Octagon Overseas Limited & Anor v Sandra Cantlay & Ors

Where a lease permits recovery of all sums paid in respect of specified insurance, the recoverable cost is the gross premium where commissions paid from it remunerate insurance-related services. A commission paid to the insured’s agent does not thereby become a discount or reduce the contractual cost of insurance.

Such arrangements may not be at arm’s length and may require close scrutiny. Their control lies in the statutory requirement that service-charge costs be reasonably incurred under Landlord and Tenant Act 1985, rather than in a narrowed construction of an otherwise wide insurance-rent provision.

Once leaseholders establish a prima facie case requiring an answer, the landlord must prove both the work supporting the commission and its reasonableness.

The appellants were the freeholder and headlessee-manager of the Canary Riverside Estate. The respondents were long leaseholders who challenged insurance service charges for 2010 to 2020 under section 27 A of the Landlord and Tenant Act 1985.

The First-tier Tribunal held that commissions paid to the landlords’ agent, Westminster Management Services Ltd (WMS), were not recoverable as insurance rent. It found that only the broker’s commission was payable. The FTT decision of 21 December 2022 was challenged under FTT reference LON/00BG/LSC/2019/0277.

The appeal concerned whether the gross premium, including the commission remunerating WMS’s insurance services, fell within the lease definition of Insurance Rent and, if so, what sum had been reasonably incurred.

1. Appeal allowed. The FTT erred in construing the Insurance Rent as excluding the commission paid for WMS’s work. The definition covered a due proportion of all sums paid in respect of the specified insurance, and its express inclusion of taxes, valuations and services relating to insurance showed that it was deliberately wide.

2. The relevant cost was the gross premium agreed with the insurer. The payments to the broker and WMS were found to be commissions for services, not a rebate or discount for placing business. The number, order, or routing of the payments did not alter their character. If WMS had not undertaken the services, they would have had to be provided and paid for by another person. The fact that WMS acted for the insured made the arrangement non-arm’s length, but did not redefine the cost of insurance.

3. The proper protection for leaseholders was the reasonableness ceiling in section 19 of the Landlord and Tenant Act 1985. The respondents had raised a prima facie case requiring an answer: the commissions were undisclosed, calculated as a percentage of premiums, and not shown to result from arm’s-length market negotiation. The burden was therefore on the landlords to establish the work done and that the commission was reasonable.

4. The FTT had effectively disavowed a reasoned finding on reasonableness. With both parties preferring a final determination, the Tribunal decided that issue on the available evidence. It accepted that WMS had performed the work described, but the landlords had provided no reliable Estate-specific breakdown justifying the amount claimed. The reasonable charge for WMS was fixed at the same total as the broker’s allowed commission and fees: £536,182.

5. The Tribunal substituted a determination under section 27 A that £536,182, rather than £1,517,372, was payable for WMS’s services. Including insurance premium tax, the payable total was £579,039 rather than £1,638,709.

• Upper Tribunal (Lands Chamber): Allowed the landlords’ appeal and substituted a determination that £536,182 was payable for WMS’s insurance services.

• First-tier Tribunal (Property Chamber): By a decision dated 21 December 2022, under FTT reference LON/00BG/LSC/2019/0277, held that the WMS commissions were not contractually recoverable and that nothing was payable in respect of them.