May the flat owner beware

Hunting for cheaper buildings insurance will be harder after a recent court ruling. Anne Spackman reports The flat owners were devastated by the judgment

Owners of flats might do well to spend the weekend casting an eye over the wording of their lease. What does it say about buildings insurance? It may say that the landlord (the lessor) is obliged to insure the property; it may say that a management company made up of the flat owners is obliged to insure but that the landlord has the right to say which insurance policy they must use. In either case, the flat owner should be aware of a recent court ruling.

The residents of 14 blocks of flats in the south of England, containing 821 homes, were in the latter position. The freeholds on their flats were sold by the developers, Tarmac and Rialto, to Sinclair Gardens Investments, one of the country's largest commercial landlords.

Sinclair Gardens Investments is owned by Peter Cutler and his wife. It has the freeholds of around 12,000 properties, producing ground rents of around £600,000 a year. Mr and Mrs Cutler also own Princess Insurance Agencies. "Both companies are in a strong financial position and together produce what I may describe as a comfortable income for Mr and Mrs Cutler," said Judge Paul Baker.

When Sinclair Gardens bought the freeholds of the 14 blocks in late 1992/early 1993 the buildings insurance was arranged through leading brokers. Most blocks were covered by a Sun Alliance policy which cost 50p per £1,000 insured.

When Sinclair Gardens took over it ordered that the insurance for the blocks should be placed through its agency, Princess, a tied agent of the Commercial Union. The cost of the policy was £1.05-£1.35 per £1,000 insured, more than double that of Sun Alliance. In addition, the Commercial Union policy had a higher excess on subsidence cover.

When they received the instruction to transfer the insurance, the managing agents for the flats wrote to Sinclair Gardens saying there was no justification for changing the arrangements. Sinclair Gardens wrote back to say that if the agents did not follow its instructions the management companies would be in breach of the lease.

This correspondence ended in court earlier this month with a ruling that Sinclair did have the right to control the insurance and that the increase in cost was reasonable. The flat owners have been given leave to appeal.

Judge Baker cited several reasons why it was good for Sinclair to control all its insurance. Mr Cutler could deal swiftly with claims and "obtain competitive premium rates by dint of the volume and spread of his business". He compared the rates obtained by Mr Cutler through Princess as favourable to so-called "book rates" quoted by large insurance firms.

The flat owners claimed the rates obtainable through Princess were only favourable to Mr Cutler. Princess was "shackled" to the Commercial Union, they argued. Because of the 23 per cent commission Princess was said to gain through the agreement, it had no incentive to keep the premium low. In fact it paid it to agree a high premium.

As for the "book rates", these were prices quoted by insurers to individual customers. They bore no relationship to the rates that could be negotiated if the insurance was properly brokered, they argued. John Ashcroft of the independent brokers CE Heath had told the court that any management company going through his firm could get the 50p rate because of CE Heath's power as a broker.

Judge Baker ruled that the flat owners' argument was too simplistic. He said they had only obtained such a good insurance deal because they were all acting through a managing agent with a large portfolio. Without such an agent they would be better off with Mr Cutler.

"Sinclair Gardens owns the freehold of 12,000 flats which gives Mr Cutler a negotiating strength which he uses in his dealings with Commercial Union," the judge said. "The nomination of tied agents can lead to abuse. Nevertheless, I am satisfied that themanagement of Princess and Sinclair Gardens provided by Mr Cutler and his staff both as regards negotiation of premiums and claims handling is beneficial to the lessees."

Those lessees were ordered to pay Sinclair Gardens' costs.

During the case, heard last October in the Mayor's and City of London county court, it emerged that Mr Cutler would have pulled out of buying the freeholds if he had not been guaranteed the right to control the insurance. A number of leading property lawyers say developers include this right in their leases as a way of enhancing the value of the freehold for a commercial landlord.

The flat owners were devastated by the judgment. Mr Cutler did not wish to comment. It remains to be seen whether it will deter a separate group of 50 north London leaseholders who are also taking Sinclair Gardens Investments to court over their insurance premiums.