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Articles Real Estate 18th Apr 2016

Real Estate Bulletin: Spring 2016

This quarter, we have a case on the implications of serving a notice to complete; an update on a case from last year about a developer changing horses (well, planning permissions) part way through a development in order to avoid infrastructure payments; landlord and tenant cases on recovering arrears from former tenants and the difficulties for landlords in getting telecoms operators off their land. There are planning points on small site exemptions from affordable housing, judicial reviews of planning decisions in the face of procedural irregularities and the interpretation of ‘tailpieces’ attached to planning consents. For the tax enthusiasts, we look at an unsuccessful attempt by a landowner to reduce Capital Gains Tax liability when selling off garden land.

Case Law Update

Contract – Notice to complete: Hakimzay Ltd v Swales

Key points:
  • When one party to a contract doesn’t complete, the innocent party can serve a notice to complete
  • This makes time of the essence and gives the innocent party certain options if the notice is not complied with, including terminating the contract

S and H exchanged contracts for the sale of a residential property. The property was let on an assured shorthold tenancy but the sale was to be with vacant possession. H paid the usual 10% deposit and a completion date of 3 April was agreed.

Unfortunately, S wasn’t able to give vacant possession of the property as one of the tenants living there refused to move out. On 11 April, H served a notice to complete on S. H and S did discuss a new completion date – and a chip on the price to compensate H for the delay – but they never actually came to any agreement about when the sale would complete.

The notice to complete expired on 29 April. Needless to say, completion did not take place by the 29th but nor did H exercise its right to terminate the contract. Instead, on 2 May, S told H the property was now vacant and H said it would arrange for the property to be inspected and then completion could take place. On 6 May, S served its own notice purporting to terminate the contract.

The question for the court when H issued proceedings against S was whether S was entitled to terminate the contract?

S tried to argue that time was still of the essence pursuant to H’s original notice to complete and that H’s failure to complete when the property became vacant meant S was entitled to terminate the contract and keep the deposit. The court decided he wasn’t and ordered S to complete the sale of the property to H.

Practical implications:

As this case shows, the effect of serving a notice to complete and making time of the essence can be misunderstood. Serving a notice to complete fixes a date for completion of the contract. If a party fails to perform by that date, that amounts to a ‘repudiatory breach’. The innocent party then has various options: it can terminate the contract by serving a notice of rescission; it can allow the defaulting party a further period within which to perform the contract (and time remains of the essence in relation to the new fixed completion date); or it can elect to treat the contract as continuing, either by expressly informing the defaulting party of this or by, for example, encouraging or allowing the defaulting party to remedy its default. This third option may seem like the least attractive, but it does mean the innocent party can pursue other remedies such as damages, or as in this case, specific performance of the contract. If the matter continues to rumble on, the innocent party can always serve a fresh notice to complete. The innocent party would then only need to give the defaulting party a reasonable time to complete, rather than the period of notice specified in the contract (usually 10 days).

Development – Section 106 Agreements: R (on the application of Robert Hitchins Ltd) v Worcestershire County Council

Key points:
  • A developer can choose which planning permission to implement if there is more than one relating to a site
  • This could result in less onerous planning obligations
  • But the planning permissions need to be consistent

Regular readers of our Bulletin may remember our coverage of this case last Spring. RHL was granted planning permission for residential development. WCC wanted a £1.046 million contribution towards the cost of implementing the Worcester Transport Strategy. RHL disputed both the requirement for the contribution and its calculation, but agreed to make payments on an instalment basis.

RHL later sold the site to another housebuilder, who agreed RHL could submit an application for a second planning permission in the same terms as the original but with no obligation to make the transport payments. The second planning permission was granted and the buyer proceeded with the development on the basis of the second permission. RHL refused to pay any further instalments to WCC.

WCC was unsuccessful in the High Court, which found that where there were two planning permissions for a site, the developer could choose which one to implement. This decision was upheld by the Court of Appeal.

Practical implications:

The tactics adopted by RHL – ie applying for a second permission rather than appealing the original permission and the Section 106 requirements – worked out well in this case, but the Court did make the point that this was because the two planning permissions were consistent. In fact, they were identical save for the transport contributions. Applying for a substantially different permission would not have got RHL off the hook. It was also fortunate that there was no Community Infrastructure Levy charging schedule in place, otherwise contributions towards local infrastructure projects would have been payable regardless of which planning permission was implemented.

