The recent case of Sadd v Brown highlights the need to ensure that a lease clearly and expressly states exactly what a landlord can recover as the courts will be reluctant to imply a term to cure what would otherwise be considered a defective lease.
This case involves a challenge in the Leasehold Valuation Tribunal. Here a tenant of a flat in a building challenged the reasonableness of the proportion of the insurance premium included in the service charge. The lease did not expressly oblige the tenant to reimburse the landlord for the insurance premium therefore this cost was not recoverable by the landlord.
What did the lease say?
The lease contained provisions which required the landlord to insure the building but there was no express provision in the service charge which allowed the landlord to recover a proportion of the insurance premium as a service charge item. The service charge items included items for repair and there was an indemnity from the tenant to the landlord for “rates, duties, charges, assessments, impositions and outgoings” on the property.
Was the cost of the insurance premium recoverable under the lease provisions?
Her Honour Judge Alice Robinson decided that the landlord was not entitled to include insurance premiums in the service charge in the first place. It was decided that the cost of an insurance premium incurred by the landlord is not a rate, duty, charge, assessment or imposition on the property. Nor can it be said that the cost of an insurance premium is included in the natural meaning of the word “outgoing” as the insurance contract was voluntarily entered into by the landlord.
Could a term be implied into the lease?
A term can be implied into a lease if it is necessary to give business efficacy to the contract. It is unusual not to include a provision in a lease which obliges the tenant to reimburse the landlord for insurance premiums. However, it was said that if one party agrees to provide a service or pay for something it does not follow that the other party is obliged to reciprocate.
There was no provision in the lease which gave any indication that the parties had contemplated that the tenant would pay for the cost of the insurance and to imply such a term would be to draft a completely new paragraph into the list of service charge items which were already detailed and specific. The fact that it would be reasonable to imply such a term or that it was probably omitted by mistake was not enough.
Any other remedies for the landlord?
In this case, the landlord still has the option of applying for the lease to be varied under Part IV of the Landlord and Tenant Act 1987, which allows a party of a long lease of a flat to make an application to vary a lease, on the basis that it does not make satisfactory provision in relation to the insurance of the building. However, this would not help a landlord of commercial premises.
What does this mean for you?
The majority of landlords will want to shift all occupation costs to the tenant.
It is important to consider carefully at the outset, when agreeing to heads of terms or signing up to a lease, what costs will be incurred by a landlord. It is then necessary to check that such costs are expressly recoverable by the landlord by way of a covenant from the tenant.
From a landlord’s perspective, insurance premiums should be recoverable as rent and payable by the tenant on demand. Interest on the premiums should be payable by the tenant if such sums are not paid on time.