Background and relevance to Scotland
The High Court in England issued its decision on 23 May 2025 in the case of London Trocadero (2015) LLP v Picture House Cinemas Ltd & Others, tackling the question of liability for insurance commission payments in commercial leases. Although this is an English decision and does not, in itself, break new legal ground, it will be of interest to commercial landlords and tenants in Scotland. The case sheds light on a practice of which tenants are generally unaware, and the circumstances in which such commission costs may—or may not—be passed on to the tenant.
Insurance arrangements in commercial leases
It is common in commercial leases in Scotland, particularly in multi-let units, for a landlord to be entitled to arrange insurance for the leased premises and to pass that cost on to the tenant. This is also the case in England. In London Trocadero, the landlord arranged the insurance of the premises and passed the insurance premiums on to the tenant as "insurance rent". Interestingly, in this case the landlord had arranged for substantial commission-based rebates from its insurance broker, which it retained rather than passing the benefit on to the tenant. In essence, the landlord arranged for inflated commissions to be paid by the insurer to the insurance broker, which then became part of a higher insurance premium. The insurance broker would pass at least part of this commission to the landlord, while the tenant faced a higher insurance premium than would otherwise have been the case. The value of these commissions in London Trocadero amounted to hundreds of thousands of pounds.
Relevant Lease term
Typically, the relevant provision of a lease will require the tenant to reimburse the landlord for the premium payable by the landlord for keeping the premises insured. The lease in London Trocadero contained such wording. The tenant submitted that, when taking the commissions into account, the sum charged by the landlord was not the true "premium payable" and that they ought to be reimbursed for this overpayment.
Court's decision
The Court held that the term "premium payable" did not include such "commission" elements and therefore the tenant was entitled to reimbursement. Simply put, the landlord was not entitled to recover insurance rent representing costs it did not ultimately incur.
In addition, the Court stated that, while its judgment was based on the interpretation of the express term of the contract, it would have nevertheless ordered reimbursement of these commissions by applying an English implied term known as the "Havernridge implied term". This principle holds that a landlord is only entitled to demand sums by way of insurance "to the extent that such sums reflect the market rate and insurance contracts negotiated at arm’s length and in the ordinary course of business."
Practical implications and potential impact in Scotland
It is important to note that the Court recognised such commissions may be common in the market and are not, in themselves, unlawful or irrecoverable. However, express, clear, and precise clauses would be required to entitle the landlord to recover such inflated insurance premiums. The lease in this case failed to meet that threshold. In essence, a landlord should be cautious about using insurance reimbursement provisions as a source of profit unless the lease clearly states that this is the intention.
It is unclear to what extent similar commission arrangements are commonplace in Scotland and whether the Scottish courts would follow a similar line of reasoning. However, the case certainly sets the scene for tenants to enquire whether their landlords have been earning similar commissions, and whether the terms of their lease permit such practices.
