Analysis of listed buildings for commercial use: Risks, challenges and opportunities
20 March 2018 – Insurance Post article by David Worsfold
Need to know:
One in five owners of listed buildings undertake some form of commercial activity from their home
The commercial activity often isn’t big enough to interest a commercial insurer but is too big to be managed through a conventional residential policy
The 24-month indemnity period for business interruption can be insufficient as listed buildings take longer to repair than other properties
Underinsurance casts a long shadow across the world of listed properties, especially when owners are constantly expanding commercial activities. Experts warn that there can be many traps for the unwary or naïve, many of which do not come to light until there is a claim.
The owners of the country’s great stately homes have long moved on from the era of https://www.highclerecastle.co.uk/downton-abbeyDownton Abbey when large families and even larger staffs lived and worked in a grand house and the thought of having the public traipsing through the house, stopping in a café before visiting the souvenir shop would have been an anathema. Even then, however, many had commercial interests, especially agricultural. Nowadays the houses and their grounds are open to visitors and many host a wide range of events and other businesses. Commercial use has become common and owners are diversifying rapidly, according to research carried out by Ecclesiastical Insurance.
Even smaller listed properties now exploit a wide range of commercial opportunities. This is a trend that has accelerated as historic buildings and gardens have become favoured venues for weddings, innovations in online lettings such as Airbnb have provided access to the tourism market and small businesses look for distinctive office spaces.
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A recent survey carried out by https://historicengland.org.uk/whats-new/news/fifth-of-listed-building-owners-running-business-from-their-propertyHistoric England found that one-fifth of listed building owners undertake some form of commercial activity from their home. As a home-based business grows, people often overlook their growing liabilities and risks, and can unwittingly find themselves with a serious insurance gap. Similarly, if their property has attractive gardens or buildings, owners often start with modest openings, perhaps for local charity events, and slowly expand and do not always appreciate the need to review their insurance cover. This can be a difficult transition for many owners of listed properties, says Tim Slattery, personal lines underwriting manager at Hiscox. “It depends on the nature of what they are doing but often there are changes in exposures that householders just don’t realise have happened. It can then be difficult for them to adjust their insurance cover. The commercial activity isn’t big enough to interest a commercial insurer but is too big to be managed through a conventional residential policy.”
The VAT trap
Many owners of historic buildings have not taken into account the changes to the Value Added Tax regime made by George Osborne when he was Chancellor of the Exchequer in 2012. He imposed VAT on all repairs, maintenance and alterations carried out on listed buildings. Prior to that, they had been exempt from VAT but The Treasury believed many owners were taking advantage of this to install swimming pools or enhance the revenue-earning potential of their properties.
“Many owners may have taken out insurance policies some years ago with reasonable sums assured but haven’t reviewed it since the VAT changes. It means repairs are now going to cost 20% more. That can be a killer when it comes to the sum insured,” says Andrew Bussey, director at consulting engineers & surveyors, Smithers Purslow.
“There should be a VAT exemption when the repairs are being done as part of an insurance claim,” he argues.
Faith Parish, director of heritage and education at Ecclesiastical Insurance, says specialist insurers are flexible when it comes to homeowners expanding their commercial activities. “We understand this happens and we offer a range of solutions to suit varied needs. Our private client policy allows for a certain amount of business use.” Typically, this would be up to around £50,000 of turnover or 5000 hours of farming a year.
Dean Wright, head of sales in the private client division at Lark Insurance, which runs a scheme for the Listed Property Owners Club, says this approach is common among insurers and they can often be very accommodating as their policyholders start to open up their properties to visitors: “We see this a lot, people opening their gardens for charity events and so on. If the public just have access to the gardens, it generally just becomes a liability issue, so there is a small additional premium to pay. If this is a charity event, we try to get our insurers to waive the charge. If the home is also open to the public, we can also cater for this. But insurers may apply a higher excess or apply a theft limitation clause for the period the property is open to the public.”
As owners get more ambitious, Wright says specialist advice needs to be sought. “Placement of these risks will all depend on the risk as a whole, for example someone working from home or running an online business, we could cater for on a private client policy wording but we would always get our commercial team involved to consider all the commercial cover that may be needed like stock, business interruption or cyber.” Parish says as commercial use develops, it is important to look hard at exactly what is going on. “There is a lot of variety. For instance, craft and pottery works can vary enormously. There could be a potting oven in the property that might significantly increase the fire risk. Even when it comes to opening up gardens, there is a big difference between just opening up your garden and serving tea and cakes and having a tree-top trail.”
Another growth area that brings additional risks is the use of listed buildings as locations for television and film. While the expensive stars will be insured by the producers, property owners can face additional hazards such as the heavy use of electricity, which might overload ageing wiring. The expansion of commercial activity often starts to expose the full extent of the challenges owners will face if they have a significant claim. This is where underinsurance looms large, both for the business uses and for the buildings themselves.
Historic England recommendations
The 2017 report by Historic England made several specific recommendations about insurance, valuations and commercial activity:
Historic England should seek to engage with professional bodies in the building trades in order to provide them with the information to correctly advise listed building owners.
