The government has announced a series of reforms to the leasehold sector which it suggests could save leaseholders thousands to tens of thousands of pounds through lease extension and enfranchisement. This may well be true, but as with their decision to overhaul leasehold and implement commonhold, this rhetoric conceals a difficult reality. When it comes to insurance, things could get a lot worse for leaseholders.
Research by Which recently revealed that the cladding scandal has seen insurance bills rocket by up to 1,000% for leaseholders living in unsafe buildings. Whilst we can agree that the leasehold system has had its flaws, handing over all building responsibilities to inexperienced leaseholders in the midst of a national cladding crisis is not the answer to solving any of the issues around skyrocketing insurance bills. It will, in fact, have the opposite effect and open up a raft of new issues around accountability, safety, and huge financial burden, particularly if these buildings aren’t managed properly and fall into further disrepair.
As things stand, leaseholders of apartment blocks are typically responsible for paying insurance costs under the terms of their lease via a service charge – a charge recouped by freeholders to ensure risk assessments, maintenance and improvements are carried out on communal areas or the building structure. All of which determine the level of insurance cover needed and therefore its cost.
Under the leasehold model, leaseholders have the peace of mind that their building insurance is being handled on their behalf by a professional freeholder – who has the expertise and dedicated teams to ensure all of the proper valuations are carried out, as an underinsured building is potentially a massive liability. This has been a particularly important process during the cladding crisis, as it has helped identify unsafe buildings that need urgent remediation.
Economies of scale play a huge role here. Freeholders often manage hundreds, if not thousands of buildings, meaning that they can negotiate with insurers at scale. If that access to bulk portfolios is removed, insurance premiums will inevitably go up and leaseholders will be left worse off.
This is exactly what will happen under commonhold; the future of how insurance is paid and managed could be thrown into jeopardy. With commonhold, whether residents want to or not they will now be responsible for arranging, managing, and funding their own insurance costs for their entire building, including fire safety and remediation assessments, whether that’s through a Resident Management Company or individually.
This is not a simple case of insuring your own car or personal possessions, this is highly complex building insurance that is time consuming to implement and must be agreed on by all parties living in that building. It can be extremely difficult to recoup costs from your neighbours, especially if you disagree on what insurer to go with. This could see many leaseholders forced to bail out others, ultimately leading to conflict in the block.
There is also the added problem that lots of leaseholders don’t even live in their flats. Over half of the UK leasehold population are buy-to-let investors. These people may live hundreds or thousands of miles away meaning sign-off processes and payments could simply grind to a halt. These small investors are often entirely reliant on a freeholder to carry out valuations and implement insurance on their behalf. The prospect of this being passed to a group of unknown residents in their block will no doubt fill them with anxiety.
The insurers will find this new structure burdensome; they may now have to deal with many different brokers, some chosen by Commonholders who could have little skill and local bias. Freeholders’ portfolios which currently have the benefit of highly experienced brokers, handling claims in-house on behalf of insurers and negotiating terms based on a collective portfolio, could be replaced by an open market of inexperienced buyers with relatively inexperienced brokers. This will create a large amount of work and a lack of enthusiasm from insurers, with the inevitable dumbing down of cover and increase in price.
Not only has the government continuously ignored the issue of rising insurance costs, but it has now thrown a load of reforms into the mix that will exacerbate the issue even more. Whilst it has aimed to address remediation funding issues, through the Building Safety and ACM Cladding funds, these do not directly help leaseholders pay for insurance costs.
If the government is going to announce such reforms, with far-reaching impacts, it should be prepared to help front the burdensome insurance costs that will fall into the laps of leaseholders. If not, they should seriously consider their direction of travel – regulating and improving the systems they have in place, rather than overhauling them for ones that could be far more dangerous.
Jamie Truscott is chairman of Cardinus Risk Management.
Comments (6)
Insurance commissions should be outlawed for block insurance.
No BTL investor is aware that block insurance won’t pay out for loss of rent due to loss of amenity if the flat is vacant for a few days.
