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Articles Real Estate 15th Aug 2017

Real Estate Bulletin: Summer 2017

A welcome from the editor….

Welcome to the Summer edition of the Real Estate Bulletin. This quarter, we revisit a case about business rates that has made its way to the Supreme Court. We also look at decisions concerning oral contracts, badly drafted option agreements, deliberately-flouted restrictive covenants and a case that answers the burning question “how many gates are too many gates?” In a Landlord & Tenant context, we look at misrepresentation and non-reliance clauses, side letters and penalties and the judicial asides that continue to cause confusion in relation to whether or not you can assign your lease to your guarantor.

The Bulletin brings together highlights from our popular quarterly update training sessions, so if you are local to the East Midlands or pass through every now and again and would like details of our next event in September, please get in touch.

Case Law Update

Business rates – Refurbishment: Newbigin (Valuation Officer) v S J & J Monk

Key points

  • Where business premises are empty, the rateable value is based on the amount of annual rent reasonably obtainable for the premises
  • Various assumptions are made, including that the premises are in a reasonable state of repair
  • However, this may conflict with what is known as the ‘reality principle’, which means that a property is to be valued as it exists on the material day

We first covered this case in Summer 2015. By way of update, M owned an office building that had been vacant since 2006 and was in need of repair. M started extensive refurbishment works in 2010. The building fell to be valued for rating purposes in 2012. On the valuation date, M had removed suspended ceilings and raised floors, the electrics, sanitary fittings and the air conditioning system. M applied to have the building listed with a nominal value of £1 on the basis of its physical state and of the works being beyond the meaning of ‘repair’. The Upper Tribunal agreed with M, the Court of Appeal overturned the decision (which would have meant a rateable value of £102,000) and so M took the matter to the Supreme Court.

The Supreme Court has reversed the Court of Appeal’s decision, so the rateable value is now a nominal £1.

Practical implications

The Supreme Court made it clear that where a property is undergoing redevelopment and is incapable of being occupied, the assumption of repair does not displace the principle of reality. This is a welcome decision for developers and property owners, especially those whose appeals are awaiting determination pending the decision in this case, or whose cases were decided on the basis of the earlier Court of Appeal ruling. However, do remember that whether a building is undergoing redevelopment or reconstruction or is merely being repaired, is a question of fact in each case. Always consult a rating surveyor to advise in these circumstances

Contracts – formalities: Matchmove Ltd v Dowding and Church

Key points

  • Contracts for the sale of land must usually comply with certain statutory requirements to be valid
  • However, where these formalities are not met, a trust can arise if there is an express agreement between two parties about ownership of the land, which one party relies on to its detriment such that it would be unconscionable to deny that party’s ownership of the land

D and C were close friends with the director of M. In 2003, they agreed to buy two pieces of land from M, a building plot (for £120,000) and a meadow (for £80,000) and the following year, paid M £66,000 towards the purchase price. In February 2005, they obtained planning permission to build a house on the plot and M allowed them to start building whilst the conveyancing was being dealt with.

The parties finally exchanged contracts for the purchase of the plot (but not the meadow) in September 2005 – the contract recorded that the £66,000 already paid was the deposit. On completion, D and C paid the balance of the purchase price for the plot and, having sold their previous house, made payments totalling the £80,000 for the meadow between October 2005 and November 2006.

Not long after, as you might have guessed, the close friends fell out. M sent D and C a cheque back for £40,000 and told them they could now only buy half of the meadow – the meadow had been a key part of the ‘deal’ from C’s point of view, as she wanted to keep horses on the land. The case went to the Court of Appeal, which found that D and C were entitled to the whole of the meadow.

Practical implications

The director of M was a respected business man, who regularly conducted deals ‘on a handshake’ and D and C were not criticised for assuming that the land ‘belonged’ to them, even though the formalities were still outstanding. D and C had incurred considerable expense in clearing and fencing the meadow, erecting a temporary barn for stabling horses and applying for planning permission for a permanent stable. However, it is always best to ensure the paperwork is in place before handing over any cash!

