[2024] UKUT 72 (LC)

The second issue for which the FTT gave permission to appeal was whether it had given adequate reasons for finding that the Landlords had not discharged the burden of showing that the disputed part of the costs of insurance were reasonably incurred. But in giving permission it effectively neutered that ground of appeal by glossing its own conclusion at paragraph [86] of the decision (see paragraph [26] above), disavowing any determination that the cost of insurance was not reasonably incurred, and explaining instead that its finding was simply a consequence of the conclusion that the disputed commission was not recoverable under the terms of the Underlease.

The FTT also suggested that if this Tribunal took a different view on the issue of interpretation of the Underlease, the application ought to be remitted to it to make a determination on reasonableness. That suggestion was not one which either party welcomed.

Mr Upton sought to persuade me that what the FTT said in its refusal of permission to appeal was simply wrong and should be ignored. It had made a finding in unambiguous terms that the Landlords, to whom the burden had shifted, had failed to demonstrate that the disputed costs were reasonably incurred.

There are two difficulties with Mr Upton’s submission. The first is that, when giving permission to appeal, the FTT said that it had not considered the issue which Mr Upton says it decided in the leaseholders’ favour. The second, which gains considerable support from the first, is that the FTT did not give any explanation for the finding which Mr Upton says it made, but which it disavows. If I were to accept Mr Upton’s submission it would not assist the leaseholders because I would also accept the Landlords’ complaint that the decision was inadequately explained and any adverse factual finding should be set aside.

Mr Halpern KC invited me to make a determination of my own of the reasonableness of the disputed insurance charges based on the evidence before the FTT. After an adjournment to enable Mr Upton to take instructions on that proposal, he confirmed that the leaseholders would prefer a determination by this Tribunal on the available material rather than face the delay, expense and further inconvenience of a second hearing by the FTT.

The material available to me includes relevant parts of the FTT hearing bundle and a transcript of the hearing. From these there is very little evidence to establish what a reasonable charge for the services provided by WMS and paid for by the commission element of the premium would be. But there are also the findings of the FTT and the positions which the parties adopted in presenting and responding to the application.

The FTT did not reject the evidence of Mr Curtis about what was done by WMS (much of it by him personally), nor how long it took, or the hourly rates of WMS employees. It did not say in terms what it made of this evidence, and Mr Upton invited me to proceed on the assumption that it had made no finding about what had been done. But the FTT referred at paragraph [44] to “work carried out by WMS” and found at paragraph [85] that the Landlords had appointed WMS to liaise with the broker, arrange valuations, seek quotes for insurance repairs “and all the other work described by Mr Curtis”. In its grant of permission to appeal it referred to the work “carried out by WMS”. It is also true that the FTT twice described the disputed charges as for “fees said to have been incurred”, but the general effect of its decision is that it accepted Mr Curtis’ evidence. Additionally, the leaseholders’ case was not that the work claimed by WMS had not been done, but that the commission was a rebate or discount and did not form part of the true cost of insurance or insurance services. In cross examination Ms Jezard put it to Mr Curtis that the work of WMS might have duplicated the responsibilities of the managing agent, Marathon, but it was not suggested that Mr Curtis was not telling the truth about what he and other WMS employees did.

I will therefore proceed on the basis that the FTT found that WMS carried out the work described by Mr Curtis. Mr Upton’s case was that no additional fee should have been charged for that work over and above the fees charged by Marathon, the managing agent acting for the Landlords before the appointment of the Manager in 2016. That does not seem to me to be a realistic submission where the work was done by two different entities and the FTT did not find that there had been duplication of work between them.

The difficulty is that the evidence was of work done by WMS for the whole of the Landlords’ portfolio of 40 properties and was not limited to the Estate. Mr Curtis was unable or chose not to provide any breakdown of the work done in connection with insurance services connected with the Estate alone. As a result, it is not possible to know what proportion of the commission paid to WMS should be attributed to the insurance services provided to the Estate. Ms Jezard assumed in her own calculations that the commission should be apportioned by reference to the proportion of the total premium attributed to the Estate by the broker and the Landlords did not either confirm or dispute that assumption. Given the way the Landlords have conducted these proceedings it can be inferred that they perceived it to be in their interests not to dispute Ms Jezard’s calculation.

The other material which the leaseholders supplied to the FTT was evidence of insurance at a development called New Providence Wharf. Ms Jezard explained in her oral evidence that she did not rely on New Providence Wharf as a comparator of what a reasonable commission might be, but only to show what information leaseholders of a different landlord had been supplied with. In fact, the FTT made use of the broker’s fee of approximately 11% as confirmation that the commission received by Reich in respect of the Estate was reasonable.

The FTT also had evidence given by Mr Curtis that the original manager, Mr Coates, had proposed a commission structure of “up to 30% of premium” which was to be split equally between him and his broker (the fees Ms Jezard estimated to have been paid to WMS and Reich were more than 37% of the total premiums she apportioned to the Estate, or 41% if tax and finance payments are omitted for better comparison with Mr Coates). Mr Coates’ “up to 30%” had been relied on by the Landlords before the FTT and was relied on again by Mr Halpern KC. That proposal, which was contained in an amended draft of the management order for which Mr Coates applied in February 2018 would have imposed a ceiling of 30% on the aggregate of all fees, brokerage or commissions and would have required that these be split equally between Mr Coates and the broker. It was never ruled on by the FTT, having been withdrawn before it was considered. Although I was told the leaseholders had supported Mr Coates’ application for variations to the management order in 2018, they had proposed a flat fee of only £10,000 in place of the commission in the current application.

There are other difficulties with using Mr Coates’ proposal. Although it provides evidence of a commission ceiling, and of the proportions in which the total was to be shared with the broker, in practice the ceiling might not have been reached in all or any year, and the agreement to share the commission will have been part of a wider agreement about who was to undertake the various tasks for which the commission was being paid. The evidence is that annual commissions fluctuate as a percentage of the total premium paid (sometimes significantly, as the information about New Providence Wharf shows).

I therefore feel unable to accept Mr Halpern KC’s implicit suggestion that the total commission should be recalculated so that it represents 30% of the premium, rather than 38% or 41%, and that so much of the total as has not already been allowed to Reich by the FTT should be taken to be the reasonable cost of the services provided by WMS. There is no evidence to support that approach and, if Mr Coates’ proposal is taken as the benchmark, it would be overgenerous to the Landlords; not only would it allow a total of 30% a year (rather than “up to 30%”) it would also leave WMS with much more than half of the total.

Nor can I be confident that adopting a more conservative approach and allowing WMS a commission of 15% (i.e. assuming an equal split with the broker, as Mr Coates’ proposed) would not be overgenerous. That would still treat what was intended as a maximum as if it was annual entitlement.

I remind myself at this stage that it is for the Landlords to satisfy the Tribunal that the costs they have claimed have been reasonably incurred. The Landlords sought permission to appeal the FTT’s determination that the burden of establishing that the commissions were reasonable fell on them, but they were refused. The leaseholders more than adequately discharged the burden of raising a prima facie case that needed to be answered by establishing that the premiums they were required to pay were not the result of an arm’s length negotiation in an open market and included undisclosed sums to take account of services which the Landlords’ agent had agreed to provide in return for a commission calculated as a percentage of the premium. It was then for the Landlords to show what work had been done to justify that commission, and why the commission itself was reasonable.

Despite the lack of evidence there are some patches of firm ground on which weight can be placed. In particular, I can take it that Reich’s fee was a reasonable one, as the FTT allowed it in full. It was said to be around 8.9% but that figure did not include a broker’s fee which was also payable. The total paid to Reich was comparable to the commission of 11% received by the broker who arranged the insurance at New Providence Wharf.

Reich was paid a total of £483,182 in commission during the ten years under consideration. It also received annual fees the amount of which was said by the leaseholders to have varied between £4,828 and £5,828 a year and by the Landlords to have amounted to roughly £6,000 a year for the years 2016 to 2020. These were accepted as reasonable by the leaseholders. (The total sum received by Reich was inflated by a financing arrangement, but the FTT did not add those sums to the commission it sanctioned). Taking an average broker’s fee of £5,300 over the 10 years would produce an estimated total fee of £53,000 for the whole period. Adding that to the commission which the FTT found to be payable gives a total of £536,182 as the reasonable cost of Reich’s services.

Mr Coates’ proposal was that a commission of up to 30% should be split equally between him and his broker with no additional fees. There is no evidence of the arrangements which he intended to agree with the broker about the division of responsibility for policy administration, claims handling and the like, but his proposal has the attraction that it relates to the Estate. It was also made by someone who had by then been managing the Estate, with all its complexities, for two years and who would have known what work needed to be done in relation to those matters. At the time, the proposal appears to have been supported by the leaseholders. It is the only evidence of a reasonable charge for arranging and administering the insurance of the Estate.

It is the Landlords who rely on Mr Coates’ proposal, and in the absence of evidence to the contrary it is not unreasonable to assume that the division of responsibility between WMS and Reich was not different from the division proposed by Mr Coates in which his fee would be equal to the broker’s. On that assumption I feel justified in concluding that the leaseholders would not pay more than was reasonable if the sum payable in respect of work done by WMS was the same as the total received by Reich (i.e. the aggregate of the commission found by the FTT to be reasonable, plus the undisputed broker’s fee).

On the basis of Ms Jezard’s apportionment, the premiums payable for the insurance of the Estate totalled approximately £5.38m over ten years. Using the same apportionment approximately £2m was paid by the insurer in fees and commissions, leaving a net premium of £3.38m. If the same sum is allowed to WMS as was allowed to Reich by the FTT (£536,182) the aggregate sum for broker’s and agent’s fees and commission would be approximately £1.07m. That figure represents 24% of a notional gross premium of £4.45m (3.38 + 1.07 = 4.45). If (as suggested in one version of the respondents’ apportionments) the net premium retained by the insurer was only £2.8m, an aggregate sum for fees and commissions of £1.07m would represent 27.6% of a notional gross premium of £3.87m.

This calculation provides comfort that the approach I have taken does not result in a charge inconsistent with Mr Coates’ proposal of “up to 30%”.