The Government’s recent reform of the leasehold system has understandably focussed on ground rents, with new legislation introduced in June 2022 through the Leasehold Reform (Ground Rent) Act having effectively put an end to ground rents for most new long residential leases. However, widespread problems with service charges also need to be urgently addressed if the Government is to fulfil its pledge to make the system fairer for leaseholders.
Leaseholders across the country routinely engage in battles over excessive costs that are included in their service charge. A recent Tribunal victory for leaseholders in a Canary Wharf block of flats potentially sets an important new precedent for how insurance policies are chosen and what remuneration, if any, managing agents can claim in relation to procuring insurance-related services.
In December, residents of the Canary Riverside Estate in East London were successful in their battle against excessive service charges, with the Tribunal ruling they had been overcharged by more than £1.6 million, comprised of £1.5 million paid to a managing agent for insurance-related services and charges of a further £121,000 in associated taxes.
Buildings insurance is a particularly thorny issue, as leaseholders have no ability to procure their own insurance and must accept the policy selected by the freeholder or their managing agent. This in itself should not pose a serious problem, but in reality it leaves freeholders and their managing agents able to select insurance policies based on the commission they will receive for choosing the policy. Given that the insurance premium will be paid out of the service charge, many leaseholders feel that there is little incentive for freeholders to select the best value policy, and in fact they may have a vested interest in choosing more expensive policies with favourable rates of commission.
In the Canary Riverside East case, the Tribunal concluded that “all the work said to have been carried out by WMS [the Managing Agent] is more accurately described as the provision of services concerning management of the estate, including obtaining insurance”. As such the £1.6m paid to WMS by leaseholders was adjudged to be excessive and unreasonable.
While leaseholders do have access to insurance policy documents under the 1987 Act, a general lack of transparency about the way such agreements are negotiated and how such commission between managing agents and brokers is structured makes it difficult for leaseholders to prove that the commission payment has been the driving factor behind the decision to select a particular policy.
Although it is well known that insurance commission is allowed, the problem is not just with the behaviour of those more unscrupulous managing agents who prioritise their own remuneration over securing value for leaseholders, but one for the wider insurance industry to address.
The most cited justification for offering a commission is that valuable work is done in procuring the insurance policy by the managing agent which justifies the costs covered by the service charge. Clearly, the Tribunal’s ruling in the case of the Canary Wharf East estate found that the managing agent had not done valuable work. It is therefore potentially a highly significant victory for leaseholders in their long-running battle against excessive service charges, although it remains to be seen whether the freeholder will appeal against the decision and what the wider implications of the ruling will be.
Mark Chick, Partner and Head of the Landlord & Tenant team at Bishop & Sewell LLP
