Request from Freeholder for reinstatement value?

by Readers Question

11:09 AM, 10th August 2015
About 3 years ago

Request from Freeholder for reinstatement value?

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Request from Freeholder for reinstatement value?

One of my properties is a flat in a large converted detached house in Dewsbury, W. Yorks. I also happen to be the MD of the ‘Right-To-Manage’ company that manages maintenance, landscaping and buildings insurance for the entire block hence I send requests for service charges to the other flat owners.underinsured

I recently received a letter from the company representing the freeholder requesting a copy of the latest valuation for the apartment block to ensure their ‘interest’ is adequately insured. So far I have declared a reinstatement value based on an estimate of the market value of all 10 properties added together which is equivalent to just over £0.5M.

I am currently in the process of getting a RICS valuation done to satisfy this request from the freeholder – my fear is that this could end up being well in excess of £0.5M thereby meaning the apartment block is underinsured unless we pay a significantly higher premium which would be unsustainable and wouldn’t enable us to carry out general maintenance and safety related checks, etc. A builder has also attended the block and gave a rebuilding estimate of £1.5M !! His justification for this was that the building would need to be rebuilt in stone in keeping with the local area.

Some questions:

1) Naturally there is a limit to how I move forward with this until the RICS valuation is complete, however I wondered if any other members have experience of this scenario ?

2) I find it bizarre that it could cost say 2-3 times more to rebuild a property in relation to its market value – what insurer would agree to pay out £1.5M for an apartment block in the event it was destroyed (e.g. fire) if the block only had a market value of £0.5M and even if the higher premium was paid to reflect the higher value ?

3) The valuation and the reinstatement value may not be one and the same – for example would the RICS valuation reflect market value or what it would actually cost to rebuild the property ?

Supposing the worst case scenario occurred and the valuation came back at say £1-1.5 M, I guess the options available are :

1) Declare to our insurers that the reinstatement value was underestimated and therefore pay the higher premium to reflect this – unsustainable unless the service charge was significantly increased. (Note so far I’ve absorbed the cost of the insurance into the service charge).

2) Continue with the same premium but accept that if the building was destroyed then myself/the other flat owners would be liable in stumping up for the shortfall since the building is underinsured.

Genghis



Comments

Neil Patterson

11:18 AM, 10th August 2015
About 3 years ago

Hi Genghis,

Being underinsured is a precarious position to be in. I have been told that if a property is only insured for half its rebuild/reinstatement cost then if something happens to the property you may only receive half the costs from the insurance company even though it is under the amount you do have cover for!

It is not uncommon for a property to cost more to rebuild than the value as it all depends on the type of construction and the area. In your case it could be the type of stone used.

Now you are aware of the potential issue I would make sure you get the rebuild cost from the RICS valuer have have the property insured for this amount asap. You may have to pass this cost on in the management fee.

If you need help finding great low cost cover please see our Property118 insurance scheme >> http://www.property118.com/landlords-insurance-landlords-buying-group-2/

Roy B

13:50 PM, 10th August 2015
About 3 years ago

My view is this - get a RICS survey for the rebuilding costs and insure for that - I see no other option - this should be included in the the service charges even if it means a large increase. Should the worst happen you are insured and have done your bit- but should it happen and you are only partially insured you may well end up being held liable for the
differnce in cost of the rebuild.

Genghis Perriaman

14:04 PM, 10th August 2015
About 3 years ago

Thanks good advice I suppose this is why many estate management companies segregate the service charge and buildings insurance so that all leaseholders appreciate what proportion of the overall cost is due to insurance

David Atkins

17:15 PM, 10th August 2015
About 3 years ago

I'm also Director for RTM. I get the insurance companies (who want new business) to come and assess. They always go over the odds and I've never found the differences between insurance companies to make much of a difference on premiums. The biggest factor is getting the best deal. Don't tell them you are a one off block manager as they will want more business. That being said the RICS valuation will cover you if the worst does happen but they are expensive.

Graham Bowcock

17:41 PM, 10th August 2015
About 3 years ago

Genghis

The advice above seems to be good. The market value is irrelevant when assessing reinstatement costs. The reinstatement valuation will cover matters such as partial damage and other issues such as bracing adjoining property (if a terrace). It is also important to consider if the property is listed or in a conservation area. In the event of damage the leaseholders will want it putting right and will assume they are appropriately covered.

Although valuers (I am one) are all very busy at the moment it shouldn't take you too long to get a decent report provided from a registered valuer. Tell the freeholder what you are doing and ask him to wait - surely he shouldn't be worried about a couple of weeks.

I think the freeholder has possibly done you a favour if you are under insured as that is very risky. The costs of the valuation and ultimately any higher insurance premiums will be passed on in the service charges to the leaseholders; just make sure you get competitive quotes and keep the leaseholders informed.

Neal Craven

8:12 AM, 11th August 2015
About 3 years ago

You must insure for the total cost of rebuilding or ANY claim will be averaged ie if you insure for £0.5m and rebuild cost is £1.5m if you have a £30,000 claim you will only be entitled to £10,000. Also if it's under insured and you are in charge I'm not sure if you could be negligent. Also don't think any lenders would be happy.

Genghis Perriaman

22:31 PM, 2nd September 2015
About 3 years ago

Thanks again for the feedback - I have a question aimed at anyone generally but particularly david - could you recommend any firms who offer competitive insurance quotes particularly for apartment blocks (here we're talking about 10 flats in a converted detached house) ?

Neal Craven

9:05 AM, 3rd September 2015
About 3 years ago

We use Proactive, my contact is
Sam Leeder ACII
Commercial Sales Manager
ProAktive

T 01302 341 344
M 07899 806329
F 01302 341 282
W http://www.proaktive.co.uk

Whiteskifreak Surrey

20:21 PM, 27th June 2016
About 2 years ago

Dear Community Members,
can anyone recommend a property VALUER local to Guildford? I need someone quickly, just to give me a realistic selling price. Any help will be greatly appreciated. Thank you.


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