Insuring trouble: What landlords must learn from the Trocadero high court ruling

A recent High Court ruling in London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others has delivered a significant wake -up call for landlords who recover insurance commissions from tenants under commercial leases.

Market practice

Insurance brokers usually charge a fee of 5% of the insurance premium for arranging the insurance cover. A landlord will then pay the broker the insurance premium plus the broker’s fee which is the “gross premium”. This gross premium is then recovered from the landlord’s tenant(s). What has become widespread practice in the industry is for brokers to ask for a fee higher than the usual 5% commission, which would increase the gross premium eventually recovered from the tenants and allow the landlord to keep the extra commission. Evidence was adduced at trial which showed that this commission arrangement has been a widespread practice since the 1970’s and the industry standard was anything up to a fee of an eye watering 28.75%.

The dispute

The landlord, London Trocadero LLP, operated a block insurance policy for a large portfolio of properties and it passed the cost of this policy on to tenants, including Picturehouse Cinemas. The gross premium included substantial landlord commissions- up to 60% of the policy premium. The tenant challenged these costs, arguing that the commissions were not truly part of the premium and should not have been passed on. The High Court agreed.

The decision

The Court found that the tenant did not know that it was paying a landlord commission. It was found that the landlord’s commission was not something imposed by the insurers but rather a fee that was engineered and controlled by the landlord.

The landlord’s commission was wholly disproportionate to the work carried out by the landlord. It was held that the insurance broker had carried out the brokerage work and there was nothing that the landlord could do by way of administration that could justify the level of fee charged.

On proper construction of the lease terms, the tenant’s insurance liability was to pay sums payable by the landlord for keeping the building insured. It was held that the purpose of the landlord’s commission was not for insurance, but instead for profit.

The High Court agreed with the tenant and held that the lease’s requirement for the tenant to pay a premium to the landlord referred to a genuine cost paid to the insurer and therefore the recovery amounted to unjust enrichment (in other words, the landlord obtained a benefit at the tenant’s expense). It was held that the tenant had made payment on the basis that it thought it was discharging a genuine liability under the lease. That basis failed and the tenant was entitled to its money back.

Key takeaways

• Tenants can challenge historical charges and have 6 years to make these types of claims against landlords. Tenants could have 12 years if there is an express term in the lease giving tenant’s the right to recover repayments.
• Tenants are entitled to ask landlords for a full breakdown of the insurance policy including evidence of who was paid what.
• Landlords can re-draft new leases in the future to ensure the recovery of commission or insurance broker fees is expressly permitted.
• Landlords should improve billing transparency with tenants and provide clearer breakdowns of insurance costs and commissions to improve tenant trust and confidence.
• Landlords should identify any historical commissions and assess the exposure of any claims.
• Landlords should ensure that they fully understand the structure of their insurance premiums and renegotiate terms with brokers if necessary.