English High Court scrutinises landlord's insurance commissions in blockbuster Trocadero case

In London Trocadero (2015) LLP v Picturehouse Cinemas Limited (2021), a tenant contested various charges imposed by its landlord, part of the Criterion Group, to insure the Trocadero Centre in London. The court ordered the landlord to reimburse the tenant hundreds of thousands of pounds in overpaid insurance rent, due to the landlord charging the tenant for the costs of insurance "commission" that were reimbursed to itself, thus giving the landlord a profit for no additional work. The judgment found this sort of commission arrangement to be commonplace.

While, like all good summer blockbusters, there was a happy ending for the tenant in this case (subject to any sequels by way of an appeal),  not every script will be the same. Landlords and tenants will both need to take advice on their leases to see whether this judgment will leave them with a movie script ending or a nasty twist.

Focus on insurance commissions

The outcome was heavily dictated by the facts and the court's interpretation of the commercial terms of the lease. The court favoured the tenant on some issues and the landlord on others, but perhaps the most notable aspect of this ruling is that it shines a light on an apparently common industry practice which may often fly under the radar of unsuspecting tenants: large payments to landlords via insurance broker commissions.

Commercial buildings' insurance typically involves the landlord paying a premium to cover the entire property, with the obligation to use proceeds for reinstating the tenant's unit. Individual leases usually allow the landlord to recharge this cost to the tenant as "insurance rent," calculated based on square footage or the hazardousness of the tenant's uses. For multiple buildings, landlords may opt for a block policy with apportionment between various policies. The insurer receives the "net" premium, while the broker's commission is added on top and passed to the landlord.

Sometimes, landlords request increased broker commissions, rebating the excess back to themselves without affecting the net premium. This can lead to tenants being charged more. The total premium, including broker's commission, is the "gross" premium, apportioned between tenants and subject to Insurance Premium Tax (IPT). The insurer retains the same net premium and the policy terms remain unchanged, but the landlord gains a significant profit element rebated through the gross premium. This arrangement can also reduce competition among insurers, potentially increasing net premium rates.

In this case, over the years, the uplift to the landlord was, on occasion, as much as 60%. This meant that the landlord received a payment higher in value than the net insurance premium itself; an amount disproportionate to any work or services carried out. The court has now ordered that the landlord pay the tenant back hundreds of thousands of pounds in restitution.

Whether a tenant can reclaim overpaid commission rent will depend on the particular drafting of its lease and the facts of the landlord's insurance arrangements. However, given that the drafting in this case was not particularly unusual and the insurance arrangements in question are commonplace, the impact of this decision could be hugely significant for landlords and tenants across the country.

Dispute background

There is a history of litigation between the parties, to which this was just the latest sequel. The claimant landlord owns the Trocadero Centre in London. The first defendant occupies part of the centre under two leases from 1994 and 2014. The topic of insurance rent formed part of a counterclaim against the landlord who had obtained a summary judgment in respect of Covid-19 rent arrears (the summary judgment was unsuccessfully appealed in the Court of Appeal).

The tenant claimed overcharged insurance rent from 2015/16 to 2024/25, seeking repayment. It argued that the premiums included landlord commissions, which should not be part of the insurance rent. The tenant also disputed a 35% fee imposed by the landlord on the 2022/23 insurance premium. Additionally, the tenant claimed the landlord failed to maintain an effective sprinkler system, causing higher insurance premiums, and disputed the obligation to pay insurance rent due to significant excesses and co-insurance clauses.

Express terms

The judge concluded that the landlord was not entitled to charge the tenant for landlord's commission under the terms of the lease by analysing clause 3.6.1(a) of the 1994 lease. The judge determined that for a sum to be considered a "premium" under this clause, it must be both "payable" and "for keeping the Centre insured against Insured Risks." The landlord's commission did not satisfy these requirements because it was rebated as part of arrangements engineered by the landlord, meaning it was not truly "payable."

Additionally, the commission was optional and not necessary for keeping the centre insured, but rather provided the landlord with an opportunity to profit at the tenant's expense. The judge also considered the reasonableness of the outcomes and concluded that the landlord's interpretation would produce an unreasonable result, as it would allow the landlord to inflate the insurance rent payable by the tenant.

Implied terms 

The tenants argued that terms should be implied into the contract. First, to ensure that the sums demanded by the landlord were representative of the market rate and reflected insurance contracts negotiated at arm's length and in the ordinary course of business (known as a Havenridge implied term). Second, to ensure that a party's discretion is exercised reasonably, rationally, and in good faith where one party has significant discretionary power affecting the other party's rights (a Braganza implied term).

The court accepted a limited version of the Havenridge implied term, finding it necessary and obvious to prevent the landlord from obtaining an arbitrarily large benefit at the tenant's expense.

However, it rejected the Braganza implication, finding that the 1994 lease did not confer any specific contractual power on the landlord to decide which insurers to approach or how much landlord's commission to request. These matters were unregulated by the 1994 lease and were aspects of the landlord's own business dealings.

Failure of basis

The concept of "failure of basis" was central to the tenant's claim for restitution. A failure of basis occurs when a payment is made on a particular shared understanding or condition between the payer and payee, and that condition or understanding fails, making it unjust for the payee to retain the payment.

The tenant argued that the overpayments for insurance rent were made on the basis that they were discharging contractual obligations that were actually due under the 1994 lease. Since the sums corresponding to landlord's commission and the 35% fee were not contractually due, the basis for these payments failed totally.

The court assessed the basis objectively and concluded that a reasonable observer would determine that the landlord's right to retain sums demanded under clause 3.6.1 was conditional on those sums being contractually due. Consequently, it held that the tenant was entitled to restitution for the overpayments made under a total failure of basis, as the payments were made on the basis of fulfilling contractual obligations that did not exist for these amounts.

Sprinkler and excess

The court found the landlord in breach of the express terms of the lease in respect of the sprinkler system as it was not operative during the relevant years. This breach increased the insurance premiums for the centre.

However, the court concluded that the landlord was not in breach of the express terms in respect of the excess issue as the amount of cover stated on the certificate of insurance was sufficient, and the excess and co-insurance clauses were reasonable conditions.

The end?

The landlord has indicated publicly that it intends to appeal the decision, so the final credits may not be rolling just yet. However, both landlords and tenants should seek legal advice now in order to understand their position regarding potential overcharges in relation to landlord commissions.

There are myriad factors to consider if a tenant is to avoid unexpected extras and if landlords are to lawfully recover them. Landlord commissions may not be expressly mentioned in a lease document but it would be favourable to landlord recovery if they were clearly set out and favourable to a tenant if disclosure drafting was widened to prevent similar issues in new leases.

Claims for overcharges could be based on express or implied terms, or on restitution. It is important to establish whether the landlord performed any valuable services related to insurance to justify the commission. The tenant's knowledge or suspicion about the landlord's commission, the wording used when payments were made, and the timing of these payments are also significant factors.

There is a 12-year limitation period for breach of express/implied terms and a six-year period for restitution, which can be postponed if the claim is based on a mistake. Concealment may also be relevant if the landlord is withholding disclosure in instances where lease drafting does not make landlord commissions obvious.