Qdime Limited v Bath Building Management Company Limited & Ors
A review of the Upper Tribunal decision
Terrorism Insurance – Can it form part of the service charge expenditure where there is no express provision within the lease?
A review of the Upper Tribunal decision in the matter of Qdime Limited v Bath Building (Swindon) Management Company Limited & Ors  UKUT 0261 (LC)
On 10 June 2014 the Upper Tribunal (Lands Chamber) gave its decision in an appeal by the landlord, Qdime Limited, from a decision of the Leasehold Valuation Tribunal dated 18 February 2013 in a case brought by the Respondents that the costs of insurance against a terrorist incident was not a recoverable head of expenditure.
In these troubled times not a day goes by without television news reporting incidences of terrorism around the world, or of the security services making arrests in an attempt to thwart terrorist attacks happening on UK soil. Indeed since September 2001 and July 2005 the idea of a large scale terrorist incident occurring in this country is not as remote an idea as it once was, and responsible landlords and managing agents have begun insuring developments against terrorist threats.
Whilst many newer leases expressly provide for a landlord to insure a building against the threat of terrorism, many older leases do not, as was the case in the leases of Bath Building, 40 Bath Road, Swindon, Wiltshire, SN1 4AT (“the Building”). The Building was constructed in the 1980s and the leases reflected the political situation of the day. As will be familiar to managing agents and landlords, the insurance provision of the leases was:
“To keep the Building including the Demised Premises insured to its full reinstatement value against loss or damage by fire and the usual comprehensive risks in accordance with the CML recommendations in that respect from time to time and such other risks as the Landlord may in its reasonable discretion think fit to insure against…”
Since 2010 the landlord had taken out terrorism insurance and recharged the same to the leaseholders within the service charges. The leaseholders challenged the expenditure on the basis that the leases did not expressly provide for the provision of terrorism insurance and accordingly it was not reasonable or payable by the leaseholders.
At first instance the LVT agreed with the submissions of the leaseholders, and found that the insurance premium should only extend to terrorism cover if the lease expressly or impliedly permits or requires it. The LVT went on to find (as surmised by the Upper Tribunal at paragraph 10(5-7) of the Decision) that:
- The covenant to insure against loss or damage by fire does not include terrorism, and the covenant to insure against usual comprehensive risks also does not include terrorism. Further, there was no evidence of any particular risk of terrorist activity;
- There was no evidence of any “conscious or express decision” to insure against terrorism, and the Landlord had not exercised any discretion to decide to insure the Building against terrorism for the purposes of paragraph 5 of schedule 6;
- If that interpretation is incorrect, then it is not a reasonable exercise of discretion to insure against terrorism given that there is no evidence that the Building is vulnerable to terrorism as defined in the Pool Re scheme, or that Swindon in general is vulnerable to terrorism.
In allowing the Appeal the Upper Tribunal found that the terrorism insurance was indeed a recoverable head of expenditure, and was therefore payable by the leaseholders.
When considering the construction of the leases, the Upper Tribunal agreed with the submissions of Counsel for the Landlord that the CML guidance at clause 6.14 sets out a list of potentially insurable risks and included within this list at 6.14.2 is “explosion”. Accordingly the Landlord is required to insure against the risk of “explosion”. Counsel for the Landlord submitted that the risk of “explosion” by definition includes “terrorism” or “terrorist activities” when regard is had to the ordinary meaning. Having regard to the various authorities referred to by Counsel, the Upper Tribunal concluded at paragraph 17 of the decision that “the LVT was incorrect in its analysis. On the Construction Issue the Lease requires the Landlord to obtain insurance against terrorism.”
As to the Landlord’s discretion to insure, the Upper Tribunal had regard to the RICS Code, which provides at paragraph 15.12 (Second Edition) that “...serious consideration should be given to the taking out of terrorism insurance”. In the circumstances the Upper Tribunal found at paragraph 39 “that the exercise of a discretion so as to accord with the RICS Code is a reasonable exercise of discretion”.
In the event that Landlords and Managing Agents find themselves in future with a challenge by leaseholders that terrorism insurance is not expressly provided for in a lease, if the lease provides for risks considered by the CML, or a reasonable discretion to insure such risks as landlord sees fit, Landlords and Managing Agents can satisfy themselves that terrorism insurance is indeed recoverable expenditure.
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In the event that Landlords are challenged by leaseholders that terrorism insurance is not expressly provided for in a lease, if the lease provides for risks considered by the CML, or a reasonable discretion to insure such risks as landlord sees fit, Landlords and Managing Agents can satisfy themselves that terrorism insurance is indeed recoverable expenditure.