribunal, to that tribunal; (b) in the case of proceedings before a residential property tribunal, to the tribunal before which the proceedings are taking place or, if the application is made after the proceedings are concluded, to any residential property tribunal; (c) in the case of proceedings before the Upper Tribunal, to the tribunal; (d) in the case of arbitration proceedings, to the arbitral tribunal or, if the application is made after the proceedings are concluded, to a county court. (3) The court or tribunal to which the application is made may make such order on the application as it considers just and equitable in the circumstances.