A recent High Court judgment has shed light on commission sharing structures between landlords and brokers in relation to property insurance. Whilst the case itself has not established any new law, it has significant ramifications for the commercial leasehold market. An increased demand for visibility on the amount of commission landlords are recharging to tenants by way of the insurance rent is just one of the outcomes we can expect to see. But what lessons can be learned from the case and what effect could it have on lease negotiation and the re-charging of insurance costs by landlords going forward?
London Trocadero, the landlord, own the freehold of the Trocadero Centre in London (the centre). Picture House Cinemas Ltd, the tenant, were defending a claim brought by the landlord for the recovery of rent and insurance arrears. A counterclaim was issued by the tenant regarding the level of insurance rent.
As is commonplace in commercial leases, the landlord had an obligation to insure the centre and was entitled to recharge the cost of insuring the centre to its various tenants. The lease in this instance required that the tenant pay to the landlord the "premium payable by the landlord for keeping the Centre insured". One of the issues central to the case was whether the landlord was entitled to charge the commission to the tenant, in addition to the premium.
It was revealed that the landlord had entered into a commission sharing arrangement with its broker. The insurer was being asked to add larger commissions on to the cost of insurance, in some cases up to 65%. The full amount of the premium for the insurance together with the inflated commission were being recharged to the tenant. However, the landlord and its broker agreed that the broker would only retain 25% of the commission with the balance of the commission being paid back to the landlord. Expert evidence given at the trial highlighted that it had become standard commercial practice, since the 1970s for inflated commissions to be charged to tenants.
The outcome of the case was as follows:
It still remains up to the parties to agree who should have the benefit of any discount or commission that the landlord receives for arranging the insurance, and how this is reflected in the drafting in the lease will often come down to the commercial bargaining power between the parties. Arguably, a landlord should be entitled to retain the benefit of any discount or commission if the landlord has a large portfolio of properties which means a lower premium can be negotiated or the landlord insures using a block policy, meaning that it is not possible to attribute any part of the commission to a specific property.
Current practices should be reviewed by both landlords and tenants when it comes to paying for and charging insurance. If a landlord is following the same unfair practice as has been highlighted by the Trocadero case and engaging in commission sharing structures then there is a risk that they are going to fall foul of the judgment.
If permitted by the lease, a landlord may recover the cost of commission from its tenants via the insurance rent, provided that the landlord is simply recharging the actual cost payable (including the correct level of commission payable to the broker).
Landlords should be reviewing their internal policies on procuring insurance. Do the terms of the lease(s) allow the cost of commission to be charged to the tenant, and if so, is the correct level of commission being charged? The Lease Code 2020 provides that a landlord should give a tenant the full benefit of any discount secured through the placing of a block policy. A landlord should also be encouraged to disclose any commission it receives to the tenant. The drafting of the lease(s) should be checked to ensure there is no ambiguity as to what the landlord can recover as part of the insurance rent.
Tenants are encouraged to act quickly as there are likely to be possible time limits in bringing claims against landlords for overpayment of insurance rent. Check the terms of the lease - does it allow the landlord to recover commission in addition to the cost of the premium? If so, a tenant should scrutinise the insurance rent demands and request visibility on the amount of commission that has been paid for the last six to 12 years.
The Trocadero v Picture House case serves as a stark reminder that transparency in insurance rent calculations is essential. The judgment reinforces that landlords cannot profit from commission-sharing arrangements unless expressly permitted by the lease. Both landlords and tenants should review their lease terms and insurance practices to ensure compliance and fairness. Greater disclosure and clarity will likely become the norm, reducing the risk of disputes and fostering trust in commercial leasing relationships.
For more information, please contact the real estate team.
