[2024] UKUT 72 (LC)

In Williams v Southwark leaseholders were liable to contribute towards “the costs and expenses of … insurance”. In 1995 their local authority landlord negotiated terms of insurance for its estate by which the gross premium payable under the policy was discounted by 25%. 5% of the discount was a loyalty bonus for maintaining the policy with the same insurer for five years. The rest of the discount was allowed in consideration of the landlord agreeing to handle claims and administer the policy. The landlord charged its leaseholders based on the gross premium and the question for the Court was how much of that gross sum represented the costs and expenses of insurance. The landlord agreed that the 5% loyalty bonus had reduced the costs of insurance so that only 95% of the gross sum could be charged to the leaseholders. As for the remaining 95%, Lightman J explained, at [5], that:

“It is clear that under the 1995 agreement the full premium (less the 5% loyalty bonus) continued to be payable by the Council for the insurance cover provided, but Zurich agreed to assign to the Council responsibility for local claims handling and to pay to the Council 20% of the premium in return for those services. The insurance premium was not reduced by this arrangement; the full 95% remained payable, but the Council became entitled to pay itself 20% out of the premium as remuneration for the services which it agreed to provide.”

In the leaseholders’ statement of case in the FTT, which was prepared by Ms Jezard, they suggested that leasehold property insurance is unique in the insurance market in that the person taking out the policy (usually the landlord) is not the person who will ultimately pay the premium. Not only did this remove the incentive to negotiate a lower premium but, additionally, “the leasehold property insurance market has developed financial mechanisms that, perversely, increase premiums by benefitting landlords (and their agents) at the expense of leaseholders”.

Whether this market is unique, and whether it operates in a way which is perverse, are not issues which can be addressed on the limited evidence in this case, but the general complaint that leaseholders are in a vulnerable position which may lead to them being required to pay more for insurance than is reasonable, features in almost every insurance case the FTT has to determine. The suspicions of leaseholders that they are being exploited are often magnified by a lack of transparency in the arrangements which have been made, and by the structure, practices and terminology of the insurance market of which few of them will have much experience. The potential for abuse is obvious where the party seeking to obtain a policy of insurance is simultaneously offering to provide services (such as claims handling) in return for a fee which the insurer will return to the insured out of the gross premium it charges for the policy.

The liability of the leaseholders in this appeal to contribute to the cost of insurance depends on the terms of their own Underleases. These are clear enough. By clause 23.2 each leaseholder has agreed to contribute towards the “Estimated Building Expenditure”, which is defined as including the Insurance Rent (as defined in the Headlease) but excluding so much of it as is referable to the insurance of the carpark (which I assume is payable separately by those who make use of the carpark).

The FTT asked itself the correct question when it considered how much of the gross premium paid to the insurer was properly included in the Insurance Rent paid by CREM to Octagon. Stripped of irrelevant parts, the Insurance Rent means:

“a due proportion … of all sums (including insurance tax, the cost of periodic valuations for insurance purposes and any VAT or other tax which may become payable in connection with the supply to the Landlord of goods or services relating to insurance … which the Landlord shall from time to time pay in respect of the insurances required by Clause 6.1(i), (iii) and (iv)

For the Landlords, Mr Halpern KC submitted that the FTT’s narrow interpretation of this definition was simply wrong. The phrase “all sums … payable” meant the gross cost of insurance premium and the FTT’s suggestion that the sums it received for the work which it appears to have accepted had been done was not a payment “in respect of the insurance” was insupportable. The words “in respect of” did not narrow the scope of the charge recoverable; on the contrary, they “have the widest possible meaning of any expression intended to convey some connection or relation between the two subject matters to which the words refer” (per Mann CJ, in Trustees Executors and Agency Co Ltd v Reilly [1941] VLR 110,111).

For the leaseholders, Mr Upton did not give the FTT’s approach his whole-hearted support. He suggested a different analysis.

On the evidence supplied by the Landlords, and in its statement of case, it was CREM, and not Octagon, which had instructed WMS to arrange insurance (as it was entitled to do under clause 6.3.2 of the Headlease if Octagon did not arrange the required insurance). It followed, Mr Upton submitted, that Octagon had not incurred any cost and that only CREM had done. There was therefore no Insurance Rent for CREM to pay to Octagon and the question whether the sums paid to WMS came within the meaning of Insurance Rent was irrelevant. That did not mean that the leaseholders were relieved of the obligation to contribute towards the cost of insurance, but that obligation was the result of a term which Mr Upton argued must be implied into their Underleases. The obvious term to be implied was one which mirrored clause 6.3.2 of the Headlease which provides that, to the extent that Octagon fails to insure or procure insurance in accordance with Clause 6.1 “[Octagon”] shall pay to the Tenant on demand the proper cost of any such insurance effected by the Tenant in such circumstances.” Mr Upton therefore suggested that clause 24.3.8.1 of the Underlease should be read as if there was included in the Estimated Building Expenditure “the Insurance Rent (as defined in the Headlease or, if no such Insurance Rent is payable by CREM, the proper cost of CREM insuring or procuring the insurance in accordance with clause 6.1 but excluding … the insurance of the car park.”

