The Court has found in favour of the commercial tenant in the case of London Trocadero (2015) LLP v Picturehouse Cinemas Limited (2021) in relation to the level of premiums payable, after the tenant contested various charges imposed by its landlord. The Court found some issues in favour of the landlord and others in favour of the tenant but this article only deals with the payment of premiums that are charged by the Landlord and the Court’s view that not all payments charged can be recovered by the Landlord. In this case the court ordered the Landlord to reimburse the tenant hundreds of thousands of pounds in overpaid insurance rent, due to the Landlord charging the tenant for the costs of insurance “commission” that were reimbursed to itself, thus giving the Landlord a profit for no additional work. The Landlord has confirmed that it intends to appeal this decision.
Landlords and tenants will both need to take advice on their leases to ensure that the landlord is able to recover the extent of the premiums which include commission and whether tenants ought reasonably to pay for such commission. This case shines a light on an apparently common industry practice which may often fly under the radar of unsuspecting tenants: large payments to landlords via insurance broker commissions.
It is accepted that the cost of the insurance for a property with the obligation to use proceeds for reinstating the tenant’s unit and usually leases allow the landlord to recharge this cost to the tenant as “insurance rent,” calculated based on square footage or the hazardousness of the tenant’s uses. For multiple buildings, landlords may opt for a block policy with apportionment between various policies. The insurer receives the “net” premium, while the broker’s commission is added on top and passed to the landlord.
Sometimes, landlords request increased broker commissions, rebating the excess back to themselves without affecting the net premium which can lead to tenants being charged more. The total premium, including broker’s commission, is the “gross” premium, apportioned between tenants and subject to Insurance Premium Tax (IPT). The insurer retains the same net premium, and the policy terms remain unchanged, but the landlord gains a significant profit element rebated through the gross premium. This arrangement can also reduce competition among insurers, potentially increasing net premium rates.
In this case, over the years, the tenant’s expert claimed that the uplift to the landlord was, on occasion, as much as 60%. This meant that the landlord received a payment higher in value than the net insurance premium itself; an amount disproportionate to any work or services carried out. The court has now ordered that the landlord pay the tenant back hundreds of thousands of pounds in restitution. This is an extreme case involving a premium being charged to a tenant in the sum of £1m. The insurance premium was £400,000 but the landlord’s commission was £600,000.
Whether a tenant can reclaim overpaid commission rent will depend on the drafting of its lease and the facts of the landlord’s insurance arrangements. However, given that the drafting in this case was not particularly unusual and the insurance arrangements in question are commonplace, the impact of this decision could be hugely significant for landlords and tenants across the country.
The lease dated back to 1994 and included wording “for keeping the Centre insured against Insured Risks”. The judge determined that for a sum to be considered a “premium” under this clause, it must be both “payable” and “for keeping the Centre insured against Insured Risks.” The landlord’s commission did not satisfy these requirements because it was rebated as part of arrangements engineered by the landlord, meaning it was not truly “payable.”
Additionally, the commission was optional and not necessary for keeping the centre insured, but rather provided the landlord with an opportunity to profit at the tenant’s expense. The judge also considered the reasonableness of the outcomes and concluded that the landlord’s interpretation would produce an unreasonable result, as it would allow the landlord to inflate the insurance rent payable by the tenant.
The tenants argued that terms should be implied into the contract to ensure that the sums demanded by the landlord were representative of the market rate and reflected insurance contracts negotiated at arm’s length and in the ordinary course of business and to ensure that a party’s discretion is exercised reasonably, rationally, and in good faith where one party has significant discretionary power affecting the other party’s rights.
The court assessed the overpayment made by the Tenant objectively and concluded that a reasonable observer would determine that the Landlord’s right to retain sums demanded was conditional on those sums being contractually due. Consequently, it held that the Tenant was entitled to restitution for the overpayments made under a total failure of basis, as the payments were made on the basis of fulfilling contractual obligations that did not exist for these amounts.
There are several factors to consider if a tenant is to avoid unexpected extras and if landlords are to lawfully recover them. Landlord commissions may not be expressly mentioned in a lease document, but it would be favourable to landlord recovery if they were clearly set out and favourable to a tenant if disclosure drafting was widened to prevent similar issues in new leases.
Claims for overcharges could be based on express or implied terms, or on restitution. It is important to establish whether the landlord performed any valuable services related to insurance to justify the commission. The tenant’s knowledge or suspicion about the landlord’s commission, the wording used when payments were made, and the timing of these payments are also significant factors.
Claims in restitution will always turn on their own facts, but there are some clear points from this case of wider application:
- Courts will start with the words in the lease and interpret those words strictly and literally. In the absence of express and clear terms in the lease entitling a landlord to charge its own commission or fee for placing/arranging insurance, a tenant is unlikely to be liable to pay these charges.
- Even if the lease does not disallow landlord’s commissions, there is the potential safety net of an implied term that the Judge found in this case, which may also assist tenants to recover or resist landlord’s commission payments.
- Courts are unlikely to imply a term into a lease to assist landlords to charge commissions or even a fee for arranging insurance where the lease does not provide for one. Commercial parties are expected to define obligations expressly in their leases.
- Landlord commercial practice or industry norms do not necessarily create a legal entitlement to charge landlord commissions. The language of the lease is paramount.
- Tenants who become aware (or ought with reasonable diligence to have discovered) that landlords are charging commission without any legal basis must not delay taking action to recover those payments.
There is a 12-year limitation period for breach of express/implied terms and a six-year period for restitution, which can be postponed if the claim is based on a mistake. Concealment may also be relevant if the landlord is withholding disclosure in instances where lease drafting does not make landlord commissions obvious.
For more information on how we can assist you with your commercial property needs, please contact our Head of Property, Anna Duffy, on 0151 321 0000 or via email at anna.duffy@dtmlegal.com.
