In the second round of Trocadero Centre litigation between London Trocadero and Picturehouse Cinemas, the issue between the parties was whether the landlord, who was obliged to insure the leased premises, was entitled to charge the tenant the full insurance "premium" that included a commission for both the landlord's broker and the landlord itself.
What did the lease say?
The tenant covenanted to pay insurance rent "equivalent to the amount from time to time assessed by the [landlord's] insurers as being payable by the [landlord] by way of premium for keeping the Centre insured…".
What happened in practice was that the "gross" premium being charged to and paid by the tenant as insurance rent comprised: (i) the "net" premium, being the insurer's cost for insuring the building; (ii) broker's commission – typically 5% of the net premium – the fee for the work undertaken by the landlord's broker to arrange insurance for the premises; and (iii) "landlord's commission" – the amount over and above the broker's commission that the broker and landlord unilaterally agreed would be charged to the insurer as commission, which would be paid by the tenant but retained by the landlord.
To illustrate: in 2018, the gross premium charged to the tenant was £176,000. This was made up of £79,000, being the cost of insuring the premises (the net premium); plus £9,000, being broker's commission; plus £88,000, being the landlord's commission.
The tenant did not dispute liability for the net premium and the broker's commission. However, it argued that the landlord's commission was incapable of forming part of the amount "payable… by way of premium for keeping the Centre insured", and that the tenant was therefore not liable to pay these sums as part of the insurance rent under the lease.
What did the court say?
Mr Justice Richards agreed with the tenant. On a proper construction of the lease terms, the tenant's insurance liability under the lease was limited to the sum payable by the landlord for keeping the Centre insured. Even if the landlord's commission was ostensibly "payable" as part of the premium paid to the insurer, its purpose was not for keeping the Centre insured (only the net premium was payable to keep the Centre insured). The landlord's commission was engineered by the landlord itself; it was an optional payment that the landlord had an unfettered ability to control that provided the landlord with an opportunity to profit at the tenant's expense.
The Judge considered and ruled out the possibility that the landlord's commission could represent a form of compensation for the work that the landlord had to undertake each year to secure insurance for the Centre. The landlord's commission bore no relation to the cost of the landlord’s actual work associated with the insurance renewal and thus did not represent an appropriate or fair reward for the landlord to arrange insurance.
The Judge also considered whether the lease provided for the landlord to recover its costs of securing and placing insurance. The fact that the lease contained provisions enabling the landlord to recover costs in numerous other scenarios, but did not make any reference to the recovery of landlord's costs of securing and placing insurance, led the Judge to conclude that those costs "are in the nature of overheads or costs of the Landlord's letting business which is to be paid out of the receipt of rent". And the Judge also did not accept that the parties would have understood landlord's commission to be a feature of the commercial landscape when the parties entered into the lease in 1994.
The tenant had been paying insurance rent on the understanding that it was discharging genuine liabilities under the lease. Since there was no contractual or other legal basis for the landlord to charge the tenant landlord's commission, there was a complete "failure of basis", and the tenant was entitled to repayment of the landlord's commission payments that it had overpaid over several years.
Implied term
The tenant succeeded on its primary case for repayment of the landlord's commission based on the court's interpretation of the insurance rent provisions in the lease. Nevertheless, the Judge went on to consider implied terms in case he was wrong and the lease did not prevent the landlord charging a commission as part of the insurance rent. He decided it would be obvious and necessary to imply a term into the lease imposing a limit on the insurance rent that the landlord could charge to the tenant. This limit would not have to be the lowest possible price but would be the sum representative of the market rate, negotiated at arm's length, in the ordinary course of business. This would effectively preclude the landlord from charging the tenant a landlord commission designed entirely to benefit the landlord at the tenant's expense, as this would not be regarded as "arm's length".
What is the industry norm?
The practice of landlords charging their tenants landlord's commission is not unusual. Based on the experts' evidence in this case, the Judge found that, allowing for a broker to retain 5% of the gross premium, "normal" landlord's commission in this scenario would be in the region of 29% of the gross premium (perhaps less in more recent years), whereas the landlord in this case was charging Picturehouse in the region of 45% – 55% from 2016 to 2020.
But would the court have found for the landlord if it had charged landlord commission in line with the industry norm? The Judge said no. There was no contractual or other legal basis for the landlord to charge landlord's commission. It was not payable to the insurer to keep the Centre insured, so it was not payable by the tenant.
Does this judgment have wider consequences?
As indicated above, the practice of charging landlord commission is not restricted to the landlord in this case, and many other landlords have been using this tactic to profit from their tenants for many years. Insurance rent payments, allocation of commissions, and lease wording should be carefully interrogated.
Overpayments can be claimed by way of restitution (as in this case), with a limitation period of six years (from the date of the overpayment) for bringing the claim. That limitation period may be extended, depending on the facts and circumstances of each case.
Claims in restitution will always turn on their own facts, but there are some clear takeaways from this case of wider application:
- Courts will start with the words in the lease and interpret those words strictly and literally. In the absence of express and clear terms in the lease entitling a landlord to charge its own commission or fee for placing/arranging insurance, a tenant is unlikely to be liable to pay these charges.
- Even if the lease does not disallow landlord's commissions, there is the potential safety net of an implied term that the Judge found in this case, which may also assist tenants to recover or resist landlord's commission payments.
- Courts are unlikely to imply a term into a lease to assist landlords to charge commissions or even a fee for arranging insurance where the lease does not provide for one. Commercial parties are expected to define obligations expressly in their leases.
- Landlord commercial practice or industry norms do not necessarily create a legal entitlement to charge landlord commissions. The language of the lease is paramount.
- Tenants who become aware (or ought with reasonable diligence to have discovered) that landlords are charging commission without any legal basis must not delay taking action to recover those payments.
The landlord has declared its intention to appeal, so this may well not be the end of the matter.