Development – overage: Burrows Investments Ltd v Ward Homes Ltd

Key points:
  • Overage enables a seller to participate in the future enhanced value of the land it is selling
  • Often, the grant of planning permission, the development of the site or the sale-on of the developed site at or above an agreed price will ‘trigger’ the buyer’s obligation to make an overage payment to the seller
  • Where the land is sold subject to overage, it is often agreed that certain disposals by the buyer will not trigger the requirement to make a payment
  • Because the obligation to pay is a positive obligation, successive buyers of the affected land should be required to give a deed of covenant to the seller confirming that they will make the payment if it is triggered in the future

B sold some land to W for residential development. The overage arrangements were that W had to pay B 29% of any sales revenue in excess of £285 per square foot of the gross internal area of the residential units to be built on the land. W was not required to make such a payment in relation to certain ‘permitted disposals’. These included the sale of houses to private purchasers and the transfer or letting of land for things like sub-stations, public open space, roads or for other social or community purposes.

W obtained a revised planning permission for its development of the site. W also entered into a Section 106 agreement that required W to transfer five units of affordable housing to a registered social housing provider (RP) to be nominated by the local authority.

W completed the transfer of the five units to the nominated RP, having taken the view that the overage wouldn’t be triggered and that there was no need to get the RP to enter into a deed of covenant with B that it would make the overage payments if they were triggered.

B took a different view and brought proceedings against W for damages, claiming that W should have got the RP to give a deed of covenant. The court decided in favour of W – the sale of the affordable units to the RP was a ‘permitted disposal’ because the provision of social housing achieved a social or community purpose.

Practical implications:

It’s important for both sellers and buyers of land to clearly define what will trigger the overage obligations and what won’t. The transfer of affordable units is often a ‘permitted disposal’ but it is better to expressly provide for this in your documentation. Buyers should also be aware of the government’s Starter Homes initiative and consider whether to extend the definition of permitted disposals to include the sale of housing under this scheme, which will, when implemented, allow for the sale of starter homes at a discounted price.

If you are selling land and imposing overage obligations, it’s also important to bear in mind that the only effective way to pass the obligations on to successive owners of the land is to require them to enter into a deed of covenant with you that they will make the payments if triggered and will pass the obligations on if they sell and so on. It is critical to register a restriction on the title(s) of the affected land such that the land cannot be sold without this requirement having been complied with.

Landlord & Tenant – default notices: Lee v Sommer

Key points:
  • Landlords need to follow a statutory notice procedure in order to claim arrears from former tenants or guarantors
  • Failure to serve a notice can give a former tenant or guarantor a complete defence to any claims but if they agree to settle the claim out of court and pay up anyway, they may not get their money back

A tenant assigned its lease of restaurant premises to a company that was later dissolved. The tenant entered into an authorised guarantee agreement, guaranteeing the assignee’s liabilities under the lease.

The landlord sued the tenant for rent arrears (£20,000) but did not follow the statutory procedure by serving a notice under section 17 of the Landlord & Tenant (Covenants) Act 1995. Despite not receiving a section 17 notice, the tenant agreed to pay up and entered into a consent order that was approved by the court.

It wasn’t until later on, when the tenant instructed new solicitors, that the tenant was told the landlord’s failure to serve the right notices would’ve given the tenant a complete defence to the landlord’s claim for arrears. The tenant then tried to have the consent order overturned but was not successful.

Practical implications:

There are implications for both landlords and tenants here.

From the perspective of the landlord, if you have granted a lease or underlease to a tenant and the tenant has lawfully assigned the lease to a new tenant who falls into arrears, you need to follow the statutory procedure in order to claim the arrears from the former tenant. You must serve the correct form of notice and at the right time. Things worked out well for the landlord in this case, because the tenant had agreed to settle the arrears, but it’s best to avoid having the argument.

From a tenant’s perspective, there are various things you should check before settling any claim from your landlord for arrears arising after you’ve assigned your lease, including whether the liability still exists, whether anything has happened that has released you from that liability and whether the landlord has served the correct notices. Payments made under a mistake of law may be recoverable but it’s better not to have paid up in the first place where you have a defence.

