Landlords beware, tenants be aware

Incurring costs and then charging a tenant

A recent case on the reasonableness of insurance premiums charged to residential tenants may have implications for the way in which the courts will approach the question of reasonably incurred costs in commercial leases.

In the case of Cos Services Ltd v Nicholson & Willans, the Upper Tribunal considered whether insurance premiums incurred by a landlord and then charged to its tenants had been “reasonably incurred” within the meaning of section 19 (1) of the Landlord and Tenant Act 1985.

Over a three year period the landlord had spent approximately £12,500, £12,500 and £13,500 on insurance premiums in relation to a block of sixteen flats with garages, as part of a block policy covering other properties owned by the landlord.

At the First Tier Tribunal the tenants produced evidence, which was accepted by the Tribunal, that cover under a separate policy could have been arranged at costs of around £2,800, £2,800 and £3,000. The Tribunal ruled that the landlord’s costs had not been reasonably incurred.

What is reasonable?

The Upper Tribunal had to consider on appeal the meaning of the phrase “reasonably incurred”.  Was it enough for a landlord to show that it had negotiated the terms at arm’s length in the marketplace, or does the landlord have to show as well that the level of cost was not unreasonable?

The Upper Tribunal quoted the case of Waaler v Hounslow LBC in which the Court of Appeal remarked that “where a contract, such as a lease, has empowered one party to make discretionary decisions which impose financial liability on another, the law will restrict the exercise of that discretion to what is rational”, even without a reasonableness requirement.

The Court of Appeal found in that case that the obligation to incur costs reasonably was “not simply a question of process: it is also a question of outcome”. A landlord may act reasonably in arranging insurance, in this case by use of a block policy, but still arrive at a cost to its tenants that is not reasonable.

Points to note for landlords and tenants

Landlords should be aware that costs incurred and then charged to their tenants may be open to challenge as unreasonable, not only in relation to the decision-making process but also as to the level of the costs themselves.

Tenants should be aware that landlords cannot use their discretion simply to charge any sum they like.

This blog post was written by Real Estate solicitor Andrew Boyd.