‘Insurance’, ‘leasehold’ – two of the dullest words in the English language. Most of us would rather poke our own eyes out with a freshly sharpened pencil than read an article on either subject. Which is mightily convenient for this Government. Our boredom and indifference give it perfect cover to overturn centuries of common-law protections and pull off an extraordinary move that will shortly legalise theft from over five million households in England and Wales.
Almost no one will report this act of highway robbery. Not even the Ministers presiding over the process seem to understand what they are doing. So what hope for the poor saps in leasehold properties, who are about to have one of their few legal protections stripped from them?
I will try to keep the tedium to a minimum, but there are a couple of basic facts you have to know to understand this story. First, when you ‘buy’ a leasehold flat, you don’t own it. You are simply buying the right to occupy the property for a set and diminishing number of years. You’re a tenant. And like all tenants, you have a landlord. That landlord is the one who buys the insurance for your building. But here’s the rub. If you were an ordinary renter, your landlord would pay the insurance premium. As a leaseholder, you are the one who must pay.
And here’s the thing. If a freeholder places insurance, but doesn’t pay for it, he no longer has the incentive to go for the cheapest policy or the best value for money. Quite the opposite. Buildings insurance can become a lucrative income stream.
That’s why, as flat living has mushroomed this century, so have a whole variety of insurance-related scams. These have driven the cost of insurance in blocks of flats so high that one young leaseholder I know pays six times as much to insure his tiny, one-bed flat as it costs his parents to insure their detached four-bedroom home.
Here’s a short guide to robbery by insurance under leasehold. Add these scams together and you are left wondering if leaseholders have any cover at all for the vast sums they are paying:
- Commission inflation. Many of the biggest freeholders have set up captive brokers to handle their insurance needs. The broker touts the business round various insurance companies looking for the one that will pay the biggest commission, which he then splits with the freeholder. In one email this author has seen the insurer offered a “50/50 split as before”. In other words, for every £1 spent on the insurance premium, the insurance company charged the leaseholders £2. The other £1 it paid straight back into their freeholder’s pocket in secret ‘commissions’. A 100% mark up!
- Huge excesses. The insurer will naturally want to limit the number of claims. The way to achieve this is to identify the most likely risks – in the case of blocks of flats, water damage – and jack up the excess on these. At some estates, leaks command a £25,000 excess per claim, and without any apparent reduction in the premium itself. Freeholders happily agree to such terms. They don’t usually live in these blocks. They don’t need to worry about pipes bursting and water running down their walls. They can enjoy the ‘no claims’ bonus that comes on top of the hefty commission they have already pocketed, while the leaseholders, who already paid to insure the building, must pay again to repair the damage from any leaks.
- ‘Cost of finance’ arrangements. Insurance is always cheaper if you can pay the premium up front rather than in monthly instalments. The difference is around 27% on average, one insurance professional has told me. In this side hustle, the broker would pay the premium payment to get the policy at the cheaper rate. But he would then bill the freeholder, and through him the leaseholders, at the more expensive monthly rate. Broker and freeholder then split the difference between them.
- Subsidising the freeholder’s risks. Many new estates have shops, restaurants, even offices and hotels in the same buildings as flats. The commercial floors are often run by the freeholder. Insurance at these estates covers things like ‘loss of trade’ and ‘public liability’. These risks don’t of course apply to leaseholders, whose flats are simply their homes. But they still have to pay.
- ‘First payee’ clauses. Not only are leaseholders not covered for regular risks like water damage, they have no real protection against huge events like fire, structural collapse or terrorism. Most flat ‘buyers’ have mortgages. The problem is their landlords have probably borrowed against the security of the same building. If that building is destroyed, who gets the payout? The answer is, the landlord’s lender, if they’ve insisted on a ‘first payee’ clause in the insurance contract. Meanwhile, the leaseholder still has a mortgage to pay, but no asset to back it. (Quite why banks lend against leases at all is a bit of a mystery.)
Okay, but what does all this have to do with the government legalising robbery, I hear you ask. I am coming to that.
