Service Charge Disputes and Insurance

In both Commercial and Residential Leaseholds, the landlord will normally be obliged to insure the building and will be able to recover costs of such insurance via the service charge provisions. 

Many leases, especially older ones, can have confusing and contradictory provisions relating to obligations and service charge recovery and a careful reading of the leases is always required.  This was highlighted in the recent case of English Rose Estates Limited v Menon and Others (2022).

The Facts

The lessees were challenging the reasonableness of service charges and in particular the insurance premiums paid by the landlord.  The matter went to the First-Tier Property Tribunal (FTT) and the FTT found in favour of the lessees on the basis that on a correct construction of the lease, while the landlord could recover those matters set out in the service charge clause, this did not include insurance premiums paid, and therefore they were not recoverable. 

The landlord obviously felt this was a surprising and erroneous decision since in the past the landlord had been paying the insurance premiums and had levied a charge on the lessees which the lessees had paid.  The landlord argued that there was an estoppel by convention and/or that the lease should be “corrected by construction” such that the insurance obligations were read to fall within the service charge clause.

It is understandable that the landlords made this point because most landlords when drawing up a lease would wish to ensure they could recover insurance premiums paid and most tenants would expect to have to pay them.

There were also certain procedural elements to the appeal which are not relevant to this article.

The Decision

The Upper Tribunal held as follows:

1. The landlord had not suffered any prejudice capable of giving rise to an estoppel by convention.
2. The landlord’s argument that there should be a correction of the lease by construction was dismissed.  The Upper Tribunal held that it was a principal limited to cases where the wording of the lease resulted in irrational/arbitrary outcomes.  It indicated these would be typically where there was a mistake in a description or date or figure.  In this case, there is no evidence that the omission of service charges for the insurance premium from the service charge clause was a mistake. 

Conclusion

If a lease requires the landlord to insure but does not include within the service charge clause an ability for the landlord to recover the insurance premium, then the landlord will have to insure at its expense. 

Lessees need to check leases when being requested to make payments to see whether they actually have the obligation to make the payment.

Landlords when granting a lease or purchasing a freehold subject to leases need to check they have an ability to recover all expenses they incur. 

The fact that a lease imposes an obligation on the landlord to pay something which it cannot recover does not mean that the provisions of the lease can be construed as if it were. 

How Pinney Talfourd can help

Pinney Talfourd are experts in commercial and residential property litigation and can advise you on changes to the law. Please do not hesitate to contact either Stephen Eccles or Lisa Eastwood should you wish to discuss anything further.