Nicholas Cheffings on where landlords may buy insurance.

Nicholas Cheffings is a property litigation partner at Nabarro Nathanson.

In the case of Havenbridge v Boston Dyers the Court of Appeal held that a landlord satisfies his insuring liability if he has struck a proper deal in the market. The court held that, in the absence of clear words in a lease, it was not necessary for the landlord to take the lowest quote on offer.

In Berrycroft Management Co v Sinclair Gardens Investments (Kensington) (1996), the Court of Appeal affirmed that decision. This case concerned blocks of flats where a management company was formed to manage the common parts. The purchaser of the reversionary interest required the management company to insure with a nominated insurer, which produced an increase on the premium previously payable by the tenants.

The court held that there was no basis to imply a term that there should be any limit on the landlord's right to nominate where the insurance was to be placed. As a result of the Havenbridge case, the tenants had their protection – in that the insurer must be of repute – but that was to be the only restriction. In this instance, the insurance had been arranged in the normal course of business with an insurer of repute. It followed that the rates charged were market rates and it did not matter that they were higher than those which could have been obtained elsewhere.

The court then considered whether it was possible to argue that the costs incurred by the landlord in insuring were "unreasonably incurred" within the service charge provisions of the Landlord and Tenant Act 1985 (which relates to residential premises). The court thought not.

This case should now put beyond doubt, and argument, the fact that a landlord is free to insure with whom he chooses provided he can show that he has done so at arm's length and with an insurer of good repute, and that the rate is not unrepresentative of the market. Tenants who wish to ensure that their landlord only takes the lowest quote available must include words to that effect in their lease. Few landlords are likely to accept this restraint.

Lawyers may argue that these cases also call into question a 1976 case which held that landlords could only recover service charges which were fair and reasonable. Well-advised tenants will ensure that wording in the lease defeats this argument.