When is it acceptable for a landlord to receive a commission for placing buildings insurance, and should the commission be passed on to the landlord’s tenants? The High Court has recently considered this issue, and there are important lessons to be learned.
The case
Picturehouse Cinemas operate a cinema in the Trocadero Centre on Piccadilly Circus in London. They are engaged in a long-running dispute with their landlord, Criterion Capital, involving various issues. Picturehouse became aware that, when arranging buildings insurance for the property, Criterion was receiving a hefty commission from the insurer, up to 60% of the net premium cost. Picturehouse successfully argued that there was no legal justification for the commission, whether under the lease or otherwise.
Had the landlord been carrying out a service by obtaining quotes and choosing the best one, they may have been able to charge a reasonable administration fee that reflected the work they had done. However, the “commission” and “administration fee” (the landlord had used both terms) charged in this case were found to be artificial and engineered for the landlord’s benefit. The landlord had been “unjustly enriched” by the overpayment, and the tenant was entitled to a refund of that element of the sums that it had paid.
What does the lease say?
The costs that a landlord wants to pass on to its tenants are tightly regulated in residential leases but, in commercial leases, the parties are generally free to agree what they want. In principle, therefore, a commercial lease could allow the landlord to charge a commission, but the wording would have to be very clear. An obligation to pay an insurance “premium” does not, the court said, include an obligation to pay a commission. The RICS Commercial Lease Code encourages transparency, and some leases now address the issue head-on, e.g. the Model Commercial Lease, which is a template commonly used in larger lettings. Where a commission is payable, however, the obligation will usually be to pay a “reasonable” sum.
It would be fair to assume that “reasonable” should reflect the work that the landlord has carried out in arranging the policy rather than an attempt to profit at the tenant’s expense. It would be a bullish landlord who sent out a lease allowing it to retain whatever commission it liked, and this would have been unlikely to have been accepted by most tenants, even before this case. The lease might stipulate that, even where the commission must be reasonable, the amount certified by the landlord is conclusive. This wording is standard in service charge provisions, but we know from a recent Supreme Court case[1] that that will not stop the tenant from arguing that the costs were not properly incurred.
How far back do we have to go?
Where a tenant has been overcharged, they have six years from the date of the overpayment to request a refund. This is the “limitation period” established by statute for cases of unjust enrichment. Tenants who believe their insurance premiums were inflated may now, in light of this case, seek to challenge them, as the case has settled an issue that was previously unclear. If the landlord has misled the tenant in a way that amounts to fraud, however, the clock would not start to run until the tenant became aware of the concealment, which may prolong the period in which to claim.
Of course, challenging the premium requires proof that a commission was paid, which can be difficult to establish. In light of this case, however, a landlord may find it difficult to refuse to disclose a breakdown of commissions paid. A failure to do so may arouse suspicion, and tenants negotiating leases now can now be expected to require a breakdown of how the premium was calculated.
