Right To Manage – Insurance costs
With today’s current economic climate, it only makes sense to look more closely at what you are paying in service charges for your flat. There is of course a natural conflict of interest between the person that arranges services (the freeholder) and the person that pays (the leaseholder- you). Frequently this difference is a major factor that groups of leaseholders take their destiny into their own hands by using the Right To Manage process.
Here we look at just one part of service charges: building insurance.
Often, the landlord (or managing agent) charge an excessive amount for buildings insurance. The agent (or freeholder) can collect a lump sum for themselves as a commission for selecting an insurance company. They seldom pass this commission on to you the flat-owners. And legally they do not have to disclose this fact to the residents.
The landlord (freeholder or managing agent) has a duty to insure the building, and the normal accepted practice is for insurance companies is to pay commission for the business placed with them. Surprisingly, the law even says that landlords do not even have to shop around for the best deal unless the lease specifically obliges them to do so, and few do. So all they have to do is shop around for the best commission.
Given that usually the freeholder does not occupy the property, his role is that of broker and as such, he can negotiate a commission with the insurance company of his choice, which can be typically 10%-30% of the annual premium.
Here is a recent example (from a specialist seller of freehold investments) showing 34% commission:
B882: Redhill, Surrey RH1 Ten flats above four shops with eleven parking bays to the rear. The ten flats are sold on 125 year leases from 28th February 2003 at a combined (rising) Ground Rent of £500 per annum. The four shops are sold on a 999 year lease at a peppercorn Ground Rent. Seven of the parking bays are commercial at £65 per month and four of the parking bays are residential at £10 per month. The Landlord covenants to insure, manage and recover costs from the fourteen lessees. Sum Insured: £3,110,100. Premium: £7,230.40. Management: £3,560. Insurance commission: £2,500. Being sold free of arrears. Copy documents held: Specimen Leases. Guide Price: £125,000.
Is it surprising that changing your building management can result in significant annual savings?
Use your rights under the The Commonhold and Leasehold Reform Act 2002 Right To Manage, to take over the management functions and save significantly on annual service charges. After you complete the Right To Manage process, by just shopping around, you can usually obtain a substantial reduction in buildings insurance premiums and will no longer pay the freeholder any insurance commission.