Landlords Beware, Tenants Be Aware – Landlord Commission and Insurance Rent

London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others 

A significant decision was handed down last week which could have wide ramifications for landlords and tenants across the country. It relates to what a landlord is able to recover from its tenants through insurance rents, particularly with regards to circumstances where the landlord includes a “landlord commission” when placing an insurance policy.

Key points to note:

Landlords

1. If you are placing insurance and re-charging your tenants a commission, check you are entitled to do so under the lease terms.
2. In this case, the Judge concluded that an additional landlord commission was not a sum “payable…by way of premium for keeping the centre insured” in accordance with the lease terms and so could not be recovered from tenants through the insurance rent.

Tenants

1. If your landlord insures the premises and charges the costs back to you, do you have visibility on the amount of commission they are charging? If not, you should request it.
2. This case shows some landlords are charging a landlord commission and passing additional costs onto their tenants in circumstances where they are not entitled to under the terms of their lease.

The court gave judgment last week on the tenant's claim disputing, amongst other things, the element of insurance rents comprising of “landlord commission”. The Judge’s decision could be of real consequence for the real estate sector, with expert evidence in the case revealing that some tenants could be being overcharged insurance rent by as much as 60%.

 

Background

The landlord, London Trocadero (2015) LLP, delegated the task of arranging property insurance to their managing agent, Criterion Capital Limited (CCL). The landlord, through CCL, would liaise with an insurance broker who would arrange a single "block policy" with an insurer (or group of insurers), which would cover properties of the landlord, and other group companies, within their portfolio.

As is standard practice, the broker would recover part or all of their fee through the commission.  Importantly, brokers are free to share that commission with others. In the present scenario, the landlord arranged with the broker for an increased commission to be charged.  The broker would retain their agreed level of commission, and the additional amount would be passed from the broker to the landlord as a “landlord commission”. Expert evidence in the case suggested that landlord commission of up to 37.5% was “not unusual”, seemingly indicating this practice is widespread.  It should be noted that the landlord obtained varying rates over the years, including 45.7%.

The facts of the case demonstrated that the landlord was able to obtain an additional profit from the tenant through the re-charging of the landlord commission, but which, importantly, the tenant was not contractually due to pay.

The Judge determined that:

First, on the correct interpretation of the insurance rent provisions in the lease, the landlord was not permitted to charge landlord commission. The insurance provisions in the lease permitted the landlord to recover the true amount of the premium payable to insure the building. In this scenario, the insurer would have been perfectly willing to insure the building without this commission on top.

Second, a term should be implied into the lease that the landlord would only be entitled to charge insurance rent reflecting a premium agreed following an arms-length negotiation. In the present case, the relationships between the insurer, broker and the landlord were not arm’s length.

The landlord is required to repay to the tenant the landlord commission of circa GBP700,000.  As at today's date, we do not know whether the landlord intends to appeal.

 

Conclusion

This is a very interesting case that could have far reaching consequences.  As is so often the case, the wording of the lease will be of paramount importance in determining whether or not a landlord is entitled to charge landlord commission.

In this case, the tenant was successful by pursuing a claim based on the remedy of “unjust enrichment”, ie that the landlord had been unjustly enriched at the expense of the tenant.  This is known as a remedy in “restitution”.  Restitution cases are notoriously fact sensitive.

The Lease Code 2020 provides that landlords should give tenants the benefit of any premium discounts secured through the placing of a block policy.  It does not place any restrictions on landlord commission, other than to require a landlord to disclose any commission it receives to the tenant.