Michael Gove's statement recently that he intends to ban freeholders and managing agents from taking building insurance commissions was met with a range of responses from those in the property sector.
For residential tenants who have long complained about high service charges this was a welcome announcement as part of Gove's larger promise to rebalance their relationship with landlords.
For those in the commercial real estate sector this highlighted Gove's misunderstanding of the interaction between brokers and landlords and the underlying provisions in commercial property leases.
A summary of the issues and the current law might help to explain the priorities of the government. However, we would argue that for the change he wishes to see, Gove will need to not only pass new law but fundamentally alter the way that brokers are remunerated for their service.
This could lead to a potentially seismic shift in the industry with unexpected repercussions.
The recently reported case of Various Leaseholders (Canary Riverside) v CRM and Octagon Overseas Limited provides the backdrop to the proposed changes to combat the disreputable landlords that Gove argues fills the sector.
The leaseholders of a Canary Wharf residential tower block applied for their landlord and the managing agent to disclose details of the insurance scheme provided for them through their service charge. Additionally, they requested that the landlord disclose what proportion of their fees amounted to a commission from the landlord's managing agent and insurance broker.
In its judgment in December last year, the First Tier Tribunal described the respondents' lack of transparency about commissions as "lamentable", considering that the "sums involved are large and constitute a very substantial percentage of the premium towards which leaseholders are asked to contribute".
With a greater number of similar cases making headlines in recent years, Gove commissioned the Financial Conduct Authority, which regulates insurance brokers, to report on the matter.
He stated that he was "keen to review how all actors in the insurance marketplace have contributed to high premiums for leaseholders" and that he "will consider all routes necessary to reduce premiums".
The FCA report, published this summer, makes interesting reading for those unfamiliar with how landlords and brokers do business.
It explains that landlords approach brokers with particular requirements for their insurance policy; brokers will scour the market for underwriters who fit these requirements and will be paid a commission by the underwriters if the landlord eventually uses their policy.
The commission is often at least 30 per cent but has been known to range from less than 10 per cent to 62 per cent of the gross premium. The FCA explains that "while in some cases customers may be aware of the amount of commission being paid, there is no general level of transparency or standard reporting regarding levels of commission".