Easements – Interference with right of way – Kingsgate Development Projects Ltd v Jordan

Key points

  • Interference with a private right, such as a right of way, gives rises to an action in nuisance
  • In order to take action, the interference must be substantial – this need not amount to a complete inability to use the right but must be more than trivial

Kingsgate Farm benefited from a right of way granted in 1960 over a track that formed part of a property known as Ferndown. There were two gates on the track, an electric gate at the point where the track joined the main road (opened by pushing a button and closing automatically) and another gate further along the track, which was left unlocked.

In July 2012, J purchased Ferndown. They did some work to widen the track and put in a third (unlocked) gate, at a point where there was a bend in the track. K bought Kingsgate Farm in 2014 and a dispute arose with J about various things, including the extent and route of the right of way, with K arguing that the right had been substantially interfered with such that it was unsuitable for its intended use.

The court found in favour of K. The erection of the new gate by J meant that there were three gates within less than 100 metres of each other and this amounted to a substantial interference. J was ordered to remove the gate it had installed.

Practical implications

If you acquire land that is subject to rights that benefit other properties, you cannot just do what you like with it, even where the property that benefits is unoccupied – in this case, Kingsgate Farm had been an operational poultry farm when the right was originally granted, but had fallen into disuse by the time K purchased it. Easements attach to property, not to owners, so it is important to check the nature and extent of any rights that benefit others before carrying out works to your own land.

Option agreement – Validity of option notice – Helix 3D Ltd v Dunedin Industrial Property Nominee Ltd and Another

Key points

  • Option agreements usually contain pre-conditions about the form of option notice, the information it should contain and any payments that need to accompany it
  • Definitions and the mechanisms for determining the purchase price and for a valid and certain exercise of the option must be clear
  • Where the wording of an agreement is commercially absurd, the courts will step in to clarify

H was the tenant of premises in London under a 10 year lease that ran from July 2011. The lease included an option for H to purchase the freehold from D within the first five years of the term. The purchase price was different depending on when the option was exercised: if H wanted to exercise the option in the first two years of the term, the price would be £1.5 million plus VAT; if it wanted to exercise the option in years three to five, the price would be the greater of the open market value of the property at the time and £1.5 million plus VAT. The parties were to agree the open market value of the property at the time H served the option notice and if they couldn’t agree, a third party would determine the value. H was also required to pay a 5% deposit when it served the option notice.

H served its option notice in 2015 (so year four of the term). The notice specified a purchase price of £1.5 million and H paid a deposit that equated to 5% of £1.5 million plus VAT.

D disputed the validity of the notice, as the open market value of the property was greater than £1.5 million so the deposit, which was a pre-condition to the effective exercise of the option, was inadequate. H argued that the wording in the lease allowed H to state the proposed purchase price (albeit that this would then have to be agreed or be determined by a third party) and pay 5% of that stated amount.

The court found in favour of H and also made declarations in relation to completion of the purchase.

Practical implications

The wording of the option was particularly badly drafted. Both parties agreed on this point at least – even D’s counsel described the drafting as ‘thoroughly inept’ – and both agreed that further interpretation would be needed in order to make the agreement work.

Although the drafting of such agreements is down to the lawyers, parties need to be clear when negotiating the deal about the mechanism for agreeing the purchase price and the timing of any valuation. The better course here would have been for the valuation exercise to be carried out before the option was exercised.

Remember that the courts won’t interpret an agreement in a particular way just to get a party out of a bad deal, but they will read words in or alter them in order to try and make it make sense!

