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Landmark Decision in Trocadero v Picturehouse

A recent ruling in Trocadero (London) Ltd v Picturehouse Cinemas Ltd & others has clarified the scope of the covenant to pay insurance rent in commercial leases with particular reference to landlord’s commission. At Quastels, we are closely following the implications of this judgment for our clients involved in commercial property leases. The decision carries significance for both landlords and tenants with potential ramifications both in terms of future drafting of leases and retrospective claims from tenants.

Background

The dispute arose out of the Landlord’s (Trocadero (London) Ltd) claim against its tenants (Picturehouse Cinemas and others), for failure to pay the annual rent and insurance rent, albeit, during COVID-19-induced closures. The Landlord’s claim for recovery of rent arrears was successful, however, the tenants brought a counterclaim questioning the level of insurance rent payable under the terms of the lease, specifically the recoverability of the Landlord’s commission. As would be expected in the vast majority of commercial leases of part, the landlord had an obligation to insure the centre in which the units were located and the tenants were obligated to pay the ‘premium’ and associated costs payable by the landlord in keeping the building insured.

In this case, the ‘premium’ charged to the Tenant, by way of insurance rent, was made up of the following:

1. The actual cost of insuring the building (the net premium);
2. The insurance broker’s commission; and
3. The Landlord’s commission, to be recovered from the Tenant for the benefit of the Landlord.

It is worth noting that on occasions, the Landlord’s commission amounted to over 50% of the premium. The landlord’s commission was entirely optional and obtained at the Landlord’s broker’s request based on a commission sharing arrangement – with the broker retaining an amount and repaying the remainder to the landlord.

Judgement

Ultimately, the court did not find that the Landlord’s commission was contractually payable by the Tenant under the terms of the lease and, importantly, ordered that sums received from the Tenant on account of the Landlord’s commission element of the insurance rent were to be repaid to the Tenant.

What was material to the Court was that the Landlord’s commission was optional, therefore, hypothetically speaking, even if the Landlord’s commission was deemed to be payable, it would not satisfy the criteria of being payable for keeping the building insured, but rather for “providing the Landlord with an opportunity to profit at the Tenant’s expense” as Justice Richards explained. Justice Richards further commented that “the costs in question are in the nature of overheads or costs of the Landlord’s letting business which is to be paid out of the receipt of rent”, indicating that any administrative costs in Landlords arranging buildings insurance should form part of their commercial considerations or financial analysis before letting a premises.

What does this mean for you as a Landlord or a Tenant?

There is a general consensus amongst legal professionals that this ruling may act as a catalyst for commercial tenants to look more closely into any embedded commissions that could be hidden within their insurance rents, in the hopes of seeking restitutionary remedies in respect of any payments previously made.

However, landlord commission structures are commonplace in commercial buildings insurance set-ups (albeit usually at a much lower percentage than as seen in this case), and such remedies would only be afforded to tenants in the absence of clear insurance provisions in the lease. There are various conditions which must be satisfied in order for a tenant to have legitimate grounds for such a claim. It is therefore crucial that tenants seek legal advice on (1) the scope of any insurance rent, before committing to a lease and (2) provisions in existing leases if tenants consider they may have a potential claim for overpaid commission.

In terms of point (2) and potential claims, tenants should act quickly given that, as a general rule (with some exceptions), a claim under restitution is time limited to six years.

Landlords should be cautious before adopting an all-encompassing approach to cost recovery as it is now clear that the courts will be unlikely to favour the landlord and permit the recovery of landlords’ commissions where this is not expressly stated in the lease. This calls for Solicitors to work collaboratively with their landlord clients to avoid any ambiguity in the recoverability of all elements of insurance rent.

Conclusion

Trocadero v Picturehouse provides us with clear guidance that the courts expect landlords abd tenants to negotiate lease agreements critically, to avoid any disparity in the respective parties’ financial obligations. Going forwards, the standard commission fee being charged to tenants could be subject to challenge in new leases and could result in numerous successful claims for previous such payments to be recovered.

Our expert Commercial Real Estate and Property Dispute Resolution departments are here to provide both tenants and landlords with bespoke advice in relation to both the interpretation of existing leases and the possibility of claims being made for previous overpayments and the drafting of insurance provisions in future leases.

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Inheritance Tax: Successive Reforms to Succession

What can we expect?

According to The Guardian, the Labour Government is looking to introduce further changes to UK inheritance tax. These changes would represent a further squeeze on planning opportunities available to families, following the abolition of the non-dom regime (2025), reforms to agricultural and business property relief (2026), and bringing pensions into chargeability (2027). With these successive yearly reforms, do we have further reforms on the horizon and how might they impact succession plans?

