A hidden extra for landlords : YOUR MONEY

Tenants should look out for excessive charges on building insurance, says Paul Gosling

THOUSANDS of leaseholders may be paying twice as much as they should for building insurance because of sharp practice by landlords.

The law allows freeholders to re-charge building insurance premiums for blocks of flats to leaseholders in the service charges. Many landlords, however, take advantage of this either by overcharging against the premiums they pay, or by contracting with high-premium insurers in return for extra commission.

"Some freeholders obtain the best possible deal on insurance, but charge leaseholders double that to make more money," says Steve Turner, superintendent of household policies at Sun Alliance. "If freeholders are giving false information we would prefer not to do business with them.

"Commission can be available to freeholders, and there is an element of the higher the premium, the higher the commission. We would not want to deal with a freeholder who asked for a higher premium."

Freeholders may also inflate the insurance re-charge to hide excessive service costs . In two recent cases where leaseholders complained to Sun Alliance, the building insurance re-charge turned out to include other service costs, such as gardening fees. The company advised the leaseholders on what the premiums should be, enabling them to negotiate the other charges.

"Commission from insurance companies is a substantial source of income for landlords," reports Peter Ward, a property partner with the solicitors, Trowers & Hamlins, and co-author of a book about leaseholders' rights.

James Crane, manager of the housing advice centre at Hounslow, Middlesex, says insurance overcharging is just one of many problems on service charges in blocks of flats. "Up to 50 per cent of the service charge may be in dispute," he says. "If leaseholders are in dispute we advise them always to pay the ground rent. They should work out the amount they are in dispute over, and pay the rest. Put the problem clearly in writing to the freeholder, keep a copy, and send it by recorded delivery."

Mr Crane advises leaseholders to keep their building society informed of any problem - otherwise the landlord may apply to the society for payment of arrears. "Building societies then whack off a cheque, and charge the person, whether the charge is reasonable or not."

It is also common, says Mr Crane, for leaseholders to be overcharged on building works, which can be of poor quality. Leaseholders are often unsure whether they can refuse to have work done or refuse to pay for expensive or bad work.

A freeholder may make only "reasonable" service charges to a leaseholder. "But what you or I or the people living there consider reasonable is not the same as what the court considers reasonable," Mr Crane says. "The court sees it as a business."

Mr Ward emphasises that leaseholders have the right to question the freeholder's choice of insurer and obtain information on the policy, including copying receipts for amounts paid. If the leaseholder is required to pay premiums direct to the insurer a county court order may be obtained requiring the landlord to change insurers.

If two-thirds of leaseholders agree, they can obtain a management audit of the landlord's accounts, which must be carried out by a qualified accountant or surveyor. The audit can check the accounts to establish whether service charges have been correctly calculated.

"It is worth doing as you may pick up items about which the landlord should have consulted you," Mr Crane says.

Jerry Fox, of the property managers Fineman Lever, warns leaseholders to look at value for money rather than just cost: "Insurance is a difficult area because sometimes it is hard to quantify what you are paying for. You can always judge by premiums, but it is the payout that counts. You can test the market, but are you comparing insurers in the same category?"

Mr Fox adds that premiums on flats should now be coming down, as more insurers are entering the market after several withdrew a couple of years ago.

Rob Eaves, of the Royal Institute of Chartered Surveyors, defends the landlord and manager. "I don't believe that a landlord taking a commission should affect what is provided any more than it does with an insurance broker. Most competent professionals would shop around before buying insurance. There is no deliberate policy of overcharging tenants."

Leaseholders who think their service charge is too high, or want their agreement with their landlord checked, may be able to obtain advice from a nearby housing advice centre. Otherwise, they can go to a citizens' advice bureau.