Development – Modification of restrictive covenant – Millgate Developments Ltd v Smith and The Alexander Devine Children’s Cancer Trust

Key points

  • Where land is burdened by restrictive covenants, a landowner can make an application for the covenant to be modified or discharged if certain criteria are satisfied
  • When considering such an application, the Tribunal will take account of whether the covenant secures practical benefits of substantial value or advantage for the beneficiaries and whether it is contrary to the public interest
  • The Tribunal will generally be less inclined to modify or discharge where the landowner has deliberately flouted the restrictions, but each case will turn on its facts

M built 23 social housing properties on a development site in Maidenhead. This was a planning requirement imposed in connection with a scheme of 47 market sale properties on another site. Part of the site was subject to a restrictive covenant preventing any building on the land and requiring it to be used only for parking. M had built 13 social housing properties on the burdened land, so was clearly (and knowingly) in breach. M applied to have the covenant modified.

The land with the benefit of the covenant was owned by S, who had donated some of it to the Trust, with the intention that it be used as a children’s hospice with private outdoor amenities. S and the Trust objected to M’s application, arguing that the development would seriously compromise the environment of the hospice and the scale and proximity would in particular impact on the planned outdoor amenities, which would lose their privacy.

M argued that the building of affordable housing met a pressing social need in the area and the fact that planning permission had been granted for such development was a material consideration. M had offered a contribution of £150,000 to the objectors for a tree planting scheme to provide privacy and to reduce noise. M also argued that the covenant had been imposed to enable the beneficiary to obtain a share in the future development value rather than securing a practical benefit of substantial value for the hospice site. The Tribunal disagreed with this last element of M’s application, but did decide the covenant should be modified.

Practical implications

Public interest played a key part in the Tribunal’s decision in this case. The Tribunal felt it was not in the public interest for houses that were available to those who may well have been waiting a long time for accommodation to be left empty. This, in conjunction with M’s offer of compensation (which would now have to be paid to the Trust), was sufficient to justify the outcome even though M had deliberately breached the covenant…normally a factor that would count against the applicant!

The decision has been appealed, but will not be heard until Spring 2018, so watch this space.

Landlord & Tenant Round Up

Assignment – Guarantors: EMI Group Ltd v O & H Q1 Ltd

Key points

  • The Landlord and Tenant (Covenants) Act 1995 changed the way the liability of landlords and tenants works once a tenant has assigned the lease
  • If the assignment is lawful, the assigning tenant (and any guarantor) is ‘off the hook’, unless it signs up to an authorised guarantee agreement
  • It is not possible to contract out of the 1995 Act, which contains anti-avoidance provisions

HMV had a lease of premises, which was guaranteed by EMI. Sadly for those of us old enough to remember the iconic high street brand, HMV went into administration, following which the lease was assigned to EMI. EMI claimed the tenant covenants in the lease were unenforceable against it in light of comments made in a previous case (K/S Victoria) which cast doubt on the possibility of a valid assignment to a guarantor.

The court in the EMI case found that the assignment was void, so the lease remained vested in HMV and EMI remained liable as guarantor. The case was due to go to appeal, but the parties have – unhelpfully for us – reached a confidential settlement, so the position remains a muddle.

Practical implications:

There may be commercially sensible reasons for a guarantor wanting to take an assignment of a lease, rather than allowing the tenant to go into liquidation and waiting for the landlord to require the guarantor to take a new lease, not least because there are Stamp Duty Land Tax implications. However, as things stand, such an assignment would be void. This is something to bear in mind when carrying out corporate or portfolio restructuring.

Similarly, call options in leases that require a tenant to transfer the lease to the guarantor if called upon to do so by the guarantor to remedy the tenant’s default will be void and guarantors may have to take an overriding lease instead. Again, this may have SDLT implications.

As well as causing operational issues for tenants and guarantors, the current state of affairs has implications for buyers looking to purchase investment portfolios. Buyers and their advisors will need to investigate the history of occupational leases to ensure there have been no void assignments in the past that might impact on the value of the asset.

