Cos Services Ltd v (1) Irene M Nicholson (2) Wendy E Willans [2017] UKUT 0382 (LC)  

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On its face, this was a simple dispute about the cost of insuring a building.

On the landlord’s case, the following amounts were recoverable:

  • 2014/15: £12,598.20
  • 2015/16: £12,670.02
  • 2016/17: £11,150.02

Having heard witnesses on both sides: Mr John Blain FCII for the tenants, and Mr Ian Capjon, property manager for the landlord, the FTT determined that the landlord was only entitled to recover the following:

  • 2014/15: £2,803.10
  • 2015/16: £2,819.08
  • 2016/17: £3,017.65

Rather oddly, given that the lessees’ complaint appears to have related to the cost of the insurance, the FTT focused on whether the insurance premiums had been reasonably incurred.

Logic would suggest that it might have been more relevant to focus on whether the premiums were reasonable in amount, but that is not the only oddity in this case.

Permission to appeal

The other oddity was the route through which the FTT granted permission to appeal.

When the landlord applied for permission, it included a letter from its insurer. That letter caused the FTT to grant permission to appeal on the ground that, had the letter been in evidence before it, it might have reached a different decision.

I am not sure how the rules allow for permission to appeal to be granted on that basis.

In any event, the FTT directed that the appeal should be by way of re-hearing. The Upper Tribunal directed however, that the appeal should be by way of review of the FTT’s decision.

Ultimately, given that both sides attended the appeal with their witnesses, HHJ Stuart Bridge heard the appeal as a re-hearing.

It is enough to give us procedural geeks sleepless nights.

Chiltern Court

Ms Nicholson and Mrs Willans bought flat 15, Chiltern Court in Harpenden, Hertfordshire, in September 2014.

It is a well-maintained, purpose-built block, predicated on even numbers. There are:

  • 16 flats arranged over four storeys, and
  • Eight garages in two blocks.

Urbanpoint Property Management Ltd had managed Chiltern Court on behalf of the freeholder, Cos Services Ltd, since 1989.

The lease

The lease, granted on 29 September 1967, was for 999 years. An annual ground rent of £15 was payable.

It contained a covenant on the lessees’ part:

“not to use the flat or any part thereof or permit the same to be used other than as a private residence only in one occupation; and

“not during the last seven years of the said term to assign or underlet the flat or any part thereof without the consent in writing of the Lessor first obtained.”

The lessees were otherwise at liberty to dispose of the flat as they wished.

The insuring covenant

As is common in leases, this was a long one:

“At all times during the said term (unless such insurance shall be vitiated by any act or default of the Lessee or the owner Lessee or occupier of any other flat comprised in the Building) insure and keep insured the said Building against loss or damage by fire and such other risks (if any) as the Lessor thinks fit in some insurance office of repute in the full value thereof including insurance to cover architects’ and legal fees and two years rent and will whenever reasonably required produce to the Lessee the policy or policies of such insurance and the receipt for the last premium for the same and will in the event of the said Building being damaged or destroyed by fire as soon as reasonably practicable lay out the insurance moneys in the repair rebuilding or reinstatement of the said Building.”

The lessees of flat 15 were liable together to pay 1/16 of the insurance premium for the building.

The statutory framework

Just to refresh his (and our) memories, HHJ Bridge set out the relevant provisions of the 1985 Act: sections 18, 19 and 27A.

The Schedule to the 1985 Act

On the appeal, the lessees raised a further argument. They relied on the Schedule to the 1985 Act, which deals exclusively with insurance. Paragraph 8(2)(a) of the Schedule provides that the Tribunal may determine that:

  • “the insurance … available from the landlord’s nominated insurer for insuring the tenant’s dwelling is unsatisfactory in any respect, or
  • “the premiums payable in respect of any such insurance are excessive”.

If the Tribunal makes such a determination, paragraph 8(4) empowers it to direct the landlord to use a different insurer.

Unfortunately for the lessees however, as they only raised the point on the appeal, HHJ Bridge held that he had no power to decide it, as it had not been raised in front of the FTT.

