Tenant Successfully Challenges Unreasonable Service Charges for Buildings Insurance

OUTCOME: Allowed

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FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY) Case reference : LON/00AM/LSC/2025/0632 Property : /LSC/2025/0632 Applicants : [redacted] (2) [COUNSEL] : In person Respondents : [redacted] (2) [COUNSEL] : [COMPANY], Managing Agent Type of [NAME] : For the determination of the liability to pay service charges under section 27A of the Landlord and Tenant Act 1985 Tribunal members : Tribunal Judge I [NAME] of decision : 16 July 2025

DECISION

2 Background

1. This is an [NAME] made by the Applicants for a determination pursuant to section 27A of the Landlord and Tenant Act 1985 (as amended) (“the Act”) of their liability to pay and/or the reasonableness of the [NAME] premiums demanded by the Respondents for the years ended 24 December 2022/23 and 24 December 2023/24 respectively.

2. The Applicants are the joint leaseholders of the First and [ADDRESS], [POSTCODE] (“the property”). It is one of two flats in a converted residential building. The other flat is a basement flat owned and rented by the Respondents, who are the freeholders.

3. The original lease of the property was dated 31 October 1988, but a new lease was granted on 21 November 2021 made between the Respondents and [NAME] (“the lease”) on largely the same terms as the original lease. The Applicants took an assignment of the lease from Mr [NAME] on 21 June 2023.

4. By clause 2(2) of the lease the lessee covenanted to: “…repay to the Lessor, the amount or amounts from time to time expended by the Lessor in effecting and maintaining insurance on the demised premises at the times and in the manner aforesaid” 5. The service charge payable by the lessee under the lease is comprised of a contribution for the above [NAME] and for the maintenance of the building. This is apportioned equally between the two flats in the building.

6. The [NAME] premiums demanded by the Respondents for the years ended 2022/23 and 2023/24 are £6,250 and £6,300 respectively. These are dealt with in turn below.

7. The Applicants primary contention is that the premiums are unreasonable and made this [NAME] dated 24 December 2024 seeking a determination in those terms. On 17 February 2025, the Tribunal issued directions, which have been complied with by the parties. Relevant Law

8. This is set out in the Appendix annexed hereto.

3 Decision 9. As directed, the determination of the [NAME] was made solely on the basis of the statements of cases and disclosure filed and served by the parties and contained in the hearing bundle comprised of 358 pages. There was no oral hearing, as none had been requested by either party. [NAME] Y/E: 24 December 2023 10. As stated earlier, the [NAME] demanded by the Respondents was £6,250. The policy was dated 11 December 2023 and expired on 10 December 2024. The contribution sought from the Applicants is £3,125, being one half of the cost.

11. It appears that prior to the Applicants taking an assignment of the lease on 21 June 2023, the previous lessee, Mr [NAME], had paid the sum of £3,154.44 on account in respect of the estimated maintenance and insurance costs for this service charge year. The estimated service charge for the maintenance costs was £1,023.30, which is not challenged by the Applicants.

12. The Applicants’ case is that the [NAME] premium demanded by the Respondent is unreasonable on the basis they have in fact obtained a comparative insurance quote in the sum of £3,559.79 from [COMPANY] dated 26 November 2024. Therefore, their liability should be £1,779.90 for the [NAME] premium for this year.

13. The Applicants submit that the test of reasonableness within the meaning of section 19 of the Act propounded in the case of [COMPANY] v Sweetman [2001] 2 EGLR 173 had not been met.

14. In that case, it was held that the there is a two-stage test to be satisfied before the definition of reasonableness under section 19 was met. Firstly, whether the landlord’s decision [NAME] process could be regarded as being reasonable (“stage one”). Secondly, whether the sum charged could be regarded as reasonable in the light of market evidence (“stage two”).

15. The Applicants argued that in relation to the first stage, the Respondents had only approached one insurance broker, [COMPANY], to obtain a quote, which resulted in a premium that was over 230% more than the previous year. No other insurance brokers had been approached for a comparative quote. This was in breach of section 12.5 of the RICS Management Code.

4 16. As to the second stage, the Applicants point to the fact that they had conducted a search of the market and were able to obtain the significantly cheaper quote for £3,559.79.

17. Specifically, in relation to the reasonableness of insurance costs, the Applicants rely on the case of [COMPANY] v Nicholson [2017] UKUT 382 (LC) where it was held that the burden fell on the landlord to justify the cost of a materially more expensive policy.

18. As to stage one, the Tribunal found that the Respondents had not in fact obtained quotes from two insurance brokers as asserted in paragraph 5 of their statement of case. Appendix 7 to the Respondents’ statement of case is no more than a series of email exchanges with [NAME], which did not result in an insurance quote being obtained.

19. Appendix 5 is simply an email from [COMPANY] dated 22 February 2024 confirming that it carried out a remarketing exercise, but no detail about this was provided. The Tribunal, therefore, found that the Respondents had properly tested the market in relation to the insurance quote it had obtained for this year. Indeed, the Applicants were able to obtain a comparative quote for £3,559.79, which lends support to the Tribunal’s finding that the Respondents had not tested the market properly.

20. As to stage two, the Tribunal found that the cost of the insurance for this year was not reasonable because the Applicants were able to obtain the insurance quote above. There is no suggestion by the Respondents that the level of cover provided was not obtained on a like for like basis. Moreover, the significantly cheaper quote obtained by the Applicants for the following year was in fact adopted by the Respondents. The inference to be drawn is that the level of cover provided by these quotes was adequate for the Respondents. There was no basis for the Respondents’ assertion that the Applicants were able to obtain a cheaper quote because they are leaseholders living in the property.

