Commercial property owners have received a stark warning regarding the possibility of being required to reimburse substantial sums from insurance commissions. This comes after a High Court ruling involving the Trocadero Centre in London, which directed its landlord to return funds to one of its tenants.

Insurance sector professionals are concerned that the industry may be confronting significant challenges as landlords may have to return rebates following the court’s decision. The ruling determined that commissions received by a landlord are not to be considered part of the “premium” that tenants are obligated to pay.

This case highlighted the often undisclosed commissions shared by insurance brokers with landlords when tenants are billed for their building insurance. Similar practices in the leasehold market previously prompted regulatory changes.

The High Court’s decision stemmed from a legal dispute between the iconic Trocadero Centre in Piccadilly Circus, operated by Criterion Capital, and its tenant, Picturehouse.

Criterion was found to have received commissions amounting to nearly 60 percent of the insurance premium charged to Picturehouse and other tenants for insurance coverage between 2015 and 2023.

Picturehouse, a part of the Cineworld group, contended that it should not be accountable for the portion of insurance premiums that compensated the landlord’s commission.

Justice Mr. Richards articulated that the commissions awarded to the landlord were not intended to facilitate the insurance of the property as outlined in their lease but rather to provide an opportunity for the landlord to profit at the tenant’s expense.

Richards also pointed out that it is a widespread practice for insurance brokers to share commissions with landlords. He concluded that in this case, the commissions were not contractually owed, enabling the tenant to potentially recoup substantial sums.

Branko Bjelobaba, an expert in insurance compliance, expressed that this ruling could signal a significant issue for the insurance sector, suggesting that many commercial tenants may have overpaid for their insurance due to landlords profiting at their expense.

“Other commercial tenants will likely scrutinize their insurance agreements now that this ruling has come to light, as it suggests potential significant recoveries,” Bjelobaba indicated.

Recent reforms in the residential leasehold sector have emerged from growing governmental concerns about tenant treatment by the insurance industry and landlords. Proposals for class-action lawsuits are underway to recover millions of pounds in insurance commissions shared with residential landlords.

Bjelobaba stated that similar scrutiny may soon extend to the commercial sector, suggesting that this situation could surpass the residential leasehold issue, emphasizing the lack of protections for commercial clients. He noted, “It wouldn’t be surprising if a collective claim is on the horizon, due to the large sums at stake.”

Bjelobaba questioned the rationale behind landlords receiving payment for insuring their properties, calling for awareness of tenant exploitation with the complicity of the insurance industry.

A representative for Criterion and the London Trocadero Centre announced plans to appeal the judge’s ruling, stating, “While we respect the judge’s decision, we disagree with the outcome. Many in the industry may be surprised to learn that a property insurance premium does not include any portion of the brokerage legitimately shared by brokers with their landlord clients.”

Ion Fletcher, director of the British Property Federation, emphasized that property owners should be transparent about the costs incurred on behalf of tenants, including clarity regarding insurance commissions. He noted the advantage landlords have due to their ability to negotiate favorable insurance terms, which should benefit tenants.

“While property owners expended effort to secure those deals, it is reasonable for them to recoup their costs through a fair commission. However, any such fees should be fully disclosed as per [industry standards],” Fletcher added.

Neither the Association of British Insurers nor the British Insurers Brokers Association provided a comment on this matter.