Real Estate Bulletin: Summer 2015

Welcome to the Summer edition of the Real Estate Bulletin. The quarter we have case law updates on:

• Business rates – refurbishment
• Contracts – fraudulent misrepresentation
• Development – defective premises
• Development – procurement
• Easements – right of way and parking

…and Landlord and Tenant updates on:

• Implied surrender
• Landlord’s intention to redevelop

…as well as planning and tax updates:

• Planning – retrospective planning applications
• Planning – use classes
• VAT – transfer of a going concern

Case Law Update

Business rates – refurbishment: SJ & J Monk v Newbigin

Key points:

• Where a commercial property is empty, its rateable value is based on the amount of annual rent reasonably obtainable for the property
• Various assumptions are made, including that the property is in a reasonable state of repair save for any repairs a reasonable landlord would consider to be uneconomic
• The assumptions apply irrespective of the state the property is actually in
• Vacant properties will not automatically be listed with a nominal rateable value

M owned an office building that had been vacant since 2006 and which was in need of repair. In 2010, M engaged a builder to carry out various works. M intended to create three self-contained lettable units within the building. The works included removing the air conditioning plant, stripping out the wiring, removing most of the ceiling tiles and removing the sanitary fittings.

The building fell to be valued for rating purposes in 2012. The property was entered on the list with a rateable value of £102,000. M argued the rateable value of the property should be £1 because of the physical state of the building at the time. At the Valuation Tribunal, M lost the argument, so it appealed to the Upper Tribunal, which overturned the decision. The Upper Tribunal’s view was that on the valuation date, the property was not capable of beneficial occupation as an office because of the physical state it was in.

The works being carried out were major, and went beyond the normal meaning of ‘repair’. This reasoning was in fact in line with the Valuation Office Agency’s own Rating Manual.

The Valuation Office then appealed to the Court of Appeal, which overturned the Upper Tribunal’s decision.

The court also noted that certain aspects of the VOA Manual were misleading.

Implications:

For M, no reduction in business rates. For the VOA, a re-writing of the Rating Manual. For property owners generally, a reminder that just because a building is undergoing a major refurbishment, it doesn’t mean its rateable value will be reduced. Each case will turn on its own facts, particularly in relation to the nature and extent of the works being done – whether they can be classed as repairs and whether a reasonable landlord would say they are uneconomic.

Contract – fraudulent misrepresentation: Morrell v Stewart

Key Points

• Exclusion clauses in sale contracts do not get a seller off the hook for making a fraudulent misrepresentation
• But it’s always a good idea to have a survey done before exchanging contracts to buy a property!

M exchanged contracts to buy S’s property which was a house, boarding kennels and a cattery. There was also a separate agreement in relation to the kennels and cattery business.

Three days after completion, M became aware of various problems with the drainage at the property involving – without going into too much detail – an overflowing septic tank.

Before the sale, S had a visit from the Environment Agency (EA) and undertook to carry out works to deal with the problem by sealing an overflow pipe.

S told the EA this had been done.

However, the works were wholly inadequate, as evidenced by the fact that effluent continued to overflow onto adjacent land!

Although M had not had a survey carried out prior to exchange of contracts, M’s solicitors had done pre-contract due diligence. In the Seller’s Property Information Form, S indicated there had not been any negotiations or discussions with neighbours or with the local authority that would affect the property. M’s solicitor also raised a specific enquiry about replumbing or retesting of the drainage at the property, which received a negative response. M’s investigations also revealed a letter from the EA in 2008 which set out the issues with the discharge from the septic tank and a confirmation from S that the issue had been dealt with.

M successfully claimed damages arising as a result of S’s fraudulent misrepresentations, on the basis that they had relied to their detriment on the statements S made about the drainage.

Implications:

Contracts usually contain a clause that a buyer accepts the property in its physical condition at the date of exchange. This is in line with the ‘buyer beware’ principle and seeks to exclude or limit a seller’s liability in relation to the state of a property on the basis that a prudent buyer would have a survey carried out. However, a seller cannot exclude liability for statements made pre-contract that are fraudulent – ie where the seller makes representations knowing them to be untrue, not believing them to be true or is reckless as to their truth. Regardless of the fact that S thought the problems had been resolved, the discussions and correspondence should have been disclosed. That said, M could’ve saved itself a lot of time and money by having a survey done in the first place.

