UK homeowners fight against hidden commissions

Leaseholder Action has taken a significant legal step by sending out Letters Before Action to four of the UK's largest freeholders. This group claim aims to recover insurance commissions that have been charged unlawfully, which could impact up to 900,000 homeowners, predominantly in multi-occupancy flat blocks. For years, many landlords, including those with wealthy beneficiaries, have profited through hidden fees associated with buildings insurance. Notably, these concealed commissions can often reach as high as 60% of the insurance premium paid by leaseholders.

The letters, initiated by Velitor Law and backed by Balance Legal Capital, outline that landlords have specific duties to leaseholders. These duties involve acting in an “honest, impartial and disinterested basis in relation to the Landlord Defendants’ obligations in arranging insurance”. It’s critical to point out that landlords are obligated not to profit from service charges and not to exceed the market rate for insurance. These responsibilities derive from common law and are reinforced by the Landlord and Tenant Act of 1987.

The targeted legal action also encompasses the insurance brokers who have benefited from this practice. Thousands of homeowners have already joined the campaign, which seeks to defend those paying for buildings insurance organised by their landlords. A second wave of legal notifications is expected to be dispatched to landlords before year-end.

David Walsh, a homeowner from West London who has joined the claim, expressed his concerns about the situation. “This is nothing short of a national scandal. Hundreds of thousands of leaseholders have been struggling with ever increasing service charges, mortgages, and like everyone else the cost-of-living crisis. So, it is even more shocking that our landlords have been milking us for cash by jacking up insurance premiums with hidden commissions. I’m looking forward to unscrupulous landlords being held to account and paying back what they owe.”

The proposed claim may affect around two dozen landlords, responsible for leaseholds of nearly 900,000 homes. In a related development, Artex, a firm of insurance risk advisers, has been informed of ongoing legal proceedings focusing on their landlord clients. Artex reportedly advised landlords to establish offshore insurance vehicles, termed “captive insurers”, to safeguard their revenue streams. In promotional materials from around 2016, Artex encouraged property owners and managing agents to capitalise on the insurance placement for tenants as a lucrative source of commission income. As stated in their literature, “Managing insurance placement on behalf of tenants can be an important revenue stream of commission-based income for both property owners and managing agents.”

After scrutiny, Artex eventually removed the controversial 2016 promotional content from their website. Liam Spender, the lead lawyer for the claim and Head of Real Estate Litigation at Velitor Law, addressed the claim’s progression. “We have now reached a critical milestone in the legal process to get homeowners their money back. Thousands have signed up enabling us to get to this point. If you are a homeowner in a block of flats, and your landlord arranges your buildings insurance, we’d encourage you to sign up to the claim. This first set of landlords are now on notice of this claim, and they are now going to have to answer in court.”

Homeowners interested in joining the fight are encouraged to visit www.leaseholderaction.com. The claim aims to recoup a minimum of six years’ worth of commissions from landlords, potentially reaching back to 1997 depending on the court's ruling. The Financial Conduct Authority has previously explored secret commissions received by certain insurance brokers, finding that the average commission was around 30% and that brokers typically shared 50% of their earnings with third parties. Some brokers charged hidden commissions up to 60%, with profits benefitting both landlords and managing agents.

This issue has become even more pronounced in light of the cladding scandal, which has seen insurance charges for affected properties soar, creating a “misery dividend” that has inflated hidden commissions for landlords and insurance brokers alike. Estimates suggest that damages payable to affected homeowners could range from £1,500 to £3,500, contingent upon various factors, including location, commission levels, and potential court-awarded interest and recoverable Insurance Premium Tax.