Real Estate Bulletin – Spring 2018
A welcome from the editor…
Welcome to the Spring edition of the Real Estate Bulletin. This quarter, we look at a case on a director’s authority (or lack of) to enter into property transactions along with interesting cases for developers on overage, easements and restrictive covenants. For landlords and tenants, we revisit a case on a landlord’s reasons for withholding consent to an assignment and look at whether a tenant can make time of the essence in relation to rent reviews. The planning points cover the impact of errors in enforcement notices and in the tax tips, there’s a reminder about a new land tax for Wales.
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 July, please get in touch.
CASE LAW UPDATE
Companies – authority of director: Knightsbridge Property Development Corporation (UK) Ltd v South Chelsea Properties Ltd & Another
- If a director signs documents without authority, those documents will be void
- Where the documents have been registered at the Land Registry, the registrations can be corrected
- The Land Registry can refuse to correct the register where there is a proprietor in possession of the land in question who would be prejudiced by the correction or if there are other ‘exceptional circumstances’
K had the benefit of a legal charge over some land owned by I. Mr B, a director of K, signed a Land Registry form DS1 to release the charge.
K also owned some other land, which it transferred to S by a transfer signed by Mr B.
At the time of both of these dealings, although Mr B was a director of K, he did not have the authority of the other directors of K to sign the documents or commit K to the transactions. It seemed that Mr K was acting in cahoots with F, a former officer of K, who also happened to be the beneficial owner of both I and S.
The other directors of K were understandably unhappy. K had released a charge which had not in fact been repaid and had transferred land for which it had not actually received any money. K brought a claim against S and against I for rectification of the register and was successful.
Although as a matter of principle the possibility of retrospective rectification of the register brings an element of uncertainty to owning or holding security over registered land, this was good news for K. The register of the first land was to be corrected, rather than just altered to include K’s charge. This meant K’s charge resumed priority, which was helpful because in the meantime, another charge had been registered against the land and K would have been second in the queue in the event of default by I.
The judge in the case highlighted the unorthodox nature of the way the various companies involved carried on their businesses, primarily because of the actions of F, who had been removed from the board of K when the other directors suspected him of having forged signatures on previous documents! Ordinarily, a buyer of land for value from a company can rely on a presumption of due execution set out in the Companies Act, which means you don’t need to check that a transaction is authorised by a company if the documents are executed in accordance with the Act. The problem here was that the documents hadn’t been – they were not signed ‘on behalf of the company’ because F was off on a frolic of his own that the other directors had not authorised. It always pays to be vigilant and to know exactly who you are dealing with!
Development – overage: Burrows Investments Ltd v Ward Homes Ltd
- Overage enables a seller to participate in the future enhanced value of the land it is selling
- Where land is sold subject to overage, it is often agreed that certain onward disposals by the buyer are ‘permitted’ and will not trigger the requirement to make a payment
- Because the obligation to pay is positive, 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
The facts of this case are covered in our Spring 2016 Bulletin. B sold land to W for residential development. W agreed to pay overage based on sales revenue. Certain permitted disposals (including disposal of land for social or community purposes) were carved out of the overage obligation; in other cases, any buyer was required to enter into a deed of covenant with B to ensure the payment obligation passed on.
W’s planning permission for the development required W to transfer five affordable housing units to a registered provider of social housing (RP). W transferred the units and took the view that the transfer to the RP was a permitted disposal and that the RP wasn’t required to enter into a deed of covenant.
When B brought proceedings against W for damages, the High Court found in W’s favour, deciding that the transfer to the RP was for ‘social or community purposes’. B appealed and was successful – the transfer to the RP was not of ‘land’ but of built units, regardless of the purpose of the transfer. The question of the amount of damages has been referred back to the High Court, if the parties cannot agree a sum.
A number of practical points arise. On the wording of this particular transfer, the ability to certify that a deed of covenant was not required was given to W. From W’s, or any developer’s or housebuilder’s perspective, it is important to have this control, otherwise sales could be delayed whilst the seller’s certificate is awaited. However, from a seller’s point of view, losing this control may mean missing the opportunity to enforce the overage obligation against future buyers.
In the absence of a crystal ball, it is not possible to draft for every possible scenario around development and disposals, and the agreement at issue in this case was entered into back in 2007, but given the focus on housing need in general and affordable housing in particular, we would like to think agreements drafted more recently will take account of affordable housing provision and how this should be dealt with in terms of overage payments.
Development – overage: Sparks v Biden
- There is a conflict at the heart of every overage agreement, even though the parties negotiate the deal and ultimately sign up to it…
- …one party wants to secure the highest possible sum, the other wants to pay as little as possible
- If a party to the arrangement seeks to exploit a loophole that renders the whole deal a commercial nonsense, the courts will step in
B had an option to buy some land from S. B was required to apply for and use all reasonable endeavours to obtain planning permission and, if B exercised the option, to proceed with the development as soon as practicable. The option agreement provided for B to pay overage to S if sale proceeds exceeded an agreed amount per unit. The overage payment became due on the freehold sale or the grant of long lease of the last newly constructed dwelling. I think we can see where this is going…
B obtained planning permission, exercised the option, bought the land and built eight houses on the site. However, rather than selling them, B moved into one of them and let the others on Assured Shorthold Tenancies. B’s argument was that the agreement didn’t oblige him to actually sell the houses and that he was entitled to retain them for his own benefit.