Landlord & Tenant – Electronic Communications Code: Crest Nicholson (Operations) Ltd v Argiva Services Ltd & Others

Key points:
  • The Electronic Communications Code (Code) gives security of tenure to licensed telecoms operators
  • Amongst other things, the Code restricts a landowner’s ability to require an operator to remove apparatus
  • This protection is in addition to the protection provided to business tenants by the Landlord & Tenant Act 1954

A had a lease of land owned by C, on which it had installed telecoms equipment. The lease was coming to an end and C served a notice under s25 of the Landlord & Tenant Act 1954 stating that it would oppose any application by A to renew the lease on the ground that C intended to redevelop the site. C also served notices under the Code requiring alteration of the apparatus to facilitate improvements to the land and requiring removal of the apparatus.

C brought possession proceedings. A challenged the validity of the ‘removal’ notice served under the Code. It argued that C was not entitled to serve the notice whilst the lease was still current. The court found that the notice was invalid.

Practical implications:

The interaction between the Code and the LTA 1954 has caused uncertainty since the former came into being. Whilst this decision provides some clarity, it isn’t the sort of clarity landowners were hoping for.

The wording in the Code is that a notice to remove apparatus can only be served by someone who is ‘for the time being entitled to require the removal of the operator’s electronic communications apparatus’. This decision means that landowners cannot serve a notice before a tenancy comes to an end, which is a particular problem where a landowner is looking to get the ball rolling on a redevelopment scheme. Commentators suggest that one option for landowners is to serve an ‘alteration’ notice under the Code, but this itself involves hurdles landowners may struggle to clear.

Planning

Planning – affordable housing small site exemption: R (on the application of West Berkshire DC & Reading BC) v DCLG

Key points:
  • Changes to the National Planning Policy Framework (NPPF) in 2014 meant that Section 106 agreements requiring a developer to provide or contribute to afforable housing should not generally be sought on sites of 10 homes or fewer
  • The idea behind the changes was to make smaller scale developments economically viable

West Berkshire and Reading Councils challenged the lawfulness of the changes to planning policy on various grounds, including that the policy had profound implications for local authorities in relation to their responsibilities for providing affordable housing. The Councils also alleged procedural irregularities with the consultation process.

The court found in favour of the Councils and quashed the policy changes and declared that the policies should not be treated as material considerations in either planning decision making or local plan production.

Practical implications:

The offending parts of the policy have since been removed from the NPPF but the DCLG appealed the decision. The appeal was heard in March but the Court of Appeal has reserved judgment, so at the time of writing, it’s ‘as you were’ in terms of the ability of local authorities to ask developers for affordable housing contributions on small scale sites. This will potentially expose developers to greater financial burdens and may make some schemes unviable. As soon as we know which way the Court of Appeal has decided, we will let you know.

Planning – Environmental impact assessments: R (on the application of Champion) v North Norfolk District Council

Key points:
  • The judicial review procedure allows an interested party to apply to the court to review the lawfulness of a decision made by a public body
  • One of the grounds of challenge is where there is alleged procedural irregularity in the decision-making process
  • Even where it finds there has been a flaw in the decision-making process, the court does not have to grant relief in every case, particularly where the outcome would have been the same

NNDC granted planning permission for development (the construction of two silos and a lorry park) at the owner’s existing site close to the River Wensum, which is a Special Conservation Area. NNDC imposed conditions on the planning permission including a requirement for the owner to monitor water conditions. NNDC gave a screening opinion that an Environmental Impact Assessment (EIA) was not needed.

A local action group, which opposed the development, challenged the planning decision on the basis that there should have been an appropriate assessment under the Conservation of Habitats and Species Regulations 2010 as well as an EIA. The applicant was successful in the High Court, but lost in the Court of Appeal and ultimately in the Supreme Court, even though there had been a procedural irregularity, because there was no reason to think planning permission would have been refused had an EIA been carried out.

Practical implications:

The Supreme Court took the opportunity to set out some guidelines on when relief should be granted in judicial review cases, which are helpful to both local authorities and anyone applying for planning permission.

Local planning authorities should give screening opinions on whether or not an EIA is required at an early stage in the planning process. However, when applying for a planning permission, applicants should bear in mind that a negative screening opinion may need to be reviewed in light of later information. In appropriate cases, mitigation measures (in this case, the water quality monitoring requirement) could be taken into account at the screening stage.

When applying for planning permission in environmentally sensitive areas, applicants should consider preparing an environmental statement as part of the application rather than relying on a negative screening opinion. This could help minimise the risk of judicial review and the consequent delays to – and potential scuppering of – such schemes.

Courts involved in the very first stage of the judicial review process, ie the initial application for permission to bring judicial review proceedings, will now have to have regard to the likelihood of relief being granted, even if there has been procedural irregularity.


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

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