21. The Tribunal noted that the Respondents also required any insurance policy to cover the loss of rent that might occur in relation to the letting of the basement flat. The Tribunal was satisfied that scope of clause 2(2) in the lease does not provide for this cover, as it does not relate to insuring the building per se. This inevitably would result in any insurance quote being higher than is required and, therefore, unreasonable.

22.

Accordingly, the Tribunal was satisfied that the Respondents had not discharged the evidential burden placed on them to demonstrate that the significantly higher insurance premium for this year was justified.

5 23. The Tribunal concluded that the insurance premium of £6,250 demanded by the Respondents for this service charge year was unreasonable. A reasonable premium was the quote of £3,125 obtained by the Applicants, for which their 50% contribution is £1,779.90. Y/E: 24 December 2024 24. The insurance cost claimed by the Respondents for this period is from 25 December 2023 to 24 December 2024. However, policy for this year is from 12 December 2024 to 11 December 2025. This discrepancy occurred because, apparently, the Respondents managing agent had served a demand on the Respondents in advance on 8 January 2024, which included an estimated building insurance premium of £6,300.

25. For the avoidance of doubt, the Tribunal was satisfied that clause 2(2) in the lease does not require the lessee to pay a service charge contribution for the estimated cost of [NAME]. The express wording of the clause is quite clear. The requirement is only to pay a contribution for any sums “…expended by the Lessor in effecting and maintaining insurance…”. In other words, the lessor can only make a demand for a contribution from the lessee once the cost of insuring the building has been incurred and not in advance as the Respondents managing agent purported to do. In any event, this point appears to be conceded in paragraph 10 in the Respondents’ statement of case.

26. In short, the Applicants were able to obtain an insurance quote of £2,282.37 for this year, which was accepted by the Respondents, and the policy was implemented. The Applicants 50% contribution of £1,141.19 was paid by them on 18 December 2024.

27. By reason of the Respondents acceptance of the [NAME] quote, it follows that the Tribunal was bound to find the premium of £2,282.37 is reasonable. As the Applicants have paid their half share contribution, no further amount is payable by them in relation to this item of expenditure. Costs & Fees 28. The applications under section 20C of the Act and paragraph 5A of Schedule 11 to Commonhold and Leasehold Reform Act 2002 can be considered together because the test for [NAME] or not [NAME] any such orders is essentially the same, namely, whether it is just and equitable to do so.

29. The applications relate to any costs incurred by the Respondents in these proceedings that may be claimed either through the service charge account or separately as administration charges. It is not known if the Respondents have incurred any such costs.

6 30. In any event, given that the [NAME] has succeeded entirely, the Tribunal makes orders under section 20C and under paragraph 5A to Schedule 11 that the Respondents are not entitled to recover any costs they may have incurred in these proceedings against the Applicants. This is on the basis that it would not be just and equitable to do so. Not to make such order would potentially make the Applicants liable for the Respondents costs even though their [NAME] had succeeded.

31. As to the fees of £110 paid for the [NAME] by the Applicants, for the same reasons, the Tribunal makes an order under Regulation 9 (below) for these to be reimbursed to them by the Respondents. The Applicants can either elect for this sum to be credited to their service charge account or paid separately to them not less than 28 days from the date this decision is issued to the parties.

Name: Tribunal Judge I [NAME]: 16 July 2025

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. If a party wishes to appeal this decision to the Upper Tribunal (Lands Chamber), then a written [NAME] for permission must be made to the First-tier Tribunal at the regional office which has been dealing with the case. The [NAME] for permission to appeal must arrive at the regional office within 28 days after the tribunal sends written reasons for the decision to the [NAME]. If the [NAME] is not made within the 28-day time limit, such [NAME] 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 [NAME] for permission to appeal to proceed, despite not being within the time limit. The [NAME] 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 [NAME] the [NAME] is seeking. If the tribunal refuses to grant permission to appeal, a further [NAME] for permission may be made to the Upper Tribunal (Lands Chamber).

7

Appendix of relevant legislation

Landlord and Tenant Act 1985 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 [NAME] may be made to a leasehold valuation 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,

8 (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 [NAME] may also be made to a leasehold valuation 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 [NAME] 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 20C (1) A tenant may make an [NAME] 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 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 [NAME]. (2) The [NAME] shall be made— (a) in the case of court proceedings, to the court before which the proceedings are taking place or, if the [NAME] 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 [NAME] is made after the proceedings are concluded, to any residential property tribunal;

9 (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 [NAME] is made after the proceedings are concluded, to a county court. (3) The court or tribunal to which the [NAME] is made may make such order on the [NAME] as it considers just and equitable in the circumstances. Commonhold and Leasehold Reform Act 2002 Schedule 11, paragraph 5A (1) A tenant of a dwelling in England may apply to the relevant court or tribunal for an order reducing or extinguishing the tenant’s liability to pay a particular administration charge in respect of litigation costs.

(2) The relevant court or tribunal may make whatever order on the [NAME] it considers to be just and equitable.

(3) …

Leasehold Valuation Tribunals (Fees)(England) Regulations 2003 Regulation 9 (1) Subject to paragraph (2), in relation to any proceedings in respect of which a fee is payable under these Regulations a tribunal may require any party to the proceedings to reimburse any other party to the proceedings for the whole or part of any fees paid by him in respect of the proceedings. (2) A tribunal shall not require a party to make such reimbursement if, at the time the tribunal is considering whether or not to do so, the tribunal is satisfied that the party is in receipt of any of the benefits, the allowance or a certificate mentioned in regulation 8(1).