Are landlords obliged to insure against terrorism? And are tenants required to pay?
The recent decision of the Upper Tribunal in Qdime v Bath Building (Swindon) Management Company centred around the objection of the management company and many of the leaseholders in a block of flats to the inclusion of the cost of terrorism insurance in the service charge. There was no express provision for the landlord to obtain terrorism insurance included in the leases and the tenants considered it to be an unreasonable expense.
Many newer leases include a requirement for the landlord to obtain terrorism insurance however many older leases do not. This particular form of lease obliged the landlord:
‘To keep the Building including the Demised Premises insured to its full reinstatement value against loss or damage by fire and the usual comprehensive risks in accordance with the CML recommendations in that respect from time to time and such other risks as the Landlord may in its reasonable discretion think fit to insure against…’
The Council of Mortgage Lenders’ (the “CML”) guidance includes a list of potentially insurable risks and this list includes “explosion”. The landlord argued, and the Upper Tribunal agreed, that the requirement was to insure against the risk of an explosion, regardless of the cause of the explosion. “Explosion” is not defined by its cause and therefore, when given its ordinary meaning, “explosion” could include an explosion caused by an act of terrorism.
Alternatively, the Upper Tribunal held that even if terrorism was not explicitly included in the CML recommendations, obtaining terrorism insurance was a reasonable exercise of the landlord’s discretion. Furthermore, the RICS Code of Management Practice suggests that terrorism insurance should be seriously considered.
Following this decision, many landlords will find that they are now required to obtain terrorism insurance and would be advised to check the insurance obligations in their leases. Landlords should not be concerned that terrorism insurance is not a recoverable expenditure, provided that there is a provision in the lease for risks considered by the CML or discretion for the landlord to insure against such risks.
However, if landlords are also property owners it could increase their own costs and they may wish to consider amending their leases to specifically exclude a requirement to obtain terrorism cover. It is also possible that landlords in certain locations, such as central London, are unable to obtain terrorism insurance and they should ensure that there is no requirement for them to do so.
Tenants should note that, following this decision, terrorism insurance could be an expense that they are obliged to pay for under the terms of their lease.