Understandably, S wasn’t happy with this as it undermined the whole purpose of the arrangement. S applied to court for a term to be implied into the agreement that B was required to market and sell each of the new houses. S was successful – the implied term required B to market and sell the houses within a reasonable time of B exercising the option and obtaining planning.
Overage arrangements are complex beasts because of the number of variables (and the need, as mentioned in the case above, to be able to predict the future). Where parties are sophisticated property owners or developers, and have taken legal advice on the agreement they are entering into, the courts will be reluctant to imply terms or rescue one party from a bad deal. However, where it is necessary to give business efficacy to an arrangement or where a missing term is so obvious ‘it goes without saying’, an aggrieved party may be successful.
Easements – actionable interference: Lea v Ward
- The presence of easements over land severely restricts an owner’s ability to develop that land and can impact on marketability and value, particularly where there is uncertainty about the route or extent, but owners of burdened land cannot simply disregard the rights of others
- Those claiming their rights have been interfered with should bear in mind that they will not automatically be entitled to an injunction to stop the interference and the circumstances (quite literally) on the ground will influence the remedy that the court awards
- It is generally better to come to a negotiated settlement, such as the release of the disputed right and the clearly defined grant of a new one than go to the time and expense of litigation
L owned land that benefited from a right of way over W’s land, granted in a deed in 1979. The deed described the right of way as being over a track between two points marked on a plan. Unfortunately, the scale of the plan meant that it was impossible to see where the two points were. Also, the deed did not set out the precise width of the way.
W obtained planning permission for his land and started to build on it. W’s development obstructed the likely route of L’s right of way at various times during construction: for a period of five months, the way was completely obstructed by perimeter fencing and subsequently, some of W’s building works meant that the likely route had been altered on a permanent basis.
L claimed actionable interference with his right of way and the court had to consider what the route of the way actually was and whether W’s development amounted to actionable interference. The court also had to look at whether, if successful, L should receive damages or be awarded an injunction.
L was successful in part. The erection of fencing by W did amount to an actionable interference, but the practical effect on L was very limited, so he only got £5 in damages! The permanent alteration of the route of the way was also an actionable interference, but the court found that if W was prepared to grant L an easement over the new route, no injunction would be awarded and L would receive nominal damages of just £500.
The case also involved a dispute about the width of the way – was it the width of the track as it was in 1979 or an eight metre strip as claimed by L? On this point, the court confirmed that the natural meaning of the wording used (i.e. reference to the track) was that the easement was granted over something that was physically discernible at the time of the grant and the evidence indicated the track was 3.75m wide, not L’s eight metres. Where there is uncertainty over the interpretation of a document, the courts will look to give words their ordinary meaning and, if necessary, take account of the circumstances at the time of the grant (which will of course come down to which party is able to provide the most compelling factual evidence at the hearing).
Those who own land that is subject to rights in favour of others cannot unilaterally alter the route of those rights, unless given the ability to do so in the grant document. Where the burdened landowner provides an alternative and equally convenient route however, the availability of a new route may well – as in this case – impact on the remedies available to the aggrieved party. However, the outcome of this case doesn’t mean owners of burdened land can cause obstruction or interference in flagrant breach of other landowners’ rights as the courts will also take conduct into account!
Easements – rights to light for tenants: Metropolitan Housing Trust Ltd v RMC FH Co Ltd
- Working out who has the benefit of rights of light over your land isn’t always straightforward
- Things become even more complicated when the benefitting land is let
- If you are looking to secure the release of rights of light to enable you to develop your land, you need to make sure all interested parties sign up, but this may get tenants into difficulty with their landlords
M had a long lease of a building in London. A developer owned a site across the road, on which it wanted to build a mixed-use development that would interfere with the light to M’s building. M was prepared to enter into a deed of release of its rights of light (in return for compensation), but landlord R objected and applied to the court for a declaration that M would be in breach of certain covenants in the lease if M granted the release to the developer.
The court found that M would be in breach of covenant if it proceeded to complete the deed of release.
Clearly, the decision will cause a headache for the developer, who wasn’t a party to the litigation and had no influence over the outcome. The case is a reminder of the importance for developers of doing a full title investigation of any land benefiting from rights of light that would otherwise prevent their proposed schemes. It’s also a useful reminder for tenants that even where they have acquired rights of light in their own right (i.e. rights that were not expressly granted to them in their lease by their landlord) they need to check the terms of their leases before agreeing deals with third parties to release those rights, no matter what the financial incentive might be.
Restrictive covenant – planning policy implications: Derreb Ltd v Blackheath Cator Estate Residents Ltd
- The Law of Property Act 1925 provides a mechanism to apply for the modification or discharge of restrictive covenants on various grounds
- One ground is that the covenant at issue is obsolete
- Developers can improve their chances of success by taking account of issues raised by objectors and accommodating them where practical
D wanted to build 130 dwellings on a site that was derelict but which had been allocated for housing in the local plan. The site was subject to covenants imposed in 1956 that it only be used as a sportsground or for the building of detached houses, the position of and plans for which were to be approved by ‘the vendor’s surveyor’.