So fire or flood the flat will be repaired.
But no rent cover is available.
So the flat as in my case might take 6 months to repair.
No rent coning in so the repaired flat might end up being repossessed!
However with a house a rent loss insurance add-on is available.
It is illegal for a LL to have two buildings insurance policies on a flat.
Which is the reason I would never again invest in flats.
All of my flats have suffered amenity loss during which no rent was coming in while they were repaired.
Only credit cards saved me from repossession.
Most sensible LL will have rent loss insurance but this is NOT available for flats which leaves LL in a very vulberable position.
The argument seems to be: Don’t reform leasehold, because although leaseholders are routinely cheated over insurance as things stand, the insurance business could make things worse for them if they were self-governing (as flat owners are in every other jurisdiction in the world apart from England and Wales).
Insurance is one of the major rackets – sorry, one of the major incentives – to own residential freeholds because although hapless leaseholders pay for it all, they are not a party of the contract and so cannot see the gigantic insurance commissions involved.
And this line is hilarious: “Under the leasehold model, leaseholders have the peace of mind that their building insurance is being handled on their behalf by a professional freeholder… ”
Yes, we are inundated with emails from leaseholders saying: “Thank goodness our site is owned and managed by anonymous private equity investors offshore …”
It is certainly the case that large freeholders are finding it easier to obtain insurance from this ever obliging sector during the cladding crisis.
One might be tempted to ask: why is the insurance sector being so disobliging to self-managed sites where building insurance costs are scrutinised by consumers, and so favourable to the large freehold owning entities where the cost can be what you like?
The argument seems to be that leaseholders should go along with the current flawed arrangement, just in the hope that freeholders / insurers might rip them off a bit less if they continue to make hay out of insurance provision.
Of course, leaseholders could and should be contracted parties in all contracts that they pay for, which would bring insurance – and other services – under some sort of oversight by those who pay for it.
Seb O’Kelly
Leasehold Knowledge Partnership
What a load of rubbish. I have bought and sold many leasehold properties and never seen any evidence of “professional” freeholders negotiating good rates of insurance premiums. Why would they? They are completely unconcerned about the costs of buildings insurance as they pass it all on to the leaseholders. Most freeholders and managing agents provide a really poor service as they do not have to account to the leaseholders who have no control over them and the costs of maintenance and repairs. Commonhold would bring about a vast improvement in the service provided to flat owners.
Commonhold would enable flat owners to appoint a managing agent if they want to.
“What a load of rubbish” i think you’re misunderstanding this excellent reply from “Seb O’Kelly”
he’s arguing on your side of the argument
what we’re finding out is there are many directors and cross interests from professional freeholders, where they are not really hunting for competitive premiums but instead operating in some sort of quid-pro-quo system
Comments like this from the insurance industry clearly have a motive, inflated premiums are currently being exposed in UK Cladding Action Group Facebook
I agree with Seb – freeholders constantly cheat leaseholders by taking out block insurance with over inflated premiums.
On 1 development I know the Managing Agent arranged a block policy to cover multiple developments they managed. The premium for 16 flats was £3,900pa and the managing Agents shared in the 40% commission with their pet Broker. Each leaseholder paid £244.00 each.
I sought an alternative quote and this was less than £1200pa for the same terms and to the Managing Agents credit they agreed to move the insurance so each leaseholder now pays £70pa – they did not share in any commission.
Homeground arrange the buildings insurance on another development and there the buildings insurance premium for last year was proposed at £8500 after rising steadily for many years. I sought an alternative quote which came to £5500 – after much pressure on Homeground & Zurich they agreed to reduce the premium to £5800 so for 30 flats over £2500 was saved. Homeground receive 20% commission.
Had either Managing Agent not been challenged then the premiums would have increased each year with them receiving an ever larger commission. There is no incentive on them to reduce leaseholders costs.
Good points well made – I hope you’ve lobbied your MP Jamie . . .