[2024] UKUT 175 (LC)

The leaseholders have two grounds of appeal.

The first is that the FTT was wrong to find, in favour of the landlord, that the commission had not increased the premium when the landlord’s witness was not present for cross-examination. Mr Spender said that he would have cross-examined Ms Amies on her assertions that services were provided, which the leaseholders dispute. The second is that the decision was wrong in law and in fact; the premium would have been lower but for the commission, FPIS did not provide services in return for the commission and the landlord can only recover the cost of commissions charged by FPIS if they represent a service performed to a reasonable standard; “FPIS has claimed remuneration for work it has not done”.

Mr Allison argued that the analogy drawn by the leaseholders with Williams v Southwark does not work. The landlord in the present case is the broker’s customer. The landlord uses a broker to get insurance, and has to pay what the broker charges. The leaseholders presented no evidence that the insurance premium (from which the commission was deducted) was not a reasonable rate or was more expensive than the landlord would have had to pay if a different broker had been used. Moreover, the leaseholders’ challenge is not one that the FTT has jurisdiction to decide; they are not challenging the premium itself, only the fact that FPIS retained so much by way of commission. And the FTT has no jurisdiction over the level of profit made by an insurance broker or any other third party.

Neither party referred in argument to the Tribunal’s decision in Octagon Overseas Limited and anr v Cantlay and others [2024] UKUT 72 (LC) – understandably as it was published very shortly before the hearing, and I too was unaware of it at the time of the hearing. Octagon was a challenge to insurance premiums which included an element of commission; the Landlord was placing the relevant insurance via its asset manager (its agent), a connected company: Westminster Management Services Ltd (“WMS”), and they in turn were placing cover via an insurance broker, Reich. A commission was paid by the insurer to Reich and shared between Reich and WMS. The leaseholders argued that the commission retained by WMS was not reasonably incurred by the landlord. For the leaseholders it was argued (as set out at paragraph 31 of the Tribunal’s decision):

The Deputy President, Martin Rodger KC, said at paragraph 32:

Octagon came to my attention while I was writing this decision, and I wrote to the parties asking for their observations upon it. I suggested to them that the above extract from the Deputy President’s decision is an apt description of what happened in the present case, where FPIS’ commission was justified by the assertion that it was a payment for services – a justification which the leaseholders sought to challenge as a matter of fact but were not able to do so because of Ms Amies’ absence. Moreover FirstPort (the landlord’s agent) and FPIS were not, according to the leaseholders, at arms’ length because they were connected companies; the potential for abuse was, again, obvious.

The general rule in a challenge to service charges under section 19(1)(a) is that the leaseholders must raise a prima facie evidential case, generally by showing that the service concerned could have been obtained more cheaply. In this case the leaseholders could not do that. Instead their argument was that there was obviously something wrong because the commission was inexplicably high. The landlord’s answer, which the FTT accepted, was that unless there was evidence that the insurance premiums were inflated by the level of commission payable to FPIS there was no basis for a challenge to the cost the landlord had incurred.

This is the situation described by the Deputy President said in Octagon at paragraph 61:

In the same way, I take the view that the leaseholders did not need to go further than they did in this case to show that something was prima facie wrong. It was then for the landlord to show either that the commission was a reasonable price to pay for the services provided by FPIS in light of the extent of those services, or that it could not have obtained a better deal by making a different arrangement, whether with that broker or a different one, that did not involve those services. The landlord chose to do the former, which means that Ms Amies’ absence did matter and the leaseholders should have had the opportunity to challenge her evidence.

Both parties responded to my observations. Mr Spender filed a second response, on 6 June 2024, without permission and I disregarded it.

In response to my observations Mr Allison argued first that the situation described by the Deputy President in paragraph 32 of Octagon, above, could be said to apply to any service charge. So it could in a sense, but the Deputy President’s observations were made in response to the argument that insurance is a particularly difficult market, where technical language and lack of transparency can make it almost impossible to know what is happening and who is being what, let alone to bring a challenge.

Second, Mr Allison argued that the situation in the present case does not match that in Octagon. There the landlord arranged the insurance through its asset manager and kept a commission. In the present case:

That is to miss the point that FirstPort was the landlord’s agent; its position was analogous to that of WMS; and FPIS, while not connected to the landlord, is closely connected to the landlord’s agent, FirstPort, so that the arrangement between FPIS and FirstPort does not appear to be at arm’s length. The structure is slightly different from that in Octagon but the mischief identified at the Deputy President’s paragraph 32 is the same: in view of the close connection between the party seeking the insurance (FirstPort, as agent for the landlord) and the broker, there is ample scope for these three parties – the landlord connected to FirstPort by agency, FirstPort to FPIS by company structure – to negotiate arrangements involving commission, which the tenants have to pay for but which does not confer any benefit on them because it is an inflated fee for what the broker does.

Finally it is argued for the landlord that even if its arguments above are not accepted, the evidence of Ms Amies was irrelevant. There was no point in the landlord’s demonstrating that the commission was a fair price to pay for services because the landlord is not taking the money. “It would be like asking L to justify the profits of its unconnected window cleaner or gardener.” However, that is again to miss the agency point. Here the landlord’s agent is getting the insurance through a broker that is a connected company. So it is for the landlord to prove either that the deal agreed by the agent (and therefore the cost incurred by the landlord) was at a competitive rate, or to show that what the broker was paid was a reasonable price for what it did.

In my judgment in going ahead without Ms Amies’ evidence the FTT ensured that the landlord was unable to answer the leaseholders’ challenge, which contrary to the landlord’s argument was enough to shift the evidential burden to the landlord to show that the price paid was reasonable, either by reference to the market and the available arrangements or by showing that the price paid reflected services carried out. The FTT therefore failed to take all relevant points into consideration and I set its decision aside.

Instead of remitting the matter to the FTT, which would be disproportionate to the amounts involved, I substitute the Tribunal’s decision that the landlord has not shown the commission retained by FPIS was reasonably incurred. Insofar as those costs are part of the charges challenged by the leaseholders for the three years in question in this appeal, they are not payable; but I have not made any positive finding that the costs were not reasonably incurred so that the point remains open in any future challenge. The sums payable by all the leaseholders together for the insurance brokered by FPIS, for each year in questions are:

I turn now to the second of the decisions appealed. This time it is the landlord who appeals the FTT’s decision that certain costs were not reasonably incurred.