The meaning of “reasonably incurred” costs

The FTT was not taken to any authorities on the meaning of reasonably incurred, but on the appeal the landlord, represented by Counsel, relied on Avon Estates (London) Ltd v Sinclair Gardens Investments (Kensington) Ltd [2013] UKUT 0264 (LC), which summarises the case law that has grown around the phrase.

Havenridge v Boston Dyers Ltd [1994] 2 EGLR 73

The leases here were of commercial property, so the 1985 Act did not apply.

HHJ Bridge adopted the summary of the Court of Appeal’s judgment set out in Woodfall on Landlord and Tenant at §7.193:

Where a lease contained an obligation on the landlord to insure the premises “in some insurance office of repute”, and an obligation on the tenants to pay “by way of further and additional rent all yearly or other sums as the Lessor shall from time to time properly expend or pay to any insurance company in respect of or for insuring and keeping insured the premises”, it was held that:

(1) “properly” did not mean “reasonably”;

(2) there was no implied term that the premium recoverable from the tenants should be fair and reasonable;

(3) the landlord could not recover in excess of the premium which he had paid and agreed to pay in the ordinary course of business;

(4) the fact that the landlord might have been able to obtain a lower premium elsewhere was not relevant; he was not obliged to shop around; and

(5) it was sufficient for the landlord to show either that the premium was representative of the market rate, or that the insurance contract was negotiated at arms’ length and in the market place.

Berrycroft Management Co Ltd v Sinclair Gardens Investments (Kensington) Ltd (1996) 29 HLR 444

Here the properties were residential.

  • The management company covenanted to insure blocks of flats occupied by tenants under long leases “in some insurance office of repute and if directed by the landlord through a company nominated by the landlord.”
  • Each tenant covenanted with the management company and the landlord to pay to the company a management charge which included a proportion of the cost of the insurance.

The Court of Appeal began by interpreting the lease. It held that the landlord enjoyed an unqualified right to nominate either the company or the agency through which the insurance was to be placed. The management company and the tenants were protected by the qualification that the insurance office should be of repute.

The Court then moved on to whether the costs had been reasonably incurred under the 1985 Act.

It noted that the judge below had:

  • Thoroughly reviewed the evidence,
  • Determined that the quotations for insurance obtained were competitive, being neither unreasonable nor excessive, and negotiated in the ordinary course of business, and
  • Concluded that the active and responsible management of the agency nominated by the landlord was, overall, beneficial to the tenants.

The tenants’ appeal was dismissed. The costs had not been unreasonably incurred.

Williams v Southwark Borough Council (2001) 33 HLR 22

Here, Lightman J held that the costs of insurance – specifically the commission given by the broker to the local authority – were not unreasonably incurred. He reached that conclusion on the wording of the lease.

Forcelux Ltd v Sweetman [2001] 2 EGLR 173

In the Lands Tribunal, Mr Paul Francis FRICS adjudicated on the cost of insurance that the landlord covenanted to provide. On the lessees’ case, it was too high.

As is often the case where a landlord owns a portfolio of properties, all were insured under one policy. The landlord gave evidence that the single policy was beneficial because:

  • The insurer agreed to provide cover, even if one of the properties was left out the policy schedule;
  • There were administrative savings in paying a single premium and of using a broker to deal with claims handling;
  • There was alternative accommodation cover, and
  • There were specially reduced subsidence excesses.

The landlord accepted that commercial “block policy” premiums could be much higher than for owner-occupiers, but argued that it was not possible to compare block with single property policies, because they were not the same.

In a decision that is often cited (by me and many others I suspect), Mr Francis said:

[39] In determining the issues regarding the insurance premiums and the cost of major works and their related consultancy and management charges, I consider, first, Mr Gallagher’s submissions as the interpretation of section 19(2A) of the 1985 Act, and specifically his argument that the section is not concerned with whether costs are “reasonable” but whether they are “reasonably incurred”.

In my judgment, his interpretation is correct, and is supported by the authorities quoted. The question I have to answer is not whether the expenditure for any particular service charge item was necessarily the cheapest available, but whether the charge that was made was reasonably incurred.