Development – defective premises: Rendlesham Estates Plc v Barr Ltd

Key points:

• As well as liability under a contract and for negligence, a housebuilder may be liable to a buyer under the Defective Premises Act 1972
• The Act imposes particular duties on those doing work in connection with the provision of a dwelling

R owned 120 out of the 171 flats on a development built by B. R alleged there were numerous defects both within the flats themselves and in the common parts, such that the flats were not fit for habitation as required by the Defective Premises Act 1972.

In order to determine B’s liability, the court had to consider the terminology of the Act, including the meanings of ‘dwelling’, ‘in connection with the provision of a dwelling’ and ‘fit for habitation’.

The court found that the flats themselves were ‘dwellings’ for the purposes of the Act (ie it doesn’t apply only to houses) but the common areas were not. The common areas were, however, ‘in connection with the provision of a dwelling’ because the occupiers of the flats had rights to use them and an interest in maintaining them. Defects in the common areas were therefore relevant, although only to the extent that they impacted on the fitness for habitation of the flats. A dwelling is fit for habitation if on completion it is capable of being occupied for a reasonable time without risk to the health or safety of the occupants and without undue incovenience or discomfort to them.

R was entitled to the costs of remedying the defects in both the individual flats and the common areas insofar as these had rendered the flats unfit for habitation. R was also entitled to an amount of damages to reflect the blight on the value of the flats where remedial works were carried out and for distress and inconvenience.

Implications:

As well as clarifying the application of the Act to flats and common parts, as opposed to houses, the court made a number of other points that may be of interest to housebuilders. For example, a dwelling may be unfit for habitation even though the defect that makes it so is not apparent at the time of completion. Note also that fitness for habitation means habitation by all classes of occupier including babies and children, pregnant women and those suffering from common ailments or allergies – there is no ‘reasonable occupier’ test here.

The decision suggests that the application of the Act is wider than previously thought and raises another potential head of liability for housebuilders who, if faced with similar claims, should look to the legal arrangements with their contractors and professional team.

Development – procurement: R (Gottlieb) v Winchester City Council

Key points:

• European procurement rules apply to public works contracts, including development agreements for town centre regeneration projects
• The rules are designed to promote competition, ensure transparency and equality of opportunity for developers who wish to be involved in such schemes
• There is a particular process to be followed in terms of advertising contracts and failure to do so can set much-needed regeneration back

Back in 2004, WCC entered into a development agreement with a developer (T) to regenerate the Silver Hill area of the city centre with the provision of new housing, retail, parking and civic amenities. In particular, T was required to provide a significant amount of affordable housing and a new bus station. WCC was to assemble the site and grant a long lease to T to enable the development to take place. The agreement provided for future variations, some of which were at the absolute discretion of WCC.

As in many towns and cities, the scheme was mothballed when the market crashed in 2008. In fact, in 2010 T went into administration and was bought out by Henderson Global (H).

Between 2011 and 2013, the CPO process was completed, allowing WCC to acquire the outstanding land interests in the site. An opportunity to revive the project arose last year when the parties agreed a number of major variations to the development agreement including the removal of the affordable housing requirements and the new bus station, as well as a significant increase in retail space. WCC approved the variations and it is this decision that came before the court following a judicial review challenge made by G, a member of the Winchester Deserves Better Campaign, that had objected to the revised scheme. The basis of G’s application was WCC’s failure to follow the public procurement process and put the revised agreement out to tender.

G was successful. Although too late to challenge it, the court also found that the original 2004 development agreement should have gone through the procurement process.

Implications:

WCC now has two options – put the scheme out to tender or rethink the whole project. Either way, Silver Hill won’t be getting regenerated any time soon.

There are lessons here for local authorities, but it’s an important decision for developers too. Even if the original agreement had been properly procured, the variations were so significant that they effectively created an entirely new agreement, which also had to be properly procured. The fact that the original agreement expressly anticipated future variations didn’t help either. Parties should not just proceed without reference to the overarching freedom of competition principles that govern these types of contract.

