By : Stephen Lennard
Landlords profit from rents. Unless their figures do not add up, in which case they are in the wrong business. In the commercial sector there is not only profit to be made from the money received from the tenant for the use of the premises. The astute landlord can and often does also profit from his own obligation to insure – the insurance rent. No doubt when life and (shortly thereafter) leases began, that was not how it was envisaged. Insuring property represented simply a sensible if not minimal step to protect the value of a substantial asset that was especially vulnerable to damage and destruction. But if it was left to the tenant, the possibility of non-compliance arose. That the premises may not have been covered against the requisite risks or for the appropriate amounts was too dangerous for landlords. Thus developed the expedient of the landlord’s retention of the obligation to insure with the tenant holding the concomitant duty to reimburse the landlord for the sums spent on the premiums. A full indemnity was needed to cover the landlord’s expenditure but there may never have been an expectation of gain.
A landlord will always wish to maintain flexibility and an unfettered freedom to choose his insurer. That informs the common formulation of the covenant in terms such as those simply requiring the landlord to insure with “any reputable insurance company” or with “any reputable underwriter.” But what may really drive the landlords’ choice of insurer is not the extent of the cover – there will be, for the most part, few significant distinctions in the perils covered – nor the cost – whatever difference that can make as the tenant is the one paying – but whether the insurer will pay commission for placing the business (which the landlord keeps) and at what level. That is where the profit on insurance rents comes in.
The level of commission is frequently between 10% and 20% and can sometimes be higher. Those landlords with large portfolios who would no doubt be able to push hard in negotiations for reduced premium payments (the benefit of which would accrue of course to the tenant) may be more influenced by the terms of the available commission payments. Even if the payment of commission is not the primary objective but only a secondary by-product of the freedom of selection of insurance retained by the landlord, the tenant is still the likely loser. That is because it is the tenant who will ultimately be paying the premium and who will suffer if the landlord does not seek to obtain cover at competitive rates.Absent an express provision, no term will be implied into the landlord’s covenant that there should be any restriction on his right to nominate either the company or the agency through whom the insurance is to be placed. Nor crucially will any term be implied that the premium charged by the landlord’s insurer should be reasonable or that a tenant should not be required to pay a substantially greater sum than he could himself arrange with an insurance office of repute. This was established in Bandar Property Holdings v JS Darwin (Successors) Ltd  2AER 305 in which the judgment of Roskill J, a classic formulation of the requirements for implying terms into contracts, accurately presaged by several years the far better known decision in Liverpool City Council v Irwin  AC 239:-
“It is axiomatic that a court will not imply a term which has not been expressed merely because, had the parties thought of the possibility of expressing that term it would have been reasonable for them to have done so. Before a term which has not been expressed can be implied it has got to be shown not only that it would be reasonable to make that implication but that it is necessary in order to make the contract work that such a term should be implied” ibid at 307G.
Bandar was approved by the Court of Appeal in Havenridge Ltd v Boston Dyers Ltd  2 EGLR 73 – there is no implied term that the insurance charged must be fair or reasonable; there is no obligation on the landlord to go shopping around for the best buy on the insurance market. Provided that the insurance was negotiated – which probably means obtained – at arms length and in the market, the tenant cannot argue that the landlord could and should have found a cheaper policy. The tenant is bound to reimburse the landlord with the full costs of the premiums of the policy that had actually been arranged. Some comfort was however offered to the tenant expressed in this way:-
“If the transaction was arranged otherwise than in the normal course of business, for whatever reason, then it can be said that the premium was not properly paid, having regard to the commercial nature of the lease in question, or, equally, it can be supposed that both parties would have agreed with the officious bystander that the tenant should not be liable for a premium which had not been arranged in that way.” ibid at 75M.
Another decision of the Court of Appeal – Berrycroft Management Co Ltd v Sinclair Gardens Investments (Kensington) Ltd  1 EGLR 47 – again found against the tenants. In contrast with the statutory regime governing service charges in a residential context, if a lease does not expressly provide for the landlord to be limited to charges which are fair and reasonable, the courts will not step in. Some softening of the position in Bandar had been indicated by Finchbourne Ltd v Rodrigues  3 AER 581 CA a case relating to service charges. However the Court of Appeal in Berrycroft found no inconsistency between the 2 decisions and the principles now seem settled.
While collusion with the insurer, bad faith, sharp practice, or other conduct falling short of dishonesty, would be caught by the refined test in Havenridge set out above- there should be no expectation that this settled position will be shortly overturned. The remedy for the tenant must be sought at the stage of negotiations where he should seek to impose an express obligation on the landlord to shop around for a reasonable level of premium while the landlord will hang on for the maximum flexibility in his actions. It need hardly be added that the tenant is less likely to achieve any result on an assignment of an existing lease.
However while the landlord may be able largely to dictate or carry on dictating the choice of insurer, on the other battlefront of commissions, some relief for the tenant may soon be at hand – from an unlikely source. The Insurance Mediation Directive received approval from the Council of Ministers on 1 October 2002. It will be implemented into domestic legislation by 2004. Also likely to occur during 2004 is the transition from the current voluntary regulation of the insurance industry by the General Insurance Standards Council “GISC” to statutory regulation under the FSA. In anticipation of the legislation, many major insurers are already insisting (see Estates Gazette 23 March 2002 page 30) that only firms registered with the GISC will be eligible to act as brokers and earn commissions. This will, of course, exclude many landlords. While some larger players will seek to attain the relevant quality standards and criteria for membership, others will be forced to look elsewhere to place their insurance – perhaps with insurers where no commission is payable to the landlord who will then no longer profit at the tenants’ expense.