D’s proposed scheme was for the construction of 38 detached houses, 25 terraced houses and 67 flats – planning policy favoured higher density housing, so it was unlikely D would get planning permission for just detached houses.
D applied for the covenant to be discharged or modified on the basis that they were obsolete, but the local residents’ association (BCER) opposed the application, expressing concern about the increased use of the private roads on the existing estate. D’s application was successful. The Tribunal found that the ‘sports ground covenant’ was obsolete, as was the requirement to obtain the approval of ‘the vendor’s surveyor’ because the vendor had died and tracing his surveyor would be impossible. The Tribunal found that the ‘detached houses covenant’ did still serve a useful purpose, given the character and nature of the locality, but that that covenant was impeding a reasonable use of the land. The covenant was modified so that D’s development could proceed.
It’s unusual for a Tribunal to find that a covenant is obsolete, but the facts of individual cases may mean that developers can make applications on this ground as well as the more commonly-found impeding reasonable user of land ground. D did well given that it did not have planning permission for development, but helped itself by giving assurances to limit the use of the private roads (to allay the concerns of BCER) and by accepting restrictions preventing it building anything other than detached houses close to property owned by the objectors.
LANDLORD AND TENANT ROUND UP
Consent to assignment – reasons for refusal: West India Quay (Residential) Ltd v East Tower Apartments Ltd
- Landlords are usually obliged, by statute or contractually under a lease, not to unreasonably withhold or delay giving consent to a tenant’s application for consent to assign the lease
- Landlords must also set out reasons for withholding consent and the court will scrutinise these if challenged by a tenant
As readers may recall from our Spring 2017 Bulletin, tenant E applied for consent to assign three residential leases. Landlord W withheld consent on three grounds, firstly because E refused to provide a bank reference for the proposed assignee, secondly because E refused to allow W’s surveyor to carry out inspections to check for any breaches of the leases and thirdly because E refused to give an undertaking for W’s costs of £1,600 plus VAT for dealing with the application for consent.
The High Court found that W had unreasonably withheld consent because although the first two conditions W had imposed were reasonable, the third one wasn’t (the fees requested were too high), and this scuppered the whole thing. W successfully appealed and the Court of Appeal overturned the original decision.
Although the leases in this case were residential, the same principles and statutory requirements apply to leases of commercial premises. Each case will turn on its own facts, dictated by the terms of the lease and the behaviour of the parties.
Where a landlord does want to withhold consent, the question to ask is whether the overall decision to refuse consent is reasonable, not whether all the reasons for the decision are reasonable. If a ‘good’ reason is independently reasonable and unconnected to any ‘bad’ reason, the landlord can withhold consent.
Generally, whether you are in the position of landlord or tenant, on matters where consent to any application under the lease is refused or to be refused, take specialist advice from our Property Litigation Team. Inability to deal lawfully with the lease could be catastrophic for a tenant’s business. When you are in the landlord’s shoes, take particular care not to inadvertently give consent to a tenant’s application in correspondence and bear in mind the time frame within which you are required to respond to applications.
Rent reviews – time of the essence: Proxima GR Properties Ltd v Spencer
- Generally speaking, in relation to rent reviews, time is not of the essence unless the lease says it is
- Such wording is unusual, with leases more commonly provide for landlords to institute a rent review ‘at any time’ after, say, the fifth anniversary of the start date
- This makes it difficult for tenants to know where they stand and for them to force landlords to get on with things
S’s lease provided for a rent review every 21 years (the lease in question is a residential one, but the principles apply equally to rack-rented commercial leases), with the first review falling due in December 2005, which landlord P did not seek to implement until March 2016. S had sent various letters to P in 2010 about the rent review, seeking to make time of the essence and argued that in failing to respond, P had lost its right to trigger the review some 11 years later.
In the current proceedings, P argued that it had never received the letters, but the Tribunal decided that was irrelevant and that even if the letters had been received, S could not make time of the essence in this way.
It was the wording of the lease that caused the problem for S in this case. It provided that the rent was to be determined by a surveyor on P’s application made ‘at any time after the expiration of the 20th, 41st, 62nd, 83rd or 104th year of the term’. The words ‘at any time’ meant just that, they didn’t mean ‘within a reasonable time’ so P was entitled to trigger the 2005 review in 2016.
Tenants aren’t always in the best negotiating position when it comes to rent reviews, especially against an institutional landlord, but on new leases, try to ensure some time limits are built in. There may be reasons why it’s not in a landlord’s interest to trigger a review when it falls due, and commercial tenants would not usually be left hanging for such long periods of time, but it is important for business forecasting and planning reasons for a tenant to know what their expenditure is going to be.
Enforcement Notices – errors: Sarodia v London Borough of Redbridge
- Local authorities can issue enforcement notices where it appears there has been a breach of planning control and it is expedient to issue a notice
- It is important that local authorities ensure such notices are clear in terms