Historic England should work with the insurance sector to ensure that historic property owners receive appropriate advice and information about insurance.
The heritage sector should explore the supply of professional expertise and materials to determine whether local or national shortages exist. This study should also assess the potential impact of Brexit on the supply of expertise and materials.
Further investigation of commercial activities is undertaken to understand the exact scale and nature of commercial activity at historic properties. This will allow Historic England to ensure that guidance is relevant and will improve understanding of the economic contribution made by the sector.
Once owners become reliant on the commercial income, perhaps for funding the expensive repairs and maintenance of the property, or even as their main income, then business interruption cover is essential. The normal 18 to 24 month indemnity periods can be woefully inadequate, warns Parish: “Once you are talking about restoring listed buildings after a fire or a major water leak, you can be looking at several years’ lost income. As an example, we had one claim where the listing authorities required a particular type of stone to be used and we had to have a quarry reopened to obtain it. People just don’t think about those sort of problems.”
David Damsell, director of major and complex loss at Crawford & Co, says the last thing he wants to find is that the BI coverage is inadequate: “The challenge is that reinstating listed buildings always takes longer. You have got to work with Historic England, the planning authorities and other specialist groups. “You have to involve them from day one to get their buy-in. They are not unreasonable people but they need to understand what you want to do and why you want to do it that way. They don’t always understand the need to get a business up and running.” He says the discussions with the relevant authorities often take between six to nine months but the biggest problem is the underinsurance of the properties themselves.
The Historic England report found that up to one-quarter of owners of listed buildings relied on their own valuations. “Overall, there are doubts over whether listed building owners are receiving appropriate advice,” says the report. “The insurers or professionals consulted may not have suitable knowledge and understanding of the needs of listed buildings and may not even visit the property. The majority of those relying on their own calculation do not possess the relevant skills to make an accurate calculation. Estimates based on purchase price may not have kept pace with house price inflation (which may be different for the specific property) and may not reflect the actual rebuild cost.”
Even the 36% who get professional valuations may not be getting the right advice, warns Andrew Bussey, a chartered building surveyor and director of Smithers Purslow. “I have had situations where on paper a listed building is insured for the exact correct amount using the Building Cost Information Service rates but this leaves you with a claim where costs exceed the sum insured. When there are extensive repairers needed, the index assumes full demolition and re-build. If it wasn’t listed, you would just pull it down and rebuild from scratch. How many times are you going to be able to that with a listed building? Slattery adds: “The trouble with listed properties is you often need to get in specialist tradesmen who are difficult to source and can be booked up a long time in advance. They also cost a lot more.” Besides, some traditional building crafts like thatching are often seasonal. Managing a repair programme becomes very complex when certain crafts can only come in when others have finished their work. “We know most people are underinsured but with a listed property, that becomes an even bigger problem. Most people are not aware of the costs involved in repairs and the complex nature of the supply chain,” says Slattery.
Even when an adequate sum insured has been put in place, there can still be some nasty surprises, says Bussey. “People need to add a buffer when they insure a listed property. “We have had situations where a claim has been agreed and where the specification is right for putting it back into a pre-loss condition. It then goes out to tender and nothing comes back within the sum assured. The policyholder has taken the right advice and the surveyor has got everything right but the circumstances, especially the market for specialist trades, has changed.” Very occasionally, if a property is badly damaged, it is possible to get it de-listed so it can be knocked down and rebuilt using modern design and materials. This is not a quick process, however. Hiscox recently handled a claim on a smoke-damaged building where toxic fumes had been absorbed into the plaster.
Slattery says everyone agreed that despite being listed it was an “ugly property in the middle of nowhere that was much better being rebuilt from scratch”. The clean-up and decontamination were likely to take a minimum of two years without any certainty that the toxicity would be completely eliminated. With the property owner’s backing, the insurer has applied to have it de-listed but is by no means certain it will be granted.
Bussey says such applications are not made very often: “You need to put forward a very compelling case for de-listing and it is very rare for it to be granted.” Parish notes: “You need to look at what a listing covers. Some planning authorities are flexible, especially where a building is listed for historical significance rather than pure architectural merit. They will help to strike a balance as listing does not mean freezing it in aspic.” Negotiations are also advised when restoration requirements clash with health and safety standards: “Health and safety comes first and there will usually be a compromise but it can take a very long time,” says Slattery.
The expansion of commercial activities within listed properties is not entirely without advantages from a risk management perspective.
Many properties are now finding demand for office space, lettings, events and visiting extends all the year round and this can reduce some common hazards such as frozen pipes and leaking roofs, says Parish: “We always suggest people keep on top of maintenance, checking for leaks, especially in parts of a property that are not used regularly. The trend towards opening all the time is also better from a security and protection perspective.”
With the costs of maintaining listed properties on the rise and the opportunities for generating income from commercial activities expanding, the need for quality advice on insured property values, BI and restoration is going to continue to increase, something Historic England has identified and will be looking to engage on with the insurance industry.