A recent court ruling in London Trocadero LLP v Picturehouse Cinemas Ltd has provided important clarification for all involved in leasehold property management. The case focuses on insurance charges and when it is (and is not) acceptable for a freeholder to recover certain costs from leaseholders. The judgment has significant implications for freeholders, leaseholders and managing agents alike.
The Background
In this case the freeholder, via their managing agent, arranged a block insurance policy for the building and passed the cost to leaseholders through the insurance rent. The insurance was arranged via a broker, and whilst a broker can charge a commission which they are free to share with others, in this instance the freeholder arranged for the broker to charge an increased commission, with the additional amount passed on to the freeholder — effectively creating an extra profit for the freeholder. This cost was then included in what the leaseholders were charged.
Over time, these hidden commissions amounted to a substantial sum, which the leaseholders challenged on the basis that they went beyond what the lease allowed.
The Court’s Decision
The court found that the lease only entitled the freeholder to recover the actual insurance premium, not any additional commission or hidden profit. Even though the lease didn’t explicitly state that the insurance should be arranged at arm’s length, the court implied this requirement. Therefore, in this scenario, the freeholder would have been expected to arrange the insurance on commercial terms that would apply if they were negotiating with an independent insurer or broker. Additionally, there should be no secret profits or hidden agreements, and the cost passed to leaseholders should reflect the actual, fair cost of the insurance. However, the arrangement here fell short of that standard because the freeholder was receiving a financial benefit beyond the true insurance cost.
As a result, the freeholder was ordered to repay around £700,000 to the leaseholders. The court concluded that the freeholder had been unjustly enriched — meaning they had received money they were not legally entitled to keep under the lease.
What this means for Freeholders, Leaseholders and Managing Agents
This ruling is a clear reminder that freeholders can only recover costs from leaseholders if those costs are allowed by the lease terms. Generally, this will be the actual insurance premium paid to the insurer — not extra commissions or undisclosed profits. Managing agents will need to ensure that insurance arrangements are transparent and properly documented. If challenged, they should be ready to provide evidence of how the insurance cost was calculated and confirm that no improper profit has been included.
For leaseholders, this decision underlines the importance of checking insurance costs carefully. Where the lease limits recovery to the actual premium or reasonable costs, leaseholders have the right to question charges that appear excessive or unclear.
Next Steps
Freeholders and managing agents should take this opportunity to review the insurance clauses in their leases, alongside the actual insurance arrangements in place, to ensure they are compliant. They should be confident that the sums being charged to leaseholders reflect genuine costs rather than hidden commissions or other forms of profit.
