Service Charge: JB Leitch successfully defends s.27A application made by leaseholders challenging increased insurance premium

JB Leitch has successfully defended an application made in the First-tier Tribunal by leaseholders for determination as to the reasonableness of service charges following an increase in the insurance premium implemented as a result of building safety issues at a different residential block on the same estate.

The background

JB Leitch defended this application on behalf of our management company client. The subject development comprised a group of residential blocks created through a combination of converted old buildings and purpose-built new buildings. Together, the development contains over 200 flats across 4 buildings.

The applicant leaseholders in this application occupy flats in a converted Grade II listed building on the development. The respondent Management Company is required to provide services under the leases, and the leaseholders are required to pay service charges in respect of the respondent’s costs.

The applicants disputed the service charge apportionments in respect of insurance costs, arguing that it was not reasonable for insurance costs for the whole estate to be combined and apportioned according to the floorspace of their flats.

Further, it was argued by the applicants that it was not reasonable for them to contribute to the full costs of insurance for the estate because costs had risen considerably as a result of an alleged failure on the part of the management company to comply with its repair and maintenance obligations in respect of external wall cladding on a different building on the estate which had been identified as presenting a building safety risk. The leaseholders argued that appropriate service charges should be paid according to the benefit received by each leaseholder.

The applicants argued that insurance costs had not been ‘reasonably incurred’. The respondent disputed that there had been any breach of covenant, and stated that its apportionment had been calculated fairly and reasonably as there were no other realistic means of apportioning insurance costs between all leaseholders.

The FTT was asked to determine whether:

1. The respondent had complied with the lease terms in calculating the leaseholders’ service charge contributions in respect of insurance costs;
2. The respondent had breached its lease obligations such that service charge costs were not reasonably incurred;
3. The respondent was able to recover its costs of the application through the service charge; and
4. The FTT should limit or remove any administration charges sought by the respondent from the second applicant.

The decision

The FTT found in favour of the respondent, agreeing that the service charges demanded were fair and reasonable. Determining each point:

1. It was not feasible for the respondent to apportion the service charges on a building-by-building basis without risking legal challenge from other leaseholders on the estate. The impact of risk on the premium could not be identified or determined by either party, meaning that apportionments would still not be made according to risk. The respondent chose to use a reasonable, and common, method of apportionment.

The FTT’s role was to consider whether the respondent had followed the provisions of the lease, rather than to impose its own view of what constitutes a ‘reasonable apportionment’. Here, the lease stated that service charges should be ‘a fair and reasonable proportion’ of the respondent’s costs. The FTT was therefore required only to consider whether the apportionment was ‘fair and reasonable’.

The respondent was required to insure all buildings on the estate. The leaseholders’ building was connected to the building containing unsafe cladding, albeit below ground, and was in close proximity such that the fire and insurance risk was greater. As a result, the insurer would not provide building-specific risk breakdowns.

2. Insurance costs were reasonably incurred according to the respondent’s contractual obligations, and could not be shown to be excessive. The applicants were unable to evidence what the insurance premiums may have been had the cladding issues at the second building been remediated sooner.

The respondent argued that it had acted within a reasonable time in all circumstances. The FTT stated in its judgment that “Whilst delays…must certainly have been highly frustrating for the Applicants, they have not been able to show clearly how the Respondent should in practice have acted sooner.”

3. The FTT could find no reason for the respondent to cover its own legal costs in dealing with the application, and refused the applicants’ application to exclude such costs from recovery through the service charge.
4. It was not clear whether any administration charges were demanded from the second applicant by the respondent for late payment and, on the same basis as (3) above, the FTT refused the applicants’ application to reduce or extinguish any administration charges.

Final thoughts

JB Leitch is pleased to have successfully defended this application on behalf of our management company client, permitting the client to apply reasonable methods of apportionment for insurance costs and to recover the costs of handling the application through the service charge.

The FTT’s role was to consider what constituted a ‘fair and reasonable’ proportion of the service charge, applying the leases’ terminology, and was not presented with alternative evidence by the applicants to show that the apportionment was not fair and reasonable, nor that the costs were excessive.