A recent decision in an English High Court action has caused some consternation in commercial landlord circles and has had landlords and tenants alike poring over the fine print of their leases.
In most commercial property lease arrangements, the landlord insures the property and recoups from its tenant the cost of that insurance (or a proportion of it, where the leased premises form part of a larger building or centre owned and insured by the landlord). In the property industry this is commonly referred to as “insurance rent”. And it has become common practice in the industry to include commission in the insurance rent charged to tenants.
In London Trocadero v Picturehouse Cinemas, the English High Court held that the terms of the lease in question did not entitle the landlord to include insurance commission in the tenant’s insurance rent, as the commission did not form part of the premium payable for keeping the Trocadero Centre insured. The tenant did not dispute liability for the net premium or the broker’s commission (the fee for arranging the insurance), only the landlord’s commission.
In this particular case the landlord’s agent arranged the insurance of the centre as part of a block policy. Under its lease the tenant was obliged to pay a proportion of the amount “payable … by way of premium for keeping the centre insured“. The landlord’s agent had negotiated significant commission, which it charged on to the tenant (proportionately) as part of their insurance rent. Then in 2022/23, the landlord instead charged a 35% insurance fee.
The insurers had for some years required a 10% co-insurance clause and a higher excess (Conditions), partly owing to fire safety concerns. The lease, somewhat unusually, also contained covenants by the landlord to maintain firefighting equipment at the centre (Safety Obligations).
The tenant argued that it had been overcharged insurance rent, as firstly, under its lease the landlord was not entitled to include either the commission or the 35% fee in the insurance rent; and secondly, the landlord had breached the Safety Obligations, which had the effect of increasing insurance premiums in certain years.
The tenant also argued that it was not liable to pay insurance rent while the Conditions applied, as the landlord had breached its covenant to obtain cover for the “full costs of rebuilding or reinstating” the Centre.
The court held that the landlord was not entitled to charge its tenant for the amounts attributable to the commission or the 35% fee and the tenant could recover these sums from its landlord by way of restitution. Even if the commission formed part of the “premium” paid to the insurers, it did not form part of the cost of “keeping the centre insured”, as it was rebated to the landlord. It was also not paid as consideration for services rendered by the landlord and was optional and negotiated to allow the landlord to profit at its tenant’s expense. Similarly, there was no contractual basis – i.e. there was nothing in the lease – which allowed the landlord to recover the 35% fee.
Furthermore, the court found that the landlord had been in breach of the Safety Obligations and the tenant was therefore entitled to recover the resulting increase in insurance rent. However, the landlord was not in breach of its insurance obligation by accepting the Conditions.
Although each case will depend on the terms of the particular lease, this case demonstrates that, in the absence of clear wording, courts may be reluctant to allow a landlord to recover sums like insurance commission from a commercial tenant. Although the decision of an English court, it would likely be viewed as a persuasive authority by a Northern Irish court.
Please do not hesitate to contact Graham Pierce and the commercial property team on 028 90 434015 for any commercial property queries.
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