Illegal use of premises - the implications
Nick Symes
An insurance contract is one of Utmost Good Faith. This requires the Insured to make a full and complete disclosure to the Insurers of all material facts relating to the property to be insured. A material fact is a fact which would influence the mind of a prudent underwriter in deciding whether to accept the risk and on what terms. This duty not only applies at the beginning of the insurance but is ongoing.
A failure to disclose a material fact renders the contract of insurance voidable and allows Insurers to avoid paying a claim.
Therefore if you discover that your premises are being used for illegal purposes then you must disclose this to the Insurers. The Insurers will then have to decide whether to continue insuring the premises but will almost certainly require you to take action to stop the illegal use by recovering possession due to breach of the lease conditions.
In addition to the insurance position there are two pieces of Legislation that are very relevant in these circumstances:
1) Misuse of Drugs Act 1971
A Landlord or Property Manager can receive a maximum of 14 years in prison and or a fine if they allow the production of controlled drugs to take place their premises. It is far from clear as to whether the lack of knowledge of the use will be an adequate defence.
In addition, any rental income received could be considered under the Proceeds of Crime Act and recoverable from you by the police such as Cannabis Farms.
It might sound surreal but it's a fact that an increasing numbers of residential properties are being illegally used for Cannabis production.
So what are the risks to the property owner?
This normally results in physical damage to the property. Electricity meters are bypassed, water damage from irrigation systems and fires occur due to electrical faults or maliciously. Costs to bring the property back to a habitable condition can be extensive and may not all be recoverable from insurers.
What sort of properties are at risk?
Where the owner has no managing agent and does not inspect the property on a regular basis. In addition where no background checks are carried out on prospective tenants.
There are a number of actions that can be taken to minimise the risks.
Undertake thorough background checks on all prospective tenants.
Refuse to accept all or a substantial part of the rent in cash and be very wary of offers to pay the whole rental period up front in cash.
Carry out regular inspections.
Finally do not assume that as your property is situated in a good class residential area that the risks are less. These farms can and do appear throughout the UK.
2) Sexual Offences Act 1956
If a premises is let with the knowledge of an offense under this Act the Landlord or Property Manager can receive a prison sentence or fine.
If you become aware of the illegal use of your premises notify your Insurance Broker and the police immediately. Otherwise in the event of loss or damage, any claim you may need to make to repair damage to the premises could be refused by the Insurer and the police may prosecute if you have knowingly turned a "blind eye" as well as look to recover monies paid to you in rent.
It is insufficient to think that you have fulfilled your duty if you have just notified the police and they have not taken criminal action. If you have reasonable concern, then you must notify Insurers at the same time as commencing civil action under the relevant section of your lease.
Nick Symes, head of department, property investors, Reich Insurance