As a second string to his argument, Mr Upton submitted that the FTT was right to find that the Insurance Rent did not include the sum paid to WMS. The reference to “sum [paid] in respect of insurance” meant the net sum paid after deducting any repayment by way of commission or discount. “In respect of” were words of connection, but the degree of connection which they signified depended on their context; in this context fees paid to WMS for management services were not paid “in respect of” insurance.

I have no doubt that the FTT was wrong to exclude the sum paid to WMS from the Insurance Rent as a matter of interpretation of the leases.

The insurance arrangements described by the FTT required the following payment steps: first, payment of the gross premium by the Landlords to the insurer; second, payment of a commission by the insurer to the broker; third, payment of a commission by the insurer to WMS. The evidence did not show how much was paid by whom, to whom (other than that WMS received its payment from Reich). It is possible that each step involved a separate payment with the gross premium being paid to the insurer first, before it made its own payments to the broker and to the agent; alternatively, the gross premium may have been paid by the Landlords to the broker, which may have deducted its own and WMS’s commissions before remitting the balance to the insurer.

Mr Halpern KC referred to Brown v Innovator One plc [2012] EWHC 1321 in which allegations of breach of trust had been made following an unsuccessful tax avoidance scheme. The disputed payments included some to people unconnected with the scheme. Hamblen J was unimpressed by those allegations and pointed out at [996]-[997] that the paying party had been entitled to 11% of the purchase price to cover expenses and its own profit, and how it chose to distribute that money was a matter for it. Additionally:

“… short circuiting payments may be permissible both legally and from an accounting perspective. As stated by Buckley LJ in Re Collard’s Will Trusts [1961] Ch 293 in the context of short circuiting by a trustee and section 32 of the Trustee Act 1925:

‘The principle is that the court will not insist on circuity of action if the same result can be achieved by direct action which legitimately could be achieved by more circuitous action.’”

It therefore does not matter in what order, or by how many payments the insurance arrangements were implemented. What matters is what the payments were for. The FTT was satisfied that the payments received by Reich and WMS were a commission, and not a rebate or discount to bring in the business. It found that Reich had negotiated the premium with the insurer and that as a result of what had been agreed Reich and WMS had been entitled to payments for the services which they each agreed to provide. It found that the sums receivable by Reich were paid in respect of insurance services and therefore within the meaning of Insurance Rent. Its sole reason for refusing to make the same finding about the sums receivable by WMS was that “sums… [paid] in respect of the insurances required by Clause 6.1(i) (ii) and (iv)…” meant only the costs “of and related to the insurance itself” and did not include costs of “the landlord’s own activities connected with taking out or claiming on insurance”.

In my judgment, on the evidence the only possible conclusion is that the cost of the insurances required by clause 6.1(i) (ii) and (iv) was the gross premium agreed between the broker and the insurer. Out of that gross premium, the insurer agreed that Reich should receive a commission for services; Reich and WMS are assumed then to have agreed that WMS was to carry out some of those services and receive part of the commission. But that arrangement did not reduce the cost of the insurance to the net sum retained by the insurer. If those services had not been provided by WMS, someone else would have needed to provide them. If the insurer had assumed responsibility or paid a third party, it would not have discounted the gross premium because it would have had an additional expense to meet. If the Landlords had paid for the services themselves, the gross premium might have reduced, but the cost of the services would be recoverable through the service charge, as the FTT acknowledged. But that was not what happened. The fact that services were to be provided by WMS, which is the insured’s agent, and not by some third party selected by the insurer, does not mean that for the purpose of the contract the cost of the insurance was less than the gross premium. It does mean that the transaction appears not to have been conducted at arm’s length and cannot be assumed to represent the best value available, or even a market value, but the consequence of those uncertainties is addressed by the reasonableness ceiling imposed by section 19, Landlord and Tenant Act 1985 and not by redefining the transaction.

I also agree with Mr Halpern that there is no justification for adopting a narrow interpretation of the definition of Insurance Rent. The sum is plainly not limited to the cost of insurance itself, as it includes “all sums (including insurance tax, the cost of periodic valuations for insurance purposes and any VAT or other tax which may become payable in connection with the supply to the Landlord of goods or services relating to insurance”. The parties’ intention was to cast the net wide, not to confine it narrowly.

Mr Upton’s preferred explanation of why the Insurance Rent did not include the commission element (because the premium was paid by CREM rather than by Octagon) is not open to him on the appeal as it was not a point raised or considered below, nor was it the subject of a respondent’s notice. In its decision the FTT did not distinguish between Octagon and CREM in any of its findings, referring instead to “the Landlords”, which confirms that the suggested significance of the distinction was not in its mind. In any event, even if the payments were all made by CREM, and not by Octagon, that would not make a difference to the sum to be included in the Insurance Rent. Clause 6.1 requires Octagon to “insure … or procure the insurance of” the Estate, and Mr Upton agreed that the Insurance Rent includes costs of insurance which has been procured by someone else at Octagon’s request. Given the closeness between Octagon and CREM (with Mr Curtis as the financial controller of both) the only possible inference is that Octagon procured CREM to obtain the insurance in their joint names, rather than CREM acting unilaterally after Octagon had failed to insure.

I am therefore satisfied that the FTT was wrong to interpret the Headlease in such a way that the gross insurance premium was not recoverable from the leaseholders, and I allow the appeal on that basis.