Misrepresentation – Non-reliance clause: First Tower Trustees Ltd v CDS (Superstores International) Ltd

Key points

  • Tenants will rely on information provided during due diligence when entering into a lease
  • Landlords should provide accurate information and update tenants when they become aware of new facts

T took a lease of a warehouse unit. It raised the usual pre-contract enquiries, which included questions about breaches of environmental law or other environmental issues affecting the property. L initially stated it was not aware of any such matters but was later alerted to the presence of asbestos in the property, both in a report and in an email from specialist consultants, advising of the health and safety risks. Although this happened before completion of the lease, L did not pass on this new information to T. T discovered the asbestos soon after moving in and then brought a claim for the cost of the remedial work and of alternative accommodation, as the unit was unfit for occupation for around eight months.

The High Court found that L was liable for negligent misrepresentation. The next step was for the court to consider whether the clause in the lease that purported to exclude L’s liability for reliance on representations made by L before the date of the lease would save L. The answer was no – the wording of that clause in this case was found to be unreasonable and therefore void.

Practical implications

Although a sometimes painful exercise, providing replies to enquiries is a key part of most property transactions, not least because the acquiring party will rely on the information put forward and will be entitled to remedies if it is inaccurate. Sellers and landlords should keep replies to enquiries under review until exchange or completion and update buyers and tenants if they become aware of changes to any information provided.

It is usual for contracts to include clauses that attempt to limit the ability of a buyer or tenant to rely on statements made pre-exchange but these must be fair and reasonable in the circumstances. This is a question of fact.

Note that in this case, T also claimed that L was in breach of its covenants for quiet enjoyment and non-derogation from grant, but the Court pointed out that these are only relevant to a landlord’s actions after a lease has been granted, not before.

Side letters – Penalties: Vivienne Westwood Ltd v Conduit Street Development Ltd

Key points

  • The Supreme Court recently changed the test for penalty clauses
  • Penalty clauses will be unenforceable if they impose a detriment on the defaulting party that is out of all proportion to any legitimate interest of the injured party
  • The courts will look at the effect of the penalty as well as the amount

T had a 15 year lease of retail premises in London. When the lease was granted, a side letter was agreed that provided for T to pay a reduced rent for the first five years and, if the rent on review exceeded a specified amount, the amount T had to pay after the review was to be capped at an agreed figure for a period of time.

The side letter was personal to the named tenant, so would end if T assigned the lease. The side letter also stated that it was not a variation of the lease and could be terminated immediately if T was in breach of any of the terms of the side letter or the lease itself, with the rent reverting to the headline level in the lease.

Confusion arose over the correct amount of rent payable after the first rent review date. Ultimately, T failed to pay a quarter’s rent and L terminated the side letter.

One of the issues determined at trial was whether L’s right to terminate the side letter was a penalty, so therefore unenforceable. The court found that it was – the letter created a primary obligation to pay the reduced rent, with a secondary obligation to pay rent at the headline rate if the primary obligation was breached. Termination was available to L regardless of the nature or severity of the breach by T or of the consequences for L. The side letter was also expressed to have retrospective effect, meaning T would have been liable for back rent at the headline level from the start of the term as well as costs and interest.

Practical implications

The Supreme Court ruled on a dispute about a parking overstay penalty recently (see coverage of the Parkingeye case in our Winter 2015 Bulletin) and established that penalties should protect the legitimate interest of the injured party. In the Vivienne Westwood case, the detriment to T was out of all proportion to any legitimate interest of L.

When negotiating side letters, well-advised landlords should take care to ensure that a tenant’s primary obligation is always to pay the rent reserved by the lease and that the lease is not permanently varied. Landlords should also review any existing side letters, and in particular the termination provisions, to check for enforceability. For tenants, remember that side letters often document a personal concession that will not pass on to benefit an assignee, which is something to bear in mind if you are looking to assign your lease.

Meanwhile, over on th Freeths Real Estate Blog…

Our current blog series, The Future of Property, is well underway, with its focus on new challenges and opportunities for the real estate sector. You may have seen our recent features in Property Week – a survey on attitudes towards technology in general and PropTech in particular and coverage of the think tank we held in June to discuss the findings.

Catch up with recent posts on agile working and crowdfunding, and a guest post from Aberdeen Asset Management on PropTech or join the growing list of subscribers by simply entering your email address on the blog page.

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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