Contingent buildings insurance – a salutary lesson
The following is based on a recent case that the Flaxmans team handled highlighting the risks involved when a leaseholder hands over the security of its investment in the lease to third parties over which it has no control.
PHOENIX is a property owner.
In January 2019 Phoenix purchased the freehold of twelve flats. The leaseholder arrangements were not without complication.
The chain was:
- The freeholder is the XYZ Property Group as evidenced by a head lease
- The freeholder has granted a long lease to Mr Jones, with permission to sub-let
- Mr Jones has, in turn, granted a long lease to Phoenix which also has permission to sub-let to individual tenants
The lease granted by Mr Jones (referred to as the Superior Landlord) to Phoenix made Phoenix responsible for its share of the insurance premium for the comprehensive policy covering the whole. The Underlease conferred an obligation to ensure that the superior landlord maintains insurance for the buildings and that the buildings are maintained in a good and tenantable condition.
There was a fire just a few days following the acquisition of the leases by Phoenix but it became clear that the buildings insurers were not going to indemnify its policyholder – for reasons that were not disclosed. It later became apparent that the Freeholder had failed to make a fair presentation of the risk to the insurer with the result that the policy was voided.
Action taken by Flaxmans
It was discovered that our client, Phoenix, had its own insurance that covered its fixtures and fittings with a sum insured of £20,000. Cover had been denied on a technicality but Flaxmans made representations on their behalf with the result that the sum insured was paid out in full.
The payment for fixtures and fittings provided Phoenix with a fighting fund, enabling Flaxmans to engage and collaborate with a specialist firm of solicitors with instructions to:
- Take what steps necessary to protect the solvency of Phoenix and, if necessary, to appoint administrators to deal with the interval during which repairs to the flats could not be completed
- Commence legal action against the Superior Landlord, Mr Jones (who, in turn, might need to issue proceedings against the freeholder, XYZ)
Flaxmans had established that both Mr Jones and XYZ had sufficient assets from which any judgment obtained in favour of Phoenix could be satisfied and we now expect a full recovery for Phoenix.
Lessons to Learn
How could the interests of Phoenix have been better protected? Just like most leaseholders, they put their faith in the Freeholder’s block policy and dutifully paid its proportion of the premium. But, in so doing, Phoenix did not appreciate that:
- They had no direct right of access to the block policy, and
- The effectiveness of the block policy, and the extent to which the Freeholder is diligent in transacting that insurance, is entirely outside the control of Phoenix
In effect, a leaseholder is handing over the security of its investment in the lease to third parties over which it has no control. That is no way to manage risk.
Flaxmans’ view is all leaseholders should therefore arrange a contingent buildings insurance in their own name. Some commercial combined policies already offer this cover, but many do not. Some conveyancing solicitors will recommend a one-off Contingent Building Indemnity insurance, but often only in cases where they have reason to doubt the suitability of the Freeholder’s insurance. But it isn’t possible to foresee whether or not a Freeholder is going to exercise sufficient care to ensure the buildings insurance operates properly.
Although contingent insurance is often available, it seems there is rarely a perceived need for it unless a conveyancing solicitor has reservations about the freeholder’s existing insurance arrangements.
Our view, underlined by this case study, is that a weakness in the insurance arrangements will often not come to light before it is too late to do anything about it. Although it is not current market practice for contingent cover to be put in place routinely, it should be on a broker’s checklist to demonstrate that the issue has been discussed with any leaseholder client and that a remedy has been offered.
Make sure the availability of contingency cover for leaseholders is always on your checklist. Don’t just leave it to your client’s solicitor.