By Harry Scoffin
The property section of The Times has this month been leading on calls to end opaque insurance arrangements for leasehold blocks.
In a sign of how leasehold is now dominating the news agenda, the title’s investment editor Mark Atherton has published on the issue of secret commissions over two consecutive Saturdays.
Freeholders and managing agents are overcharging leaseholders for the insurance of their flats, while also pocketing large commissions from the insurers. Campaigners for leasehold reform are calling on the government to crack down on the practice. Sir Peter Bottomley MP, the co-chairman of the Al
APPG co-chair Sir Peter Bottomley was quoted in both pieces.
Sir Peter has described the behaviour of freeholders and their managing agents who deliberately levy sky-high insurance premiums on captive lessees as “corrupt”:
“We believe unfair service charges cost leaseholders hundreds of millions of pounds each year with secret commissions on buildings insurance deals making up a large part of it. Regulators must do more to bring this corrupt practice against leaseholders to an end.”
The MP for Worthing West also said that leasehold insurance scams, including secret commissions, will be raised at a meeting with the Financial Conduct Authority (FCA).
LKP remains concerned that leaseholders do not have to be listed as a joint insured party in the policy document, even though they are the ones doing the paying and typically hold the majority financial stake in a building.
This can make leaseholders susceptible to controversial clauses – ‘first payee’, which favours a freeholder’s lender in the event of an insurance payout following a fire or terrorist attack, being just one example.
Martin Boyd, LKP chair of trustees, said:
“The solution to the loophole is for the FCA to rule that leaseholders are a party to any insurance policy for their buildings.”
Campaigners for leasehold reform are calling on regulators and trade bodies to take action against freeholders and managing agents who overcharge for buildings insurance and hide commissions and other payments. Times Money reported last week that many leaseholders are being overcharged
Since leaseholders are defined in law as tenants, many struggle to get full transparency over what deal their freeholder has signed them up to.
Managing agents can also evade responsibility for unfair insurance practices when the freeholder has kept insurance as a ‘reserve domain’.
Jay Beharry, the London leaseholder activist who shadow housing minister Sarah Jones visited last week to publicise Labour’s leasehold manifesto, has demanded insurance be removed from the hands of distant freeholders:
“One of the things we want to see is the freedom for leaseholders to arrange their own buildings insurance, irrespective of whether they have the right to manage or not.”
The Times has provided an explanation of how innocent leaseholders can be paying well beyond the market rate for the cost of buildings insurance.
Under current rules, flat lessees can only take out contents insurance. Their third-party freeholders have to ensure the building is adequately insured and that the cost is reasonable.
Freeholders will normally task their appointed managing agent to find the most advantageous policy, The Times has learned.
In this scenario, the managing agent’s broker will collect commission from the insurer they have sourced and “may share this with the managing agent and, sometimes, with the freeholder, meaning that three parties are taking a cut.”
Neil Holloway, the M2 Recovery founder who seeks refunds for leaseholders overcharged on insurance, was quoted saying:
“The size of these commissions can amount to between 40 and 60 per cent of the total premium. So where leaseholders of a block of flats are paying £10,000 for insurance, as much as £6,000 of that could be going into other people’s pockets. Managing agents and freeholders are treating buildings insurance as an extra revenue stream.”
Times journalist Mr Atherton, a leaseholder in South London took his freeholder in upper tribunal and won the case.
In his latest Times article he has the example of Graham Hollingworth, who saw the insurance premiums for his development in Gateshead surge from £9,920 to £35,000.
Mr Hollingworth said that after Residential Management Group (RMG) was replaced in 2016, the premiums came down to £15,925.
Mr Atherton has revisited his leasehold dispute with MB Freeholds, of which Mr Hawthorn is a director using the name Hawthornthwaite (“Leaseholders call for crackdown on insurance commissions, July 5th).
It seems that even after the property tribunal ruled against the freeholder placing the insurance, MB Freeholds is still refraining from noting the residential leaseholders’ interest in the policy:
“The judge ruled that MB could only take over the insurance of our flats if it was itself insuring in joint names, which it was not.
MB is still insuring the individual flats, but not in joint names, and seeking to charge us for the cost.
This is despite RMG acknowledging that more than 50 per cent of leaseholders are insuring correctly.”
Mark Loveday, of Tanfield Chambers, said:
“On the face of it the landlord has not insured in the joint names of the freeholder and leaseholder from June 2018-20. The Upper Tribunal clearly stated that if the landlord has not insured properly it cannot recoup these costs (of insuring the individual flats). It also stated that if the leaseholders were correctly insuring their individual flats in joint names the landlord should not be asking for an extra contribution to cover the cost of insuring the block.”
The article ends with a quote from an exasperated Mr Hawthorn:
“We are acting in the best interests of residents but we will not be made scapegoats of freeholder bashing so are minded to cancel the insurance policy once we have informed leaseholders.”
Today’s Lord Best report has urged that a new regulator of managing agents forces “transparency around potential conflicts of interest (e.g. mandatory disclosure of commissions and management fee charges)”.
This statutory requirement would mean leaseholders could see clearly whether their insurance premiums are high because of kickbacks and other unfair practices.
LKP will push to ensure this transparency principle covers regulated managing agents working for freeholders who insist on placing the insurance themselves, which is a common set-up. As flat lessees know too well, there can be no room for loopholes.