Atherton & Ors v MB Freeholds Ltd, Re Albion Court (LANDLORD AND TENANT - Service Charges)

Factual and Procedural Background

Albion Court is a residential estate comprising 27 flats let on long leases granted in the early 1960s. The leases contain insurance provisions obliging each leaseholder to insure their own flat in joint names with the landlord. Historically, the freeholder (Company A) insured the communal parts only, while individual leaseholders insured their flats. Since 2014, Company A acquired the estate and arranged insurance for the whole estate, including individual flats, resulting in significantly increased premiums. Leaseholders challenged the landlord’s right to recover the full insurance costs, arguing they should not pay twice for insurance they had already procured. The First-tier Tribunal (Property Chamber) dismissed the leaseholders’ application, holding that the landlord was entitled to recover the full cost under the lease terms. Three leaseholders sought permission to appeal, which was granted by the Upper Tribunal (Lands Chamber). The appeal was heard on the basis of written material and submissions, with the Tribunal conducting a review of the First-tier Tribunal’s decision without additional evidence.

Legal Issues Presented

1. Whether the freeholder is entitled to recover from the leaseholders the full cost of insuring the entire estate, including individual flats, or only the cost of insuring the communal parts.
2. Whether the freeholder’s insurance obligation under the lease requires insurance to be effected in the joint names of the landlord and leaseholder, and the consequences of non-compliance.
3. Whether the leaseholders who complied with their insurance obligations are liable to contribute to the landlord’s insurance costs incurred under the proviso clause when the landlord insures on their behalf.
4. Whether the First-tier Tribunal erred in its treatment of the evidence, particularly concerning the basis and cost of insurance prior to the landlord’s acquisition.

Arguments of the Parties

Appellants' Arguments

• The leaseholders argued that historically only the communal parts were insured by the landlord or its predecessor, and that in 2015 the landlord changed the basis of insurance to include individual flats, causing a substantial increase in premiums.
• They contended that they complied with their obligation by insuring their flats and by noting the landlord's interest on their policies, although not in joint names as required by the lease.
• The appellants asserted that the landlord was not entitled to recover the full insurance cost for the entire building, as this amounted to double insurance.
• They challenged the First-tier Tribunal’s conclusion that insuring only the common parts would cost the same as insuring the whole building, arguing this was counter-intuitive and unsupported by sufficient evidence.

Respondent's Arguments

• The landlord (Company A) contended that clause 3(vii) of the lease required insurance in joint names, which none of the appellants complied with, thereby triggering the landlord’s right under the proviso to insure and recover costs.
• It was submitted that the landlord was entitled to insure the whole estate in its sole name and recover the cost from all leaseholders, regardless of their compliance.
• The landlord argued that it was impossible to insure only the common parts separately, supported by refusals from three insurers to quote for such limited cover.
• It was contended that the proviso clause’s reference to “such insurance” did not require insurance to be in joint names when the landlord exercised its right, and that the landlord’s insurance was consistent with the lease’s terms and commercial purpose.
• The landlord maintained that the right to insure was discretionary and recoverable as a contractual claim, not damages.

Table of Precedents Cited

Court's Reasoning and Analysis

The court examined the lease provisions, particularly clauses 3(vi) and 3(vii). Clause 3(vi) obliges leaseholders to contribute to the landlord’s insurance costs for communal parts, while clause 3(vii) requires each leaseholder to insure their own flat in joint names with the landlord. The proviso to clause 3(vii) allows the landlord to insure on behalf of leaseholders who fail to comply and recover the costs.

The court found that the First-tier Tribunal erred in its factual analysis by not properly considering the appellants' evidence that historically only communal parts were insured by the landlord or its predecessor and that the insurance premium increase reflected a change in coverage. The First-tier Tribunal’s inference that insuring only communal parts cost the same as insuring the entire estate was unsupported and insufficiently reasoned.

Regarding the joint names requirement, the court accepted that the appellants had not complied by insuring in joint names but only noting the landlord’s interest. The court rejected the landlord’s argument that it was entitled to insure in its sole name without replicating the joint names requirement, holding that "such insurance" in the proviso refers to insurance complying fully with the lease’s description, including joint names.

The court considered and rejected the landlord’s commercial arguments that insurance in joint names would be impractical or that the landlord’s sole-name insurance was justified by business reasons. The court emphasized that the lease’s scheme contemplates each flat insured in joint names and that the landlord’s power to insure on default is a safety net intended to preserve the same insurance basis.

Therefore, although the landlord had the right to insure on behalf of non-compliant leaseholders, it was not entitled to recover the full cost of insuring the entire estate in its sole name. The landlord’s right to recover costs is limited to the cost of insuring the communal parts under clause 3(vi).

Holding and Implications

The appeal was ALLOWED. The Upper Tribunal set aside the First-tier Tribunal’s decision and held that:

• The landlord was not entitled to recover the full insurance premium for the entire estate from the leaseholders, as this amounted to double insurance.
• The landlord’s entitlement to recover insurance costs under clause 3(vi) is limited to insuring the communal parts only.
• The landlord’s right under the proviso to clause 3(vii) to insure on behalf of defaulting leaseholders requires insurance to be effected in joint names, consistent with the lease’s terms.
• The landlord’s insurance in its sole name covering the whole estate was not in accordance with the lease, and the landlord cannot recover those costs from the appellants.
• The appropriate insurance contribution for each appellant was assessed at a significantly lower amount reflecting only communal insurance costs.
• An order was made preventing the landlord from passing on the costs of these proceedings to the appellants through the service charge.

No new legal precedent was established beyond the interpretation of the specific lease provisions in this case. The decision clarifies that landlords must adhere strictly to lease insurance obligations and cannot recover costs beyond those properly incurred under the lease terms.