Background

The case concerned a landlord and tenant dispute relating to premises at the Trocadero Centre ("the Centre") in London. The tenants initially faced a claim by the landlord for the recovery of rent arrears and insurance rent which had accrued during the Covid-19 pandemic. The tenants counterclaimed alleging they had been overcharged insurance rent.

Commission sharing structures, where landlords and insurance brokers agree to add high commission (often 25-65%) to the insurance premium, charge the full amount to the tenant and thereafter share the commission between themselves, are commonly used in commercial leases. The landlord of the Centre had entered into such a commission structure with its insurance broker, and in issue was whether the tenant's obligation to pay the landlord the "premium payable by the landlord for keeping Centre insured" included a liability to pay the landlord's commission.

Judgment

The court agreed with the tenant that the landlord was not entitled to charge commission as part of the insurance rent. The only recoverable costs were those sums actually payable for keeping the Centre insured against the insured risks. The landlord's commission was not a true cost of keeping the Centre insured; instead it was an arrangement engineered between the broker and landlord, and rebated to the landlord.

The court rejected the landlord's argument that the commission was consideration for it arranging the insurance. The commission (ranging between 45-55% from 2016 to 2020) did not represent an appropriate or fair reward for the "service" of arranging the insurance each year. Furthermore, the lease did not contain any express provision entitling the landlord to recover the cost of arranging the insurance and the court was not willing to imply such a term.

The tenant's counterclaim therefore succeeded and it was entitled to recover the commission sums previously paid to the landlord by restitution.

The court rejected broader arguments regarding the tenant's liability to pay higher insurance premiums and large excesses due to the landlord's (alleged) failure to maintain the Centre's fire safety sprinkler system. The landlord had, as required under the lease, still obtained cover for the full cost of reinstatement.

Implications

It has been common practice for landlords to charge tenants insurance rents which include high levels of commission that is later rebated to the landlord. The specific construction of the lease was key to the findings of the court in this case, but it is very likely that other commercial leases will have been drafted on similar terms, and it follows that tenants who have been inadvertently charged commissions will now look to recover these sums from their landlords. Claims for restitution could be very large, particularly for institutional landlords with large property portfolios. Depending on the facts of each case, most claims will be subject to a six year limitation period from the date the tenant was overcharged, and therefore claims are likely to follow fairly swiftly in the short term.

Where claims arise, landlords may look to other parties involved in the transactions for potential recoveries and contributions, with exposure for their indemnity insurers. Third party claims may include:

• Property managers and managing agents who have engaged in commission sharing practices on behalf of their client landlords and/or advised landlords in relation to the same
• Solicitors who prepared the original lease documentation and/or advised the landlord on the scope and operation of the lease terms, specifically the landlord's entitlement to recover insurance premiums, commissions and related costs/fees from the tenant, and
• Brokers (and any other third party) that encouraged the use of commission sharing structures, particularly where they have also benefitted from receipt of commission paid under such arrangements

While the decision may yet be appealed, landlords, their agents and professional advisors should be aware of the heightened risk arising from commission sharing structures. They should review their practices and ensure that any commissions or fees charged are reasonable and fully documented. Importantly, if the landlord intends to charge a commission or fee for securing insurance, it is essential that the insurance provisions in the lease expressly and clearly provide for this, and the commission or fee charged is commensurate with carrying out this work. The court will not imply such terms into a lease.

Commission payments received by FCA-regulated entities have been under the watch of the Financial Conduct Authority in recent years. With greater regulatory scrutiny and the new Leasehold and Freehold Reform Act 2024 (expected to come into force late 2025/26), which will limit landlords, freeholders and property managing agents to a new permitted fee charged to leaseholders separately from the insurance premium in the case of multi-occupancy buildings, it is expected leaseholder commission claims will be legacy and limited to landlord/broker past practice.

Commissions are also receiving significant attention by the courts currently. The Supreme Court's decision in Johnson v Firstrand Bank Ltd, expected in July 2025, will have wide-reaching ramifications for credit finance where a commission is unknowingly paid by a consumer to a lender's agent or intermediary. The appeal follows the Court of Appeal's landmark ruling that it was not enough for a lender's standard terms and conditions to make reference to the car dealer receiving a commission (as a fee for arranging finance terms for car purchasers). Informed consent required disclosing to the purchaser the exact commission paid by the lender to the dealer and how this had been calculated. While the judge did not explore informed consent or the role of fiduciary duty relationships in Trocadero, the Supreme Court's judgment could be highly relevant to commission sharing structures involving landlords. Our briefing note on the motor finance commissions is available here.