Under common law there is a concept called ‘fiduciary duty’. If someone acts as your agent in a financial transaction – like buying a car, a mortgage or an insurance policy – the law says he has to act in your best interests, and, crucially, that any deal needs your informed consent. Last autumn, in a key test of this principle, the Court of Appeal ruled in favour of customers who had taken out car loans. They’d sued banks and dealers for concealing how interest rates on their loans were calculated to take bigger payouts for themselves. If the judgment stands – and there is a Supreme Court appeal pending – those customers and millions like them will be entitled to money back.
What applied to car loans must logically apply to the vast secret commissions that all those millions of leaseholders have been paying for decades on their building’s insurance. A barrister specialising in the subject argues that: “Leaseholders are particularly entitled to these common law protections because, unlike people shopping for mortgages or car loans, they have no choice about where they get their insurance. They can only buy it via their freeholder.” What is more, she says, the whole insurance establishment has prevented them from finding out the truth about where their money was going. That secrecy strengthens leaseholders’ case that there has been a breach of ‘fiduciary duty’.
I know that to be true. The Financial Conduct Authority, whose duty is supposedly to protect consumers, has repeatedly stonewalled leaseholders on my estate. It argues that our freeholder is the customer for the insurance and therefore we, his tenants, have no right to information about commissions.
The truth finally began to come out a couple of years ago when a Canary Wharf estate discovered, after a gruelling three year court battle, that its freeholder had creamed off £1.65 million in secret insurance commissions. This opened the floodgates. There is now backing for a class action suit to retrieve insurance commissions across the board. Dozens of estates are signing up.
Now, finally, we get to where governments – Conservative and Labour – come into this sorry tale.
Michael Gove, in his Leasehold and Freehold Reform Act (LAFRA) – the last piece of legislation passed before the General Election – sought to outlaw secret commissions for freeholders. It isn’t clear how this would be policed. Brokers work on commission and are entitled to it. Who would check the overall level of commission paid or how it is subsequently split?
But not content with proposing an unenforceable ‘ban’, the law also proposes ‘compensating’ freeholders for the income streams it is assumed they will lose. Instead of commissions, they would be entitled to a whole new range of ‘permitted fees’ for the supposed work of placing buildings insurance and making claims. But freeholders and their agents can already charge us for any work they do on our behalf. The only consequence of giving insurance-related work special legal protection will be to make it harder for leaseholders to challenge these charges in court.
The key question is this: if secret freeholder commissions were never legal in the first place, why on earth should they be replaced with specially permitted fees that leaseholders will now be forced to pay? That is what I mean by legalising theft.
And here is where Labour takes over the story. When Labour was in opposition, then Shadow Housing Minister Matthew Pennycook was constantly berating Gove and his team for the timidity of their reforms and the lack of urgency. But since Labour took office, it has been a very different story. Even switching on the limited provisions of Gove’s Act is proceeding at a glacial pace. As to replacing leasehold with Commonhold (the common ownership of flats) – which has been ‘announced’ three times – it seems this will apply only to new flats and even that will take four-to-five years. How – or even if – the five million already caught in these debt traps are ever to be freed up, we are not told.
Labour claims the go-slow is all the Tories’ fault. Gove’s legislation is “full of holes” because it was “rushed through”. Odd that Mr Pennycook, who was a key member of the Bill Committee, never raised any of these concerns at the time. But now everything must be consulted on, for fear of legal challenges from the freeholders, including, ultimately, in the European Court of Human Rights.
Labour always claims to be protecting leaseholders from freeholders. But its very first consultation, on ‘permitted fees’ for insurance work, does the very opposite. Few leaseholders will have struggled through it. The language was bafflingly technical, the questions endless. The framing took for granted that ‘permitted fees’ were legitimate. The questions were mostly about what sorts of work should be charged for. I’d lay money the results will allow the Government to protect freeholders’ income streams from any challenge by us.
If this Government had any real intention of helping leaseholders, it would have ignored this part of LAFRA altogether and concentrated all its efforts on making it easier and cheaper for leaseholders to buy out their freeholders, or at least manage their buildings, including buying insurance themselves. This should be the priority. Because it is the only move that will end the clashing incentives that enable this robbery to take place.
Leasehold cannot be reformed. It must be ended if there is to be any justice in home ownership.
Margaret Rothwell is a pseudonym. The author is a member of the campaign group, Free Leaseholders.
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