[40] But to answer that question, there are, in my judgment, two distinctly separate matters I have to consider.

First, the evidence, and from that whether the landlord’s actions were appropriate, and properly effected in accordance with the requirements of the lease, the RICS Code and the 1985 Act.

Second, whether the amount charged was reasonable in the light of that evidence. This second point is particularly important as, if that did not have to be considered, it would be open to any landlord to plead justification for any particular figure, on the grounds that the steps it took justified the expense, without properly testing the market.

[41] It has to be a question of degree, and while the appellant [sc. landlord] has submitted a well-reasoned and… in my view a correct interpretation of “reasonably incurred”, that cannot be a licence to charge a figure that is out of line with the market norm.

On the evidence before him, he held that the insurance cost was reasonably incurred.

Avon Estates

We leap forward to 2013. Here, the LVT determined that insurance costs had been reasonably incurred and the Upper Tribunal dismissed the tenants’ appeal.

It held that the LVT had properly applied the law, and that the landlord was not obliged to shop around to find the cheapest insurance.

In what might be described as a rather eyebrow-raising generalisation, it continued:

[30]… So long as the insurance is obtained in the market and at arm’s length then the premium is reasonably incurred.

There is nothing to suggest that the insurance was arranged otherwise than in the normal course of business, and the [tenants] did not seek to adduce evidence to support such a contention.

The [tenants’] complaint is that it might be possible to obtain a cheaper rate, but it is not for the landlord to establish (as has been expressly found in Berrycroft) that the insurance premium was the cheapest that could be found in order for the costs to have been reasonably incurred.

The words “properly testing the market” used by Mr Francis in Forcelux in 2001 do not in any way detract from the decisions of the Court of Appeal in Berrycroft and Havenridge that the landlord must prove either that the rate is representative of the market rate, or that the contract was negotiated at arm’s length and in the market-place.

The burdens

At this point in the appeal, HHJ Bridge took stock:

  • The burden of proving that costs had been reasonably incurred was borne by the landlord, but
  • There was some conflict between Forcelux and Avon Estates as to how a tribunal is to assess whether insurance costs have been “reasonably incurred”.

In Forcelux, the approach was cumulative:

  • First the Tribunal assessed the appropriateness and lawfulness of the landlord’s actions in claiming the costs, and
  • Secondly it assessed the reasonableness of the amount being claimed.

In Avon Estates however, the approach was in the alternative. The landlord had to prove one of two things. Either:

  • That the rate charged was representative of the market rate, or
  • That the contract was negotiated at arm’s length and in the market place.

According to Avon Estates, provided that the landlord had conducted the proper processes, an insurance premium that was itself unreasonably high in amount may nevertheless have been “reasonably incurred.”

The Waaler factor

The need to reconcile the conflict between Forcelux and Avon Estates was arguably superseded by the Court of Appeal’s judgment in Waaler v Hounslow LBC [2017] EWCA Civ 45, where the court specifically reviewed Forcelux.

Waaler is not about insurance premiums. It is however about whether costs of major works to the fabric of a local authority block were reasonably incurred.

In the Upper Tribunal, the tenant successfully argued that in deciding whether the incur costs, the local authority should have taken into account:

  • The length of the leases of the flats,
  • The leaseholders’ views of the works, and
  • The financial impact of the works upon them.

In the Court of Appeal, the landlord argued that if a landlord reasonably takes the view that his proposed course of action is a reasonable way of dealing with underlying defects, he need not take account of the tenants’ views and the costs will have been reasonably incurred.

The reasonableness of the landlord’s actions, so the argument went, should be judged against the reasonableness standard of Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, aka the Wednesbury principles.

Lewison LJ gave lengthy consideration to the meaning of “reasonably incurred” in the 1985 Act. He distinguished between the concepts of rationality and reasonableness.

Rationality

Dealing with rationality first, he held that if a contract – for example a lease – empowers one party to make a decision that will impose a financial liability on another, the empowered party must exercise its discretion rationally.

Effectively therefore the law implies into the contract a term that the decision-making process will be lawful and rational in the public law, Wednesbury sense. That means that

  • The decision will be made rationally (as well as in good faith) and consistently with its contractual purpose, and
  • That the result will not be so outrageous that no reasonable decision-maker could have reached it: see Braganza v BP Shipping Ltd [2015] UKSC 17.

Reasonably incurred

Rationality is not end of the story, as Lewison LJ explained further:

“[25] If the landlord incurs costs that are not justified by applying the test of rationality, then the costs in question will 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. It follows in my judgment that merely applying a rationality test would not give effect to the purpose of the legislation. The statutory test is whether the cost of the work is reasonably incurred.

“[26] Part of the context for deciding whether costs have been reasonably incurred is the fact that, in principle, the cost of the work is to be borne by the lessees…

“[27] This is emphasised by the definition of ‘relevant costs’ in section 18(3)(c) which ties the meaning of that expression to a service charge as defined by section 18(1). In other words no cost is a relevant cost unless it is part of an amount payable by a tenant. When any tribunal considers whether a cost has been reasonably incurred it will always have as its context that, if it has been reasonably incurred, the tenant will have to contribute to it.”

If it is to have any meaning, section 19 of the 1985 Act:

“must have been intended to protect the leaseholder against charges that were contractually recoverable otherwise it would serve little useful purpose.”

Turning then to Forcelux, the Court of Appeal observed that:

“It is true that the member considered the landlord’s decision-making process. But the important point is that he did not stop there. He also tested the outcome by reference to what the cost of cover was on the market. In other words the landlord’s decision-making process is not the only touchstone. The outcome was also “particularly important.”

At last HHJ Bridge had his answer:

“If, in determining whether a cost has been “reasonably incurred”, a tribunal is restricted to an examination of whether the landlord has acted rationally, section 19 will have little or no impact for the reasons identified by the Court of Appeal in Waaler.

“I agree”, he said, “with the Court of Appeal that this cannot have been the intention of Parliament when it enacted section 19 as it would add nothing to the protection of the tenant that existed previously.

“It must follow that the tribunal is 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 is, in all the circumstances, a reasonable charge. It is, as the Lands Tribunal identified in Forcelux, necessarily a two-stage test.”

That does not mean that the landlord must find the cheapest insurance premium on the market. It does not prevent a landlord from insuring its whole portfolio under one policy, but it does mean that the landlord:

  • Must consider the terms of the lease and the risks that are to be insured against;
  • Must be able to explain the process by which the particular policy and premium have been selected, with reference to the steps taken to assess the current market, and
  • Will need to produce evidence that a noticeably higher premium under a block policy provided “significant compensating advantages” to the lessees.

Equally, any comparable quotes obtained by tenants must be referable to the risks against which the landlord must insure under the lease: they must be genuinely like-for-like.

Back to the evidence

His review of the law complete, HHJ Bridge applied himself to the evidence before him.

The landlord’s evidence

The landlord’s property manager, Mr Iain Capjohn, gave the landlord’s live evidence. He explained:

  • The general position and conversations with the broker, Genavco Insurance Ltd, although he was not able to explain how the policy had been negotiated;
  • The premium had been affected by a very large claim in 2012-13;
  • The landlord’s brokers tested the market annually when the policy was due to be renewed, and advised if the policy should be changed. In 2014, for example, the policy had been moved from AXA to NIG;
  • A large, comprehensive block policy was required to take account of periods where flats may be unoccupied without the landlord’s knowledge, and to comply with the landlord’s insurance obligations;
  • No commission was paid to the managing agents, but the landlord derived a 10% commission from the brokers;
  • The landlord’s mainly long leasehold properties were sprinkled across the country, although Mr Capjohn did not know how many properties were covered by the policy;
  • The landlord wanted a “comprehensive all-cover policy because it did not want to have to deal with discrepancies and it was crucial that everything was covered”, and
  • There had been delays in responding to tenants’ enquiries because the brokers provided the answers to questions. There had been no effort on the landlord’s part to arrange for the tenants’ insurance witness, Mr Blain, to speak to the landlord’s brokers.

The landlord also produced two letters – one of which being the one that caused the FTT to give permission to appeal.

The first was from the broker, Genavco, which gave some background as to how the premium was decided.

The second was from NIG, the insurers, explaining what it described as the “essential protections” included in the policy in order to ensure the block policy covered all eventualities. They were:

  • Cover for sub-letting, irrespective of the state of knowledge of the landlord;
  • Maintaining cover where there was sub-letting, irrespective of the nature of the sub-let;
  • Maintaining cover if any part of the property was unoccupied or used for business purposes;
  • Maintaining cover even if payment of the premium was delayed, with an undertaking “to maintain insurance for the benefit of the freeholders in such event.”

NIG stated however that it expected to be notified as soon as the landlord became aware of any of the first three essential protections, and that once notified, it “reserve[d] the right to underwrite any change in risk when we are made aware.”

In relation to delays in payment, “fraud, criminal act, wilful or malicious act or neglect on the part of the freeholders” removed the protection.

The tenants’ evidence

Mr John Blain FCII gave evidence for the lessees. He did not do so as an expert, and it was accepted that he was not impartial, because he had acted in a professional capacity on behalf of Mrs Willans’s husband for over thirty years.

Even so, HHJ Bridge found him to be “an impressive and truthful witness who was clearly at a loss to explain how one insurer could be charging premiums over four times the amount of other insurers for what were similar albeit not identical terms”.

That was all the more so, given Mr Blain’s opinion that the block policy should produce lower premiums, rather than higher ones.

For balance, HHJ Bridge would have liked to have heard from a broker with relevant expertise on behalf of the landlord. Mr Capjon, the managing agent, could only give limited evidence, because he could not explain the mechanics for apportioning the premium between the landlord’s various properties.

Further, whilst the landlord’s case was built on the advantages of the essential protections, HHJ Bridge noted that those protections were not absolute. The insurer was entitled to withdraw cover, if not notified as soon as the landlord knew of a sub-letting/empty property/business use.

Further the Covea and AXA comparables produced by the tenants echoed the notification provisions relating to changes of tenancy or occupation. The differences between the NIG and Covea and AXA policies were therefore not that significant.

Conclusion

The significant difference between the cost of the landlord’s NIG policy and the cost of other, lower-cost premiums available on the open market on similar terms continued to mystify HHJ Bridge.

It was a mystery that the landlord had been wholly unable to explain. It had therefore “failed to satisfy the Tribunal that the amounts sought to be charged to the tenants were “reasonably incurred”.”

The appeal was therefore dismissed.

Observations

More mystery

It occurs to me that it might be said that section 19 repeats itself.

If the “reasonably incurred” test has two stages, of the which the second is directed at the reasonableness of the amount claimed, why does section 19 also provide a separate, single stage test relating solely to the reasonableness of the amount claimed? It is not the case that that the “reasonably incurred” test only applies to costs which the landlord has the discretion to incur.

The Schedule to the 1985 Act

The Schedule to the 1985 Act makes a rare, if fleeting appearance here. In my experience it is rarely relied upon, despite its useful provisions.

I cantered gently through it a couple of years ago in my observations to this post.

Rather than repeat that exercise, I think that some expansion on Southwark v Williams is called for, raising as it does the “c” word – commission.

Insurance and commissions

From HHJ Bridge’s decision, it would appear that Lightman J accepted that the local authority was entitled to 10% commission as a matter of, well, just what happens when a landlord insures.

The position in Williams however was that the insurer handed over the claims handling function to the local authority.

In those circumstances, the court determined that the commission was an amount of money “reasonably incurred” for the provision of that service. In other words, the local authority earned the commission by doing something that the insurer would otherwise have been obliged to do itself.

If the right (or not) to retain insurance commissions are your bag, you might like to read this decision by HHJ Huskinson.

It seems to me that there are arguments – even without diving into the law of trusts – quite clearly against landlords being entitled to retain a commission simply because they have placed insurance with a particular insurer.

One day, I have no doubt, there will be a case that unpacks the whole commission caboodle.

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