H will of course be able to bid for the contract if WCC do decide to tender it in its current form, but they will be in the same position as any other potential bidder and the work done to date to formulate the scheme has been lost.

One other interesting point about this case is the status of the applicant, G. There had been uncertainty about whether residents would have the standing to bring this sort of claim. The decision indicates that they do. Whilst this increases the potential for challenge, the judicial review process is long-winded and expensive so this may act as a deterrent to all but the most determined campaigners.

Easements – right of way and parking: Bennett v Winterburn

Key points:

• It is possible to acquire legal rights over adjoining land by long-user (prescription)
• Use must be without force, without secrecy and without permission
• There are steps landowners can take to prevent such rights arising

In 2010, B bought buildings and a car park in Keighley, West Yorkshire that had previously been owned by the local Conservative Club. The property was next door to a fish and chip shop owned by W. The shop’s customers and delivery drivers had used the car park (despite signs saying it was a private car park for the use of club patrons only) for a number of years, so W claimed prescriptive easements over the car park area, both for access and for parking, for the benefit of themselves, their staff and their customers.

Unsurprisingly, B resisted the claim. On appeal, B was successful in resisting the claim for a right to park, on the basis that there were clearly visible signs and because, over the years, the Club’s owners had occasionally raised the issue of parking with W. The Tribunal did declare that a right of way on foot had arisen for the benefit of W, their customers and licensees. The signs on B’s property only made reference to parking, not to access.

Implications:

Landowners need to keep a close eye on who is using their land for unauthorised purposes. There are various physical steps that can be taken to prevent rights arising, including erecting barriers. As we can see from this case, signs may not always be foolproof, particularly if they are too specific. As it’s difficult to list everything possible that is prohibited, it might be easier to grant a temporary consent to park or to access adjoining buildings, reserving a right to withdraw that consent at any time. However, this also needs monitoring as who agreed what and with whom can be forgotten over time. The good news is it’s not necessary to go as far as issuing trespass proceedings against an encroaching neighbour, although clear attempts to prevent unauthorised use, possibly followed up with correspondence, may help.

Landlord & Tenant – implied surrender: Obichukwu v London Borough of Enfield

Key points:

• Leases can be surrendered by operation of law
• This means there’s no paperwork, but the actions of the parties are taken to indicate that a lease has come to an end
• If a lease is surrendered in this way, tenants could lose out on valuable rights

O ran a grocery business from a shop in Edmonton. She had statutory rights in relation to the lease under the Landlord & Tenant Act 1954.

The shop was part of a retail parade on the ground floor of a block of flats. LBE owned the block, which it intended to sell for demolition and redevelopment. Having re-housed the residential tenants, LBE then sought to obtain vacant possession of the retail parade and started negotiations with the commercial tenants regarding the termination of the leases. LBE also started the ball rolling on a CPO in case the negotiations were not successful.

A public inquiry was held to consider objections to the CPO. O had objected but said she agreed, in a conversation with a council officer at the inquiry, to withdraw her objection and to vacate her shop with the expectation that she would receive compensation under the CPO. A week later, O wrote to LBE stating she was surrendering her lease voluntarily by handing over her keys. The letter did not mention compensation and a day later, LBE accepted the keys from O’s husband. The issue of compensation was raised subsequently.

LBE took the view that O had surrendered her lease and therefore, there was no longer any interest to be compensated. O brought proceedings in the Upper Tribunal, but she was not successful.

Implications:

Whilst the council came in for some criticism, and the decision caused the Tribunal ‘extreme discomfort’, its behaviour was found not to be an abuse of process. O had not been legally represented at the point she offered to give up her lease and therefore had not appreciated that she was also giving up any rights that attached to her interest. Tenants should be careful not to act in a way that brings about a surrender by operation of law such that preceding rights are lost.

It is safer to enter into a written agreement to surrender that preserves any such rights, but remember that where a tenant has the protection of the Landlord & Tenant Act 1954, a statutory notice procedure has to be followed in order to make the agreement effective.

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The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.