L&FRA 2024: insurance commission consultation closes 24 February 2025

There is lots of service charge caselaw on landlord and managing agents’ insurance commissions, for example Williams v Southwark LBC (2001), Octagon Overseas v Cantlay (2024) and Spender v FIT Nominee Ltd (2024). Para 3.6 of the RICS Residential Service Charge Management Code requires managing agents (and landlords?) to disclose all “insurance fees (including commissions)” annually, and they may only be retained “in return for a service of value”. The Financial Conduct Authority has also published two recent reports on broker and freeholder commission sharing arrangements.

The effect of all this has generally been that tribunals have tended to make landlords and agents account to leaseholders for some kinds of ‘bad’ insurance commissions, while allowing them to retain other kinds of ‘good’ ones. ‘Good’ insurance commissions require the landlord or agent to provide substantial services in return, such as claims handling.

During the passage of the Leasehold and Freehold Reform Act 2024, a lot was said about allegedly unfair and secret insurance commissions. Unsurprisingly, section 59 therefore codifies and extends the caselaw.

Section 59 amends the Landlord and Tenant Act 1985 to ban certain “excluded insurance costs” that are attributable to payments made, or to be made, to arrange or manage insurance”. Tribunals will have the power to order the “return” of these costs or pay damages. But under the new s.20G(2)(b) of the 1985 Act, certain “permitted insurance payments” will not be treated as excluded insurance costs. These kinds of permitted payments will be defined by regulations.

The Act does not actually use the word “commission”. But “excluded insurance costs” plainly mean the ‘bad’ kinds of commissions referred to above, whilst the “permitted insurance costs” are squarely aimed at the ‘good’ kinds of commission. The aim is to ensure that remuneration will not be directly linked to insurance premiums, and that freeholders and agents will no longer be incentivised to select insurance brokers on the basis of commission arrangements.

This is one part of the 2024 Act which will be switched on later this year. And since much of the detail must be in secondary legislation, the government needs to consult. A consultation Permitted insurance fees for landlords, freeholders and property managing agents was launched on 2 December, although it may have been missed by many at the height of the festive season.

The critical part of the regulations will focus on the kinds of ‘excluded insurance costs’ that can legitimately be retained by landlords and managing agents. The key question is Question 9, which asks “What specific activities relating to the management and arranging of insurance should freeholders and property managing agents be permitted to carry out and be remunerated for through a leaseholder’s service charge?”

The consultation closes on 24 February 2025.

A copy of the Insurrance Insurance Commission cosultation can be found here.