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Should the Housing Association I work for cap the service charge for buildings insurance at £100 per year?

Reader’s E-mail:

If the buildings insurance charges is more than £100 can we cap the charges at £100 how do we consult on an issue such as this? or has anyone else done this?

Reply from Service Charge Dispute Guide

1. The legal requirement to cap at £100 per year relates specifically to section 20 of the Landlord and Tenant act 1985. Under the Service Charges (Consultation requirements) (England) Regulations 2003 the amount a landlord can charge for services procured under a qualifying long term agreement is limited to £100 per year if the consultation requirements are not met.

2. In order to determine whether this legal restriction applies in the case of your Housing Association you need to determine two things:

i. Whether the building insurance was procured through a qualifying long term agreement.

and

ii. Whether the correct consultation procedure was carried out.

3. A qualifying long term agreement is defined in section 20ZA of the Landlord and Tenant Act 1985 as:

“qualifying long term agreement” means (subject to subsection (3)) an agreement entered into, by or on behalf of the landlord or a superior landlord, for a term of more than twelve months

4. ​Therefore​, if your Housing Association has entered into a contract with an insurance company to provide building insurance for its housing stock for more than one year then it has entered into a qualifying long term agreement and the requirement to consult under section 20 applies.

5. ​The consultation procedure which applies in these circumstances is either schedule 1 or schedule 2 of ​Service Charges (Consultation requirements) (England) Regulations 2003​ ​depending on the value of ​insurance policy being procured.

6. As a factual observation, we are aware of a number of registered social landlords who have been caught out in respect of the consultation requirements in relation to the procurement of building insurance.

i. The anecdotal evidence we have is that there has been a sharp hike in the cost of procuring bulk building insurance policies over the last few years.

ii. What this has meant is that in previous years when registered social landlords have procured building insurance in bulk to cover the whole of their housing stock they have not had to consider the section 20 issue because the individual charge per property has been below £100 and therefore no consultation has been required.

iii. The same providers​ who have more recently procured building insurance have had something of a nasty shock because the cost of insurance has increased and the £100 threshold has been exceeded.

7. ​If your Housing Association has entered into a contract for multiple years of building insurance and not consulted under section 20, then you have only two options:

A) Cap all bills at £100.

B) Apply for a dispensation of the consultation requirements for all affected leaseholders.

8. This is a judgement to be made solely by the Housing Association. ​The way you make the decision is to consider the cost of applying for a dispensation versus the cost of capping.

9. Following the decision of the Supreme Court in the case of Daejan Investments Limited v Benson and others [2013] UKSC 14​ it is likely that your Housing Association would be granted a dispensation from the consultation requirements, and as an educated guess we think it is unlikely that a First Tier Tribunal would impose a financial penalty as a condition of granting a dispensation so long as the Housing Association has carried out a thorough tendering process. We say unlikely because if the best price has been sought it would be enormously difficult for residents to prove that they had experienced ‘prejudice’ in terms of a financial loss as a consequence of not being consulted.​

10. ​The key consideration for the Housing Association is that applying for a dispensation would involve considerable administrative costs.

i. It is likely that a First Tier Tribunal would expect the Housing Association (at the very least) to send a copy of their application to all affected leaseholders.​

ii. Add to this staff time in responding to enquiries, preparing the case, and attending a Tribunal.

iii. These costs will mount up and the Housing Association needs to consider carefully whether such costs will exceed the amount to be written off as a consequence of capping the individual charges at £100.

iv. No one benefits if the administrative costs of applying for a dispensation exceed or nearly equal the value of the write-offs. In such circumstances it would be better to give the residents a windfall by capping the amount charged to them for building insurance.

Click on the link to read more Reader’s Questions and Answers on Consultation (Section 20)