Cost of terrorism insurance recoverable under service charge

explosion insuranceCan a landlord recover the cost of terrorism insurance as part of the service charge? In Qdime, the Upper Tribunal (Lands Chamber) decided that, on the terms of the relevant leases, the cost of insuring against a terrorist incident was recoverable.

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Qdime v Bath Building (Swindon) Management Company [2014] UKUT 0261 (LC)

In Qdime, a freehold building contained 13 flats. The tenants of 11 of the flats challenged the inclusion of the cost of terrorism insurance in the service charge. The landlord argued that the cost was recoverable as:

  • the wording of the leases obliged it to procure terrorism insurance as part of its obligations to insure the building, or alternatively
  • it had in any event exercised its reasonable discretion in procuring terrorism insurance in accordance with the terms of the leases

What did the leases say?

The leases were in common form. The landlord covenanted:

'To keep the Building including the Demised Premises insured to its full reinstatement value against loss or damage by fire and the usual comprehensive risks in accordance with the CML [Council of Mortgage Lenders] recommendations in that respect from time to time and such other risks as the Landlord may in its reasonable discretion think fit to insure against....'

The tenants covenanted to pay the costs of such an insurance policy and by virtue of another lease provision, ultimately paid them as part of the service charge as being expenses reasonably and properly incurred in each 'Maintenance Year'.

What did the Tribunal decide?

Meaning of 'explosion'

The CML guidance sets out a list of potentially insurable risks. The words 'terrorism' or 'terrorist activities' are not listed, but 'explosion' is. The landlord argued that the word 'explosion' should be given its ordinary meaning and so clearly included explosions caused by terrorism.

The Tribunal agreed. In addition, the obligation was to insure against explosion, but not against any particular method by which an explosion might be caused.

Discretion to insure against other risks

In case it was wrong in its conclusion, the Tribunal went on to consider whether the landlord had exercised its reasonable discretion in procuring terrorism insurance in accordance with the obligation to insure against such other risks as it thought fit.

It decided on the evidence that the landlord had exercised discretion in procuring the insurance. It also decided that the landlord's discretion had been exercised reasonably.

The Tribunal's only function was to conclude whether or not a lawful decision had been reached in the circumstances, and was within the range of reasonable decisions, as opposed to it being construed as a perverse decision. Exercising a discretion so as to accord with the RICS Code was a reasonable exercise of discretion. The Code provides that '...serious consideration should be given to the taking out of terrorism insurance'. It does not link the acquisition of insurance to the risk posed in any given case. The nature of insurance is that one is guarding against unpredictable and unexpected events. Guidance of this sort was to be afforded great respect and departures from its terms should be well-reasoned and justified.

What are the lessons for lawyers?

While the decision relates to residential premises, it is of potentially of wider application. Some tenants argue that property insurance is more for the benefit of the landlord than the tenant and that at least the tenant's contribution to the terrorism premium should be limited or capped in some way. Tenants' lawyers should explain to their clients that even if the lease does not oblige them specifically to pay the costs of insuring against terrorist acts, if they are obliged to pay for insurance against explosion, then this will include explosions caused by terrorism.

This article was written by Joanna Bhatia, solicitor in the Lexis®PSL Property team and was first published in  LexisPSL Property  on 16 June 2014.  Click here for a free one week trial of Lexis®PSL Property. 

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