60% of leaseholders overcharged
A recent article in Property Week highlights claims by a London property manager that up to 60% of leaseholders and this includes residential landlords, are being ‘ripped off’ and paying inflated building insurance premiums.
Chainbow,which manages more than 77 sites that are home to 3,600 leaseholders across the south-east, said building insurance scams are one of the most widespread examples of malpractice by managing agents and freeholders.
Many landlords, particularly those in large metropolitan areas own leasehold properties where the freeholder often pays the landlord block insurance and requires the leaseholder to then pay a service charge in which the building insurance is included.
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Roger Southam, Chainbow chairman and a member of a RICS working group, said: ‘Around 60% of residential blocks are part of building insurance scams. The reason why no one bothers to highlight them is usually because there is a lot of money to be made.’
He added: ‘If an insurer says he can charge a certain amount in premiums but will give the freeholder a percentage of that sum for appointing a particular insurance company, both parties win and the leaseholders are none the wiser.’
Property Hawk investigates
Property Hawk could not resist the temptation to investigate further into this sharp practice affecting landlords.
The difficulty for many landlords that think they may being ‘ripped off’ by their freeholder/landlord is that the exact amount paid in landlord insurance by the freeholder is often hidden along with any ‘kick back’ or commission paid to the freeholder by the landlord insurance company.
Who is responsible for insuring a residential block varies and will depend on the terms of the lease. A landlord should therefore start by investigating their lease. It may be that the leaseholder or the freeholder are responsible for insuring the block or it could be that the leaseholder may have to use landlord insurance nominated by the freeholder.
The common position according to the Leaseholder Advisory Service is for the freeholder to insure the block and then charge the leaseholder a service or management charge. The leaseholder is billed according to the apportionment clause.
Where a landlord is not happy with the scale of the charges they should get the freeholder or management company to provide a copy of the landlord insurance policy. Whether the landlord does this directly will depend on the lease obligations. Some leases require a landlord if requested by the tenant to do so, others do not. If the landlord fails to do this when required by the lease, then they are in breach of their lease obligations.
Where the freeholder/landlord refuses to provide details of the block policy there is a statutory provision in the Landlord & Tenant Act 85 schedule 2 which means that the leaseholder can request a provisional summary of the landlord block insurance.
The freeholder if requested then has to provide details of the amount insured against, the name of insurers and the risk insured against. They must also confirm that the insurance has been paid.
The leaseholder can then check with the landlord block insurer what is covered. A landlord should note that sometimes there will be problems in confirming the information from the landlord insurer because of the data protection act.
These details however may not tell the landlord if there is any or the amount of ‘kick back’ paid to the freeholder. Under the Landlord and Tenant Act (LTA) the leaseholder who puts in a written request to the freeholder must have a reply within 6 month from the freeholder/landlord. This allows the leaseholder to assess the landlord insurance policy and any related accounts. It should allow the leaseholder to see whether there is any ‘kickback’ paid to the freeholder by the landlord insurance company.
The LTA 85 s 19 requires that all charges made to the landlord/freeholder are reasonable.
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Once the leaseholder has information relating to the landlord insurance policy they are then advised to phone round for ‘like for like’ quote using the risks in the existing landlords insurance policy. If they find a handful of insurers at 20% or less than the landlord’s policy then they should go back to the freeholder to request an adjustment or threaten them with going to the Leasehold Valuation Tribunal (LVT) to challenge the reasonableness of the landlord insurance in the service charge.
If the LVT finds in favour of the leaseholder then the LVT could require that the landlord/freeholder credit the leaseholder with any over payments. There is a possibility that where the overcharging has continued for many years that this could amount to thousands of pounds over the course of the lease.
Currently there is a variety of opinions on whether any claims under the LTA are restricted by the statute of limitations restricting the LVT to act retrospectively only up to 6 years. Potentially a leaseholder could claim back decades of inflated insurance costs.
RICS consultation into unfair charging
Chainbow has made its claims as the RICS launched a consultation into the transparency in professional fees charged on property transactions and services.
The consultation will cover service charges in leasehold property; commission on letting renewals; commission on parts of home information packs such as energy performance certificates; valuation fees; and arrangement of fees for security loan valuations.
Central to the investigation, however, is the declaration of insurance remuneration and commissions.
Chris Horne Editor of Property Hawk the UK’s leading website for residential landlords comments:
“It was apparent to us after a recent feature on ground rents that the flip side for landlords of potentially becoming a freeholder is that for many landlords who are also leaseholder is that they are potentially being ‘ripped off’ on the amount of landlord insurance they are charged.”
“Surely landlords and leaseholders should have greater protection from this sharp practice”
Chainbow suggested that, in the absence of protective legislation, the only way leaseholders in a property can avoid being exploited is by joining forces and establishing a right-to-manage company, which would have stronger negotiating clout with agents and freeholders.
Roger Southam Chairman of Chainbow said the potential outcome of the consultation is industry lobbying of the Financial Services Authority for tighter regulation or the government to require greater disclosure of information by agents and insurers.
The RICS said it would consult industry and consumer groups and convene select committees to examine evidence of malpractice.
The deadline for responses to the RICS is 17 July.