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The burden of proof when charging Insurance premiums under the service charge - is it really that important?

2nd May 2024

In this Legal Update, we examine the case of Octagon Overseas Ltd and another v Cantlay and others [2024] UKUT 72 (LC) and the somewhat thorny subject of whether Leaseholders are liable to pay as a service charge a premium for insurance that includes an element of commission payable to the Landlord by the insurer/broker.  In this case the figures were astounding, albeit they did relate to a 10 year period.


This case came before the First Tier Tribunal (“FTT”) in December 2022 who found that the residential Leaseholders were not liable to pay service charges totalling £1,517,372, which related to insurance and associated insurance premium tax of £121,338 and which had been paid back to the Landlord’s agents as commission by the insurer.  The FTT considered that the lease terms did not require the Leaseholders to pay those sums and in any event, the sums could not be found to be reasonable. 

The Landlord appealed on the following grounds:

  • Whether the FTT’s interpretation of the lease was correct that the Leaseholders were not liable to contribute to that part of the insurance premium subsequently paid to the Landlord as commission; and

  • That the FTT had sufficient grounds to conclude that the relevant costs had been reasonably incurred.

The Development

Canary Riverside (the Estate) is a large residential and commercial estate in the Docklands area of East London. It comprises five residential towers containing 325 flats and apartments let on long leases, the first Appellant, Octagon Overseas Ltd (Landlord), owns the freehold of the Estate.  All five of the tower blocks were originally leased to the Second Appellant, Canary Riverside Estate Management Ltd (CREM), under a Headlease granted in 1997 (the Headlease), and it still holds the same Headlease over four of the blocks. The Respondents are the Leaseholders of 98 apartments in the four CREM blocks who are members of the Residents’ Association of Canary Riverside (RACR).

The Lease

Under the flat leases, the Landlord covenants to insure and the Headlease provides that the Landlord shall be entitled to retain and utilise as it sees fit any commission attributable to the placing of the insurance.

The tenants covenant under the lease to pay “the Rents”, one of which is the “Insurance Rent”, the definition of which included “insurance tax, the cost of periodic valuations for insurance purposes and any VAT or other tax which may become payable in connection with the supply to the Landlord of goods or services relating to insurance

The decision in the FTT

The Leaseholders’ position was that the discount (commission and a loyalty bonus) that the Landlord received should be passed to the Leaseholders as occurred in Williams v London Borough of Southwark (2001) 33 HLR 2.

During the FTT hearing no evidence was provided by the representative of the Landlords and therefore the figures estimated were not agreed and indeed heavily scrutinised by the Leaseholders.  Also heavily disputed was the fact that, as per the figures estimated by the Landlord, the Leaseholders had been paying more for the placing of an insurance premium than the total cost of managing the estate. 

After over a three year deliberation, delayed due to the Landlord’s refusal to provide the requested insurance information, the FTT found that, in respect of insurance for the years 2010 to 2020, the sums disputed by the Leaseholders were received by the Landlords’ agents as commission from the insurers, and therefore fell outside of what the lease provided for as a service charge.  Accordingly, the Leaseholders had no obligation to contribute to those sums (paid as commission). The FTT went further to find that even if the Leaseholders were liable under the lease to contribute, the Landlords failed to prove that the charges for the insurance services were reasonable.  The FTT disallowed the whole of the £1.6M in insurance premium and associated insurance tax.

The Landlord appealed.

The finding in the Upper Tribunal

The Upper Tribunal (“UT”) agreed with the Landlord’s interpretation of the lease, that there is no justification for the FTT to adopt a narrow interpretation of the definition of Insurance Rent. The sum allowed by the covenant is plainly not limited to the cost of insurance itself, as it includes “all sums including insurance tax, the cost of periodic valuations for insurance purposes and any VAT or other tax which may become payable in connection with the supply to the Landlord of goods or services relating to insurance”. Those who drafted the provision clearly intended it to cast a wide net, not to confine it narrowly, and therefore the FTT was wrong to interpret the Headlease in such a way that the gross insurance premium was not recoverable from the Leaseholders.  The FTT’s decision on this point was therefore reversed.

The next question to deal with then was whether the sums demanded under the above provision are reasonable in sum.

It is relevant on this point that the FTT found that the recipients of the commission, the agents appointed by the Landlord, did undertake work relating to the insurance (ie, assisting with claims etc) and so it would not be right that the agent should be paid nothing for that work. Of the total commission of £1.5m over a 10 year period the UT considered, from the limited evidence available from the Landlord, that a fee of around £536,000 (plus insurance premium tax of £43,000) for the 10 year period was reasonable and thus due. It is worth considering the Judgment to see how the UT came to the above number (see para’s 47 - 67).

Final Thoughts

There are a number of key lessons to be taken from this ruling:

  1. Evidence of work undertaken is vitally important when attempting to prove the reasonableness of sums charged.

  2. Given the point at 1 above, the Landlord’s failure (intentional or not) to provide evidence to support the reasonableness of the fees charged and covered by the commission clearly hindered its ability to justify the numbers it was seeking, and so we see a determination by the UT resulting in a reduction by 66% of the sum claimed.  In this case that amounts to a huge £1M+ loss for the Landlord;

  3. Insurance premiums with loyalty bonuses should be reviewed carefully as not adding a credit/not reducing the bills to match the loyalty bonus provided can open the Landlord up to challenge;

  4. This decision predates the anticipated tightening of the rules on service charges relating to insurance and commissions thereon to be introduced in the Leasehold and Freehold Reform Bill and so, whilst this decision was essentially in favour of the Landlord, it may be that a very different light would have been cast had this decision post dated the proposed new rules.

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This Legal Update describes the position in law as at the date of this article and care should be taken to note any subsequent amendments to the position as set out above.  The Legal Update is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of KDL Law or by KDL Law as a whole.

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