Landlords take note, on the back of a recent case, you face an increased risk that tenants will challenge costs which they are responsible for in a lease. The case in question related to tenants' challenge of insurance costs the Tribunal found in favour of the tenants, because the costs incurred were considered to be unreasonable.
Where leases require insurance costs to be 'reasonably incurred' or even just 'reasonable', landlords should:
- 'shop around' and be selective when renewing insurance policies. The premium charged must be reasonable and competitive in the market, but this does not mean that the cheapest insurance cover available is the only option. Other factors (such as the terms of the lease, the liabilities to be insured, the terms of the policy, credit rating of the insurer etc.) will all be relevant;
- be prepared to supply evidence to tenants to demonstrate that the landlord acted rationally when incurring the cost and that it is a reasonable charge in the circumstances; and
- when using block policies, consider whether tenants are adversely affected by the block insurance.
Whilst the recent case related to insurance premiums for a residential block, it would seem arguable that the same principle could also apply to commercial leases where a service charge cost or insurance premium has to be 'reasonably incurred'. It would therefore be prudent for commercial landlords to take the steps above when the costs themselves have to be 'reasonably incurred' or 'reasonable'.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.