Insurance costs have increased substantially in recent years and insurance commission has become a hot topic for leaseholders. Tenants regularly argue before the First-tier Tribunal (Property Chamber) that the landlord should deduct any commission it receives from their service charge bill in respect of insurance costs. Landlords say the fact they receive commission does not mean that the gross premium is not payable. Who is right? What about broker’s commission – should that be credited back to the tenants?
These were some of the questions considered by the Upper Tribunal (Lands Chamber) recently in Octagon Overseas Ltd v Cantlay [2024] UKUT 72 (LC); [2024] PLSCS 65, but the decision may soon be old news if the Leasehold and Freehold Reform Bill comes into force.
The decision
Octagon owned the freehold of a large estate in London’s Docklands containing 325 flats in five blocks together with commercial units, cafés and a gym. Four of the blocks were held on a headlease by a management company (CREM).
The headlease placed the primary insurance obligations on the freeholder. It contained a fairly standard insurance covenant requiring the landlord to insure “with some insurance company… of repute or with Lloyd’s Underwriters and through such agency as the Landlord may from time to time determine”. Slightly less standard was a term which provided that the landlord would be entitled to retain and utilise as it saw fit any commission attributable to placing the insurance. CREM was required to pay insurance rent in respect of the cost of insuring and the residential leaseholders were required to reimburse CREM for the “insurance rent” as defined in the headlease.
Octagon delegated its responsibilities to an agent (WMS), which in turn engaged a broker (Reich) to place the insurance. The chosen insurer paid a broker’s fee to Reich, which passed on part of that fee to WMS. The FTT found that the broker’s fee paid and retained by Reich was payable by the leaseholders, but that the part passed on to WMS was not.
The UT disagreed. It said that the terms of the lease did not allow the FTT to exclude the sum paid to WMS from the insurance rent. The leaseholders were required to reimburse the landlord for the cost of insurance, which was the gross premium agreed between the broker and the insurer. Out of that gross premium, the insurer had agreed that the broker should receive a commission, and the broker had arranged with the landlord’s agent that it would carry out some of the services and receive part of the commission. If those services had not been carried out by WMS they would have been carried out by someone else. They formed part of the cost of insuring. That arrangement did not reduce the cost of the insurance to the net sum retained by the insurer.
However, on the question of whether the fees charged by WMS for the work actually done in placing the insurance were “reasonably incurred”, the landlord was less successful. The UT considered that only about 35% of the remuneration paid to WMS for its services via the insurer’s commission was reasonably incurred and the service charge was reduced accordingly.
Incoming legislation
Octagon turned on the construction of the provisions of the lease and the headlease. However, if the Leasehold and Freehold Bill comes into force in its current form, the wording of the lease will be trumped by statute.
The perception is that freeholders have abused their position in relation to insurance commissions in order to “milk” leaseholders. If the Bill becomes law, managing agents will only be able to charge transparent administration fees for building insurance and won’t be able to receive commission for arranging building insurance on behalf of leaseholders.
The Bill introduces a new section 20G to the Landlord and Tenant Act 1985, which will provide that “excluded insurance costs” are not to be taken into account in determining the amount of any variable service charge payable by a tenant.
Excluded insurance costs are defined as any costs (whether or not they are expressed as forming part of an insurance premium) that:
(a) are attributable to payments made, or to be made, to arrange or manage insurance; and
(b) are not attributable to a permitted insurance payment.
Payments (which include non-monetary benefits and a right to retain money) made to arrange or manage insurance include payments made:
(a) for the purpose of providing an incentive to enter into, or arrange for another person to enter into, a particular contract of insurance; and
(b) as remuneration for any work done in relation to (i) a contract of insurance before or after it has been entered into, or (ii) insurance generally without a particular contract of insurance in contemplation.
Permitted insurance payments will be set out in regulations which are yet to
be made.
A new section 20H will provide that, if a tenant is charged and pays an excluded insurance cost, the FTT may not only order that it be repaid but can also award damages to the tenant of between one and three times the prohibited amount. On the plus side for landlords, a new section 20I will imply a term into a lease under which a service charge is payable to the effect that, if the landlord incurs costs attributable to a permitted insurance payment, the tenant must pay the landlord those costs. This is irrespective of whether the lease provides for the recovery of such insurance costs.
The Bill also includes provisions requiring landlords to be more transparent about insurance by imposing a duty to provide information about it.
Insurance commissions are one of the last remaining benefits of being a landlord. Like many of the other proposed reforms, the removal of this “perk” will, no doubt, speed up the transfer of management responsibilities from freeholders to leaseholders.
Nicola Muir is a barrister at Tanfield Chambers
