As a tenant you might feel like your lease provides you with limited control over your landlord’s expenditure, such as the cost of the property’s insurance premium. However, if your lease is residential as opposed to commercial, then you are presented with statutory safeguards which aim to ensure fair service charges, which building insurance falls under.

Who Is Obliged to Pay the Property’s Insurance Premium?

It is common practice for a landlord to be required under the terms of the lease to obtain sufficient insurance in respect of the property. However, usually the tenant will then be required to reimburse this cost, notwithstanding the fact that the tenant might not necessarily have been consulted prior to the landlord obtaining the policy or the tenant having had the chance to do their own research into the insurance marketplace.

Moreover, a lease could contain a term expressly excluding the tenant from having the right to obtain their own insurance.

Overall, it is vital to check the terms of your lease to confirm the following:

a) Who has the right to obtain insurance?

b) Who is obliged to obtain the policy?

c) Most importantly, who is obliged to pay this cost once obtained?

Is The Insurance Premium Cost Reasonable?

Express Term in the Lease

A lease may contain a term expressly stating that the insurance policy obtained must be reasonable in price and/or stipulating how it is to be obtained. If the landlord does not uphold this obligation, you could argue that your lease has been breached. Sadly, not all leases will contain this level of protection explicitly and therefore, residential tenants may need to rely on statute to include implied terms into their lease.  

Statutory Rights and Implied Terms

Residential tenants have statutory rights in relation to insurance, including the ability to challenge the cost placed on them by their landlord in the First-tier Tribunal (Property Chamber). The regulation of the recovery of service charges is based on a test reasonableness as set out below.

The Statutory Provisions

The Landlord and Tenant Act 1985, Section 19(1) may provide a tenant with a legal basis to challenge the reasonableness of the property’s insurance premium.

• Under Section19(1)(a) an interim service charge must be “reasonable in amount”.
• Likewise, under Section19(1)(b) a charge relating to expenditure already undertaken requires the relevant insurance costs to have been “reasonably incurred”.

As explained earlier, building insurance usually falls within the definition of an interim service charge. Therefore, a landlord should try to ensure that the policy obtained is for a level of protection which is reasonably required. For example, if the landlord has included extra risks to the policy without any justification and in turn the premium increased, this could be interpreted as unreasonable.

Likewise, it’s possible that if the landlord fails to demonstrate that they did sufficient market research or an adequate comparison exercise of insurance policies, then the policy might be seen as being unreasonably incurred.

Unfortunately, the Landlord and Tenant Act 1985 provides no guidance as to what constitutes reasonably incurred. Consequently, tenants are required to rely on case law. Some of the relevant authorities are set out below.

Case Law

The test for reasonableness in Section 19(1) was dealt with in Hounslow v Waaler [2017] EWCA Civ 45. This reaffirmed a two-stage test as outlined below:

1. The landlord must show they adopted a reasonable decision-making process. I.e. did the landlord ‘test the market’ for alternative insurance premiums? AND
2. The outcome of their decision must have been reasonable. In effect, is the premium grossly out of line with the market norm?

Although Hounslow v Waaler is useful authority for supporting the idea that landlords should compare different insurance policies, Avon Estates (London) Ltd v Sinclair Gardens Investments (Kensington) Ltd [2013] UKUT 0264 is authority confirms that a landlord is not required to shop around to find the cheapest insurance policy. This case stated that if the insurance is obtained in the market and at arm’s length, the premium will generally be a reasonable one.

The case of Cos Services Ltd -v- Nicholson and Willans [2017] considered what is reasonable in relation to an insurance policy which covers multiple properties owned by a landlord. In this case, the tenant was able to provide evidence outlining that if their property was insured on a separate policy, the premium would have been significantly reduced. Thus, the Upper Tribunal held that the premium cost was not reasonably incurred. The Tribunal came to this conclusion using the following two-stage test:

1. Landlord’s decision to incur costs must be rational AND
2. Sum charged must be in all circumstances, a reasonable charge, taking into account terms of lease and liabilities to be insured, landlord’s explanation of the process of selecting policy and steps taken to assess the market, where comparable cheaper policy is genuinely comparable by reference to its terms.

As such, even if the lease does not expressly request consultation, this case can be relied upon to obtain evidence as to what steps were taken by your landlord to test the market. If the answer is not enough steps, then it might support your claim of unreasonableness.

How Can You Protect Yourself?

Firstly, review your lease to understand your obligations as a tenant and likewise, to obtain knowledge of what is expected from your landlord.

Secondly, if you are of the view that the insurance policy is unreasonable, obtain the relevant evidence to determine if a market comparison exercise was undertaken.

Thirdly, if you are unsatisfied with the evidence provided, it is possible to challenge the cost based on unreasonableness through a Tribunal. The Tribunal will consider the evidence presented and then decide on the matter. Please note that you can apply to the Tribunal for a decision on whether a service charge is reasonable, regardless of whether you have already paid the charge. Therefore, to mitigate the risk of the landlord bringing a claim against yourself due to non-payment, it may be wise to settle any payment requests whilst you consider if to apply to the Tribunal.