This case reiterates the legal principle on lease contractual terms for how landlords recover insurance costs from tenants under commercial leases.
Background
It is common practice in commercial lease terms to provide that the landlord insures the building and charge the proportioned costs of insurance to tenants as ‘insurance rent’.
However, it is not new that some in the industry have adopted insurance commission practice which works as such: the Landlords ask their insurance companies to pay large commissions to their brokers. The brokers then give some of this money to the landlords. To cover these high commissions, the insurance companies raise the insurance prices for the landlords. The landlords, in turn, charge their tenants more for the insurance.
As a result, the insurers get the same amount of money as before, the brokers earn their usual commissions, but the tenants end up paying more. The landlords just keep the extra money from the increased charges.
The landlord in this case had been paid more than £1 million a year at the cost of the tenants.
Legal Issue
The legal principle is the lease contractual terms and wording of the lease. The court considered ‘premium payable’ in the lease term, and whether the landlord is entitled to recover the commission money in return.
Decision
The High Court ruled in favour of the tenant, Picturehouse, and ordered the Landlord to repay the insurance cost that had not incurred on the basis of unjust enrichment. It found that “premium payable” was not part of a genuine cost incurred, so that the landlord was not entitled to recover insurance rent in such practice. The Court made suggestion that a term to require the landlord to act reasonably in arranging market rates insurance transparently to be inserted in the lease terms.
While the case does not break any legal ground, it is of particular interest for revealing such a commission practice which is unknown to many tenants. It acts as a reminder to both landlord and tenants to review lease provisions concerning insurance, to review current insurance practice reflects genuine recoverable costs and to avoid using insurance as a profit generator unless it is agreed and provided in lease terms.
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