Turning to the latest attempt by the Treasury to gauge public sentiment, ministers are considering introducing:

1. a lifetime cap on gifting; and
2. changes to taper relief that reduces IHT rates on gifts made between three and seven years before death.

Under the current rules, any gift (of whatever amount) made more than seven years before death is typically exempt from IHT. As for taper relief, the rate of tax levied on gifts within that seven year period ranges from 32% down to 8%. In effect, the longer you live, the more you and your heirs are rewarded.

We can only speculate for now, but might a lifetime cap apply to the donor or the donee. For example, might there be a lifetime gifting cap of £1 million to be applied across any number of beneficiaries and once that £1 million cap is hit (even if distributed among, say, 15 recipients), an immediate tax charge arises, much like a gift tax? Or, would the Government look to apply a cap on each donee (or recipient) of, say, £100,000. If this amount is exceeded, then again, it triggers a lifetime gift tax on the excess.

Beyond the speculation, with the Government exploring a range of options (including a wealth tax) to help overturn their £40 billion hole, the reality for clients is that traditional planning might soon be severely curtailed.

What to do?

If introduced, the new cap could squeeze succession and tax planning further, resulting in far greater tax liabilities and possibly the sale of assets if gifting in delayed. Combined with the reforms to APR and BPR, delayed gifting could lead to the fragmentation of family ownership of assets and businesses. A potential reform to taper relief might add insult to injury, whatever form this ends up taking.

There are, of course, other considerations to gifting including potential capital gains tax implications and the loss of control, so gifting may be as much of a psychological burden to overcome as well as one that is fiscal in nature. Given the capital gains tax element, there is always the risk of double taxation which is perhaps its own standalone article.

When should we act?

Lawyers typically answer with ‘it depends’. However, with the ongoing erosion of IHT reliefs, the time is NOW. Don’t wait until the Budget, as there will likely be anti-forestalling rules preventing you from acting once there’s ‘clarity’ means it’s too late by then.

Client’s should therefore look to:

1. Maximise current exemptions: Gifts made today under the current system still benefit from full taper relief and the seven-year exemption window;
2. Use every available relief: Annual exemptions (e.g., £3,000 per year), ‘gifts from surplus income’, wedding gifts, and small gifts are still intact, but these may become more restricted with anticipated reforms;
3. Avoid being caught off guard: Future reforms may apply retrospectively to gifts made after certain dates or impose cumulative limits such that any delay could further erode your ability to gift tax-efficiently.

In summary

If you have assets you can afford to gift, there is no time like the present. The Guardian article is a warning of what is to come and so clients should act with certainty of the current system noting that there is a window of time before any future reforms become law.

If you have any queries relating to inheritance tax and gifting, please contact Ben Rosen of Quastels LLP.

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A Simple Guide to Property Ownership Options When Buying With Your Partner or a Friend

What are Joint Tenants?

Holding the property as joint tenants means that each person has an equal interest in the property. If one of you died, the survivor would automatically own the whole (100%) of the property.

What are Tenants in Common (equal shares)?

Holding the property as tenants in common, in equal shares, mean that you each own 50% of the property. If one of you died, your 50% share of the property would be left to whomever you choose under your Will. You may wish to consider this option if you are both contributing equally to purchasing your property but wish to decide who your 50% share is left to.

What are Tenants in Common (unequal shares)?

Holding the property as tenants in common, in unequal shares, means that you hold the property in anything other than 50/50 shares. It could be 60/40, 80/20 or even 99/1. You may wish to consider this option if you are contributing different amounts to purchase your property. Should you decide to hold your property as tenants in common with unequal shares, you should consider making a Declaration of Trust providing for more detail as to options on disposing of your share and contributions to property expenses.

Does This Affect Our Mortgage?

No, it does not matter how you hold your property when it comes to your mortgage. You are both jointly and individually responsible, meaning that you are not just liable for ‘your half’ of the mortgage.

Can We Change Our Minds Once the Property is Registered?

Joint Tenants to Tenants in Common: this is done by way of severance of joint tenancy. You can do this by yourself, or by appointing a Solicitor.

Tenants in Common to Joint Tenants: to do this, you both need to agree to the change. The documentation is more complicated. You should appoint a Solicitor to assist with this.

What is a Declaration of Trust?

In simple terms, it is a legally binding document that sets out the underlying ownership between the property owners. It can be drafted to suit your required needs, but it will mainly outline how much of the property you each own, the amount each person has contributed to the purchase, and the procedures for selling or transferring ownership. The existence of the Trust will need to be registered with HMRC and the Land Registry. To find out more, please contact our Private Wealth & Tax team who can assist.

If you have any queries about the contents of this article, please contact our Residential Real Estate team via the form below.

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