What happens when an insured risk strikes with devastating consequences?

The residents of Spencer Court in Newburn will have been watching the demolition crews move in to tear down the development only 7 years or so after it was completed.  Heavy rain is believed to have led to a culvert on private land collapsing.  The resultant flooding carried away the ground upon which the building was constructed, leaving the piles for the foundations exposed.

Damage to a block of flats caused by flooding is almost always covered by the buildings insurance for the block.  Most leases for blocks of flats oblige the freeholder to place that insurance for the benefit of the tenants.  Cover is usually limited to the rebuild cost  of the block, which is usually less than the open market value of the leasehold and freehold interests combined.  The important thing about this is that in the event that it becomes impossible to rebuild the block most leases provide that the proceeds of the claim be dispersed proportionately amongst the policy beneficiaries.  It is this rebuild sum insured that is paid out to the leaseholders and not the open market valuation of their interests.

It is important to note this as the Spencer Court case could be an example where it may be impossible to rebuild the properties because of the scale of the flooding and the effect on the surrounding land.  This could leave leaseholders in a difficult position if the rebuild cost is substantially less than their mortgages, it may leave them with no property but still with at least part of the mortgage to pay. 

Fortunately, such circumstances as these are rare but when the worst does happen it can have difficult financial consequences even where all parties have fulfilled their legal obligations.

About leaseholdlawyer

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