[2024] UKUT 72 (LC)

The FTT said that there was considerable uncertainty about the exact arrangements regarding the commission structure because no documents evidencing the arrangements between the Landlords and either WMS or Reich had been disclosed. The Landlords’ complete lack of transparency regarding the commission payments since 2010 had been “lamentable”.

Nevertheless, on the basis of the evidence given by Mr Curtis, the FTT found that the Landlords instructed WMS to secure insurance, and that it instructed Reich to act as broker. Reich then identified a suitable insurer and agreed a commission structure with it. The insurer paid a sum to Reich (part of which was then paid to WMS). Mr Curtis had not seen any contractual documents, and he did not think WMS invoiced Reich; its share of the commission would just be sent to it. The FTT found that the whole sum was paid in respect of the work undertaken by WMS and Reich in connection with the insurance i.e. the payments were a commission in return for service; it concluded that “these were arrangements for the payment, and sharing, of a commission, rather than a rebate or discount as suggested by Ms Jezard.”

The FTT then asked itself three questions. First, whether the costs of the work carried out by WMS and Reich were costs that the leaseholders were obliged to contribute to under the terms of their leases; if so, whether they were relevant costs within the meaning of section 18(2), Landlord and Tenant Act 1985 so as to be subject to the statutory limit in section 19(1); and if so, whether the costs had been reasonably incurred.

As to the first question, the FTT accepted that the starting point was the definition of Insurance Rent in the Headlease, which was payable by CREM to Octagon and which the residential leaseholders were then obliged to contribute to through the service charge. If Octagon had received any commission attributable to the placing of insurance, the FTT considered that it would have been entitled to retain it because clause 6.3.1 of the Headlease said it could. But the commission had been paid to WMS and Reich, not to Octagon or CREM, so clause 6.3.1 was not engaged.

The FTT was satisfied that the work carried out by Reich, the broker, was the supply of a service relating to the insurance of the Estate and so fell within the definition of Insurance Rent in the Headlease. The leaseholders were therefore required to contribute to that part of the total cost of insurance, provided the amounts paid to Reich were reasonable. There was no evidence that insurance could be obtained without incurring a broker’s commission, nor any alternative quotes from brokers. The FTT therefore determined that Reich’s commissions of £483,182 over ten years (of which £38,696 was insurance premium tax) were reasonable in amount, had been reasonably incurred, and were payable by the leaseholders.

The FTT took a different view of the payments made to WMS. It explained its conclusions at paragraph 83, focussing on the definition of Insurance Rent in clause 1 of the Headlease, as follows:

“In our determination, any payment for the work that WMS is said to have carried out, … did not amount to “sums… [paid] in respect of the insurances required by Clause 6.1(i) (ii) and (iv)…” of the Headlease and which can be recovered from the Applicants. In the tribunal’s view this is a narrow definition which extends to costs of and related to the insurance itself, and not to the landlord’s own activities connected with taking out or claiming on insurance. As such, sums paid for WMS’s activities do not fall within the definition of Insurance Rent, and there is no contractual liability on the Applicants to contribute towards these costs. We conclude that all the work said to have been carried out by WMS is more accurately described as the provision of services concerning management of the Estate, including obtaining insurance.”

The FTT said that “clear provision in the residential leases” would be required to entitle the Landlords to pass the cost of employing WMS on to the leaseholders. In the FTT’s view, those costs could not be recovered as part of the costs of insurance, because they did not fall within what it took to be the narrow definition of Insurance Rent in the Headlease. It acknowledged that some of the costs might have been recoverable under clause 24.3.7 of the residential leases, which allows for the recovery of the cost of the management, administration and supervision of the residential buildings on the Estate. But that would require that the costs be properly demanded through the service charge as costs of management and not concealed within the costs of insurance. The FTT added, at paragraph 86:

“In our determination, not only are the leaseholders not contractually obliged to pay these sums, the [Landlords] have also failed to satisfy the burden on them to prove that such costs were reasonably incurred in insuring the Estate, and therefore recoverable as either insurance rent or service charge.”

The FTT therefore determined that the leaseholders were not liable to contribute towards so much of the sum claimed in respect of insurance as represented the payments to WMS; it found, on the basis of the calculations of Ms Jezard, that since 2010 these payments had been £1,517,372 plus insurance premium tax of £121,338.