As a leaseholder, ensuring that your building is properly insured is critical for protecting your investment. But what happens when the freeholder is unresponsive and unable to provide essential documentation, such as the buildings insurance policy? This scenario recently arose for a reader, Simon Mars, whose neighbour faced difficulties when selling her flat due to a lack of buildings insurance documentation. Here’s an overview of the issue and guidance on how to approach such situations.
The Problem Simon describes a situation where one of the leaseholders in a block of five flats was unable to sell her property because the freeholder had not provided evidence of buildings insurance. Neither the managing agents nor the freeholder had a copy of the insurance policy, leading the buyer to withdraw from the sale. This raises an important question: what can leaseholders do in these circumstances?
Legal Obligations Typically, under the terms of most leases, the freeholder is responsible for arranging buildings insurance for the entire block. Leaseholders pay their share of the premium through service charges. If the freeholder fails to provide or maintain insurance, it can lead to significant complications, especially when leaseholders are trying to sell or remortgage their properties. Without buildings insurance, mortgage lenders are unlikely to proceed, leaving the leaseholder in a difficult position.
Should the Conveyancing Solicitor Have Resolved This? In Simon’s case, the conveyancing solicitor involved in his neighbour’s attempted sale should have been responsible for ensuring that the buildings insurance was in place before the sale could complete. Part of a conveyancer’s duty is to investigate and verify all necessary documentation, including buildings insurance, before allowing the sale to proceed.
If the solicitor was aware that neither the freeholder nor the managing agents could provide proof of insurance, they should have advised the seller of the issue and attempted to resolve it. This might have involved:
- Contacting the freeholder and managing agents directly to request the insurance documentation.
- Advising the seller on alternative solutions, such as arranging temporary insurance or escalating the matter legally if the freeholder remained unresponsive.
Could the Conveyancing Solicitor Be Liable for Professional Negligence? If the solicitor failed to carry out these actions and allowed the sale to fall through due to missing insurance, they may be negligent. Solicitors owe a duty of care to their clients to act with reasonable skill and care in the performance of their professional duties. In this case, the solicitor’s responsibility would have included ensuring the sale could go ahead smoothly, which involves ensuring that all necessary documentation, such as buildings insurance, is in place.
A solicitor may be found negligent if:
- They failed to inform the seller about the lack of buildings insurance or did not take appropriate steps to remedy the situation.
- The seller suffered a financial loss as a result of their failure to act.
What Can Be Done After the Event? If the seller believes their solicitor has been negligent, they may wish to take the following steps:
- Raise a Complaint with the Solicitor’s Firm The first step is to raise a formal complaint directly with the solicitor’s firm. Solicitors are regulated by the Solicitors Regulation Authority (SRA), and the firm should have a procedure for handling complaints. The seller should outline the specifics of the issue, including how the solicitor’s failure resulted in the collapse of the sale.
- Seek Independent Legal Advice If the solicitor’s firm does not provide a satisfactory response, the seller can seek independent legal advice from a solicitor specialising in professional negligence. They can help assess whether the solicitor was negligent and advise on the next steps, including the possibility of making a claim for financial losses.
- File a Complaint with the Legal Ombudsman If the issue remains unresolved, the seller can file a complaint with the Legal Ombudsman. This independent body investigates complaints about solicitors and can recommend compensation for clients who have suffered due to poor service.
- Pursue a Professional Negligence Claim In cases where negligence is proven, the seller may be able to pursue a professional negligence claim against the solicitor. If successful, this could result in compensation for any financial losses suffered as a result of the sale falling through. These losses could include costs related to the collapsed sale, such as legal fees, surveyor fees, and potential differences in the selling price if the property later sells for less.
Steps to Resolve the Situation
- Check the Lease Agreement The first step is to review the lease agreement to confirm the freeholder’s obligation to provide buildings insurance. In most cases, the lease will specify that the freeholder is responsible for arranging and maintaining insurance for the property.
- Write to the Freeholder If the freeholder is unresponsive, the leaseholders should collectively write a formal letter to the freeholder, reminding them of their legal obligations under the lease to provide buildings insurance. It is essential to send this communication via recorded delivery, so you have proof that it was received.
- Contact the Managing Agents If managing agents are involved, it is their duty to manage the property on behalf of the freeholder, including ensuring that the building is insured. If the managing agents cannot provide a copy of the insurance policy, you should formally request that they escalate the issue with the freeholder and provide an urgent update.
- Consider Collective Legal Action If the freeholder remains unresponsive and the insurance issue is not resolved, leaseholders may need to consider collective legal action. Leaseholders could apply to the First-tier Tribunal (Property Chamber) for an order to compel the freeholder to arrange insurance or to seek the appointment of a new managing agent if the current agents are failing in their duties.
- Right to Manage or Enfranchisement If issues with the freeholder persist beyond insurance problems, leaseholders may wish to consider exercising their right to manage or to collectively buy the freehold (enfranchisement). Under the right to manage (RTM), leaseholders can take over management responsibilities, including insurance, without buying the freehold.
- Arrange Insurance Independently In exceptional circumstances, where the freeholder is either missing or refuses to comply, leaseholders may be able to obtain their own buildings insurance. However, this can be complicated and might require legal advice to ensure compliance with the lease. Leaseholders should also be aware that if they arrange insurance independently, they may struggle to recover the cost from the freeholder.
Inform Your Mortgage Lender
If you’re a leaseholder with a mortgage, it’s essential to notify your lender as soon as you become aware that the buildings insurance is not in place. Most mortgage agreements include a condition that requires the property to be adequately insured at all times. Failure to comply with this condition could lead to serious consequences, including the lender taking action to protect their security interest in the property.
Here are the steps to follow:
- Contact Your Mortgage Lender Promptly Inform your mortgage provider in writing as soon as you become aware of the insurance issue. Provide details of the situation, including any communication with the freeholder or managing agent, and outline the steps being taken to resolve it. Lenders may appreciate your proactive approach and may offer guidance on next steps.
- Discuss Interim Measures Some lenders may allow you to arrange interim buildings insurance while the issue with the freeholder is being resolved. This temporary insurance would be for your flat only, rather than the entire building, but it might offer some protection and show the lender that you are addressing the problem.
- Understand Potential Lender Actions If the situation remains unresolved, the lender could take action, such as:
- Adding an insurance policy to cover the property and recovering the cost from you.
- Issuing a notice of default on the mortgage.
- In extreme cases, they might demand full repayment of the loan or take legal action to protect their interest.
- Provide Regular Updates Keep your mortgage lender informed of progress, including any attempts to resolve the issue with the freeholder, or legal action being considered. Maintaining open communication can help mitigate any potential escalation on the lender’s side.
Why It’s Important By keeping your lender informed, you protect yourself from potential breaches of your mortgage terms, and you also demonstrate that you are taking responsible steps to resolve the situation. In the worst-case scenario, if the freeholder continues to be unresponsive, the lender may work with you on alternative solutions, including enforcing insurance on the building.
In summary; While a freeholder’s failure to provide buildings insurance can be stressful and cause delays in property transactions, leaseholders do have options to address the issue. From writing formal letters to applying for legal remedies, it’s essential to act swiftly to ensure that the building remains protected. Additionally, informing your mortgage lender can prevent potential breaches of your mortgage agreement, protecting your position while the issue is being resolved. If all else fails, considering the right to manage or buying the freehold could offer long-term solutions, giving leaseholders more control over their property’s management.
