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    Flat Living
    Home » Landlord/Managing Agent Commission/Discounts on Insurance of Flats

    Landlord/Managing Agent Commission/Discounts on Insurance of Flats

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    By Flat Living on May 1, 2020 Buying Insurance for your Block

    Simon Tye, Legal Adviser at LEASE, shed some light on this sometimes complicated subject.

    Most leases of blocks purpose-built with flats, or buildings converted into flats, require the landlord to insure the whole building. The cost for doing so, usually the premium, is passed on to leaseholders via the service charge.

    In most cases, it is preferable that the whole building is insured with one insurer, rather than each flat taking out their own cover. The latter situation would complicate claims over which insurer pays and would mean the cover may differ between policies.

    If you have a mortgage, the UK Finance Association handbook requires that a residential lease should contain adequate provisions relating to the insurance of the building.

    The controversy arises where the landlord, or their managing agents, receive a commission, or a discount, from the insurer for taking out the policy with them. In some cases, the commission may be split between the insurance broker and the landlord, or with their agents.

    Discounts

    It would be rare for a lease to address specifically the question of commissions or discounts and whether these can be retained by the freeholder. 

    There have been several decisions of the First-tier Tribunal (Property Chamber) and of the Leasehold Valuation Tribunal on this issue and these have decided that profits, or bulk premium discounts, cannot be retained by landlords. The reasoning being that the discount is not a “relevant cost” that has been reasonably incurred under the Landlord & Tenant Act 1985. Examples: Melcombe Regis Court (LON/00BK/N51/2003/0109/01) & Vinery House, 154 Winchester Road Southampton (CHI/OOMS/LIS/2006/0006).

    Commisions

    The position as regards the commissions is more nuanced but, as most leases state that the leaseholder’s obligation is to pay its share of the actual cost, the obvious argument is that the commission should be deducted, if this has reduced the actual cost of insurance to the landlord.

    An argument that a landlord might make, to the contrary, is that if they are providing services for the insurer, such as claims handling or brokerage, then this should be allowable as a commission. 

    This was the argument made in the leading case of Williams v Southwark Borough Council (2001) 33 HLR 22. Here the freeholder was the council and the Court agreed that the majority of the commission was in return for providing these types of services and therefore reasonable.

    One of the main problems for leaseholders, in challenging the insurance commissions or discounts to the landlord or their agents is finding out if these have been paid in the first place.

    The RICS Service Charge Residential Management Code provides that any commission and other sources of income related to the insurance should be notified, annually, to the landlord and the leaseholders. It states that is best practice to include this information in the service charge accounts.

    The ARMA Consumer Charter & Standards Edition 2A, also provides that its members must not receive any income from any insurance premiums they, or any Associated Company, have dealt with other than to receive a Proportionate Charge for services provided.

    The RICS code and ARHM Code of Practice for England 23 (relating to retirement housing management) do carry weight and are admissible as evidence in relevant proceedings before a court or tribunal whether, or not, the agent in question has signed up to the code.  The Arma code applies to its members.

    Leaseholders have the right to request the landlord to allow them to inspect and take copies of the insurance policy. (Section 30A of the Landlord & Tenant Act 1985).Once they receive a copy of the policy, they then have a right to make a written request to inspect any accounts, receipts or other documents which provide evidence of payment of any premiums due under the policy in respect of the current and previous period of insurance.

    The government is presently looking at reform of Leasehold practices generally; it is possible that insurance commissions /discounts of this type will be one of the issues for reform.

    To find out more about LEASE, head to their website.

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    At Flat Living we provide information and guidance from leading industry contributors for leaseholders, residents management companies, residents associations, Right to Manage Companies, Freeholders, Landlords and Property Managing Agents.

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