In this blog we look into a recent first tier tribunal (FFT) case, in which the leaseholders of Canary Riverside Estate challenged the insurance premiums they’d had to pay over the last 10 years to their managing agent, Westminster Management Services Ltd (WMS). Before going any further it is worth noting that the freeholder (Octagon Overseas Ltd) and head lessor (Canary Riverside Estate Management Ltd) at Canary Riverside Estate, along with WMS, are all believed to be John Christodoulo companies.
It appears that the freeholder instructed WMS to obtain insurance for the development, and WMS then instructed insurance brokers Reich to find insurance. This led to the primary issue, as it was found that both Reich and WMS were being paid substantial commissions, although this information had to be wrung out of the brokers through disclosure applications, as none of the companies involved had disclosed this. The leaseholders involved argued that commission, totaling £1,517,000, was not payable and reasonably incurred.
The tribunal found that a commission could be retained in two circumstances:
- Where the lease specifically provided for this to happen, which in this case the headlease between Octagon and CREM did, under a clause dealing with ‘insurance rent’. The sub-leases entitled CREM to pass on ‘Insurance rent’ costs to the leaseholders. However, no commission was paid to Octagon, it was paid to WMS and the brokers.
- Or via Williams v London Borough of Southwark (2000) ALL ER (D) 377, a commission could be retained where it was a payment for work done, such as the landlord doing work for the insure, which would have otherwise been charged to the leaseholder. These fees would still be subject to reasonableness.
As the second circumstance isn’t relevant here, the tribunal focused on the clause dealing with ‘insurance rent’ and took the view that the costs recoverable under ‘insurance rent’, should relate to the insurance itself and not WMS activities to obtain the insurance. As such, there was no requirement for the leaseholders to contribute towards these costs.
Some of the costs associated with WMS activities to obtain the insurance may have been recoverable under the service charge (subject to reasonableness), but they were not demanded in this way.
When obtaining insurance it is important to refer to the lease in question to ascertain what costs are recoverable and via what means. Additionally, it is crucial that all insurance fees (including commission) are declared annually to the client and leaseholders, and should reflect the level of work carried out, as stated in paragraph 12.1 of the 2013 RICS code.
It remains to be seen if this decision will be appealed, so there may be further developments.