Insurance considerations for letting a flat

Many people decide to let leasehold flats. In many cases as buy to let investments but also letting occurs by so called incidental landlords, i.e. those who have met a potential life partner with whom they have moved in or those who have temporally relocated because of work. Whatever the reason for letting a flat, there are some insurance considerations to be aware of.

Firstly let’s assume that the lease allows you to let, or that if it requires the freeholders consent, that consent has been obtained. Many leases state that letting is only permitted with the freeholder’s consent, not to be reasonably withheld. One reason that a freeholder may withhold permission could be in respect of the insurance arrangements. The block policy may have limitations on letting which need to be overcome before consent can be granted. Typically these are due to poorly constructed block polices limiting the percentage of let flats or the types of tenants permissible. In respect of type of tenant there is a significant word of caution for lessees letting flats. The lease will almost undoubtedly hold the lessee reasonable for invalidating the block policy and therefore a lessee must ensure they won’t do this. So do check your proposed rental will not invalidate the block policy.

Many lessees may decide not to take a policy to cover the contents of a let flat on the assumption that there are not enough contents to protect. But you should remember that carpets, loose floor coverings, curtains, blinds and all freestanding white goods are considered contents, so there might be more than you realise. But more importantly taking an appropriate landlords policy will normally provide liability cover for the landlord (the lessee who is renting the flat)! This cover is not required by law but should be a must have purchase as the liability section of the block policy is likely to not properly protect the lessee renting their flat.

The controversial question is that of loss of rent should the flat be rendered uninhabitable by an insured event such as fire or a large water escape. Personally I believe this should be a standard cover for all block policies (unless the lease prohibits letting) but not all share my view.

Some freeholders are of the mind that anyone who lets their flat is doing so for commercial gain and as such other lessees should not be contributing towards the cost of insuring their loss of rent. There is no doubt that by not giving this cover then a freeholder with a large portfolio will make savings on claims costs when rented flats are uninhabitable.

Divided Market
Personally I feel this is inappropriate as this is not fair on incidental landlords and why should anyone letting their flat be paying premium towards alternative accommodation for owner occupied lessees if they are not also receiving cover for the financial costs of their flat being uninhabitable. If anything paying loss of rent is often cheaper than alternative accommodation.

As the market is divided on this matter then the only option for a lessee is to first check if the freeholders block policy covers loss of rent by lessee following an insured event and if it does not to consider arranging appropriate insurance elsewhere. This is an option that can be included on some landlords tenants policies or there are specific policies in the market.

Whilst on the subject of loss of rent one of the common misconceptions by lessees is the understanding of loss of rent cover. If the block policy covers loss of rent then this is only whilst the flat is uninhabitable. It doesn’t cover loss of rent by the lessees tenant defaulting on their rent which is a separate subject. Insurance cover is available for tenant default and this is available as an extension on some landlords policies. Extreme caution has to be exercised with this cover as most policies will require the default to be notified in a fairly short timeframe to the insurer and failure to do such will invalidate a claim.

What happens in a major event?
It is worth considering what happens when a let flat is badly damaged by a major event such as fire. Probably initially the block insurers loss adjuster will arrange emergency hotel accommodation until they can establish the contractual relationship of all the affected residents. Tenants of lessees will normally be on a short term assured tenancy agreement and the standard form is that the contract is broken when the flat becomes uninhabitable by an insured event. In practice, this means that the contract is broken and the lessee renting the flat returns the deposit to their tenant. If insurance cover is in place by the block policy or a suitable landlords policy the tenant receives loss of rent they were receiving subject to the policy limits.

The tenant of the lessee may not be able to rent another flat at the same rate and any difference in rent incurred by the tenant will not be met by either the block policy or the lessee’s landlords policy. Regrettably with rents rising so rapidly this is an increasing problem and the bad news for tenants doesn’t end there in the event of a major loss. Very few tenants arrange insurance for their contents making the financial hardship even greater when it all goes wrong.

Ultimately lessees letting their flats have to be careful to ensure they have the appropriate insurance in place and failure to do so could prove very costly.

Paul Robertson is MD of Midway Insurance and 1st Sure Flats Tel: 0345 370 2842