[2024] UKUT 175 (LC)

Service charges were demanded of the leaseholders, in each of the three years in question, in reimbursement of the cost of various insurances other than the main buildings insurance, including insurance for the gardens, external common parts and the roads. These insurances were arranged for the landlord, by a broker, First Port Insurance Services Limited (“FPIS”), part of the same corporate group as the managing agents of the estate, FirstPort (and said by the leaseholders to be in common ownership with FirstPort). The landlord of course paid an insurance premium, which the leaseholders were then required to reimburse as service charges.

The leaseholders’ challenge is to the commission retained by FPIS. Their argument before the FTT was that it was not reasonably incurred by the landlord because it was not a payment for services provided by FPIS; they argued that a commission of about one-third of the amount retained by the broker for the three years in dispute would be appropriate. In effect their case was that the broker’s profit margin was too high.

The leaseholders relied upon Williams v Southwark London Borough Council (2001) 33 HLR 22 a decision by Lightman J on a challenge to service charges in respect of insurance premiums. In that case the landlord arranged insurance itself, and passed the premium on to the tenants. The broker allowed it to retain 25% of the premium by way of commission. Of that 25%, 5% was a payment for repeat business, or a loyalty payment; the other 20% represented a payment for the handling and administration of certain claims on the policy. Lightman J found that the landlord was entitled to retain the 20%, which was a payment for services, but the landlord conceded that it must account to the tenants for the 5% it received by way of loyalty payment.

The leaseholders also relied upon Cos Services Limited v Nicholson and another [2017] UKUT 382 (LC), where the Tribunal (HHJ Stuart Bridge) held that the whole of what the landlord spends on insurance, including premium and any commission retained by the broker, must be reasonably incurred in order to satisfy the requirements of section 19(1)(a). In that case there was an obvious discrepancy between what the landlord was paying and the premiums obtainable from other insurers in the market, which the landlord could not explain, and the Tribunal upheld the FTT’s decision that the premium was not reasonably incurred to the extent of that discrepancy.

In response to the leaseholders’ argument the landlord called a witness in the FTT, Ms Liza-Jayne Amies, who made a witness statement. She pointed out that brokers earn their money from commission agreed with the insurer and deducted from the premium paid by the policyholder. She explained the services provided by FPIS to its client the landlord, including the analysis of the market consideration of the policy on offer, keeping cover under review during the term of the policy and acting for the landlord if a claim is made. Ms Amies did not attend the hearing before the FTT; very shortly before the hearing it was said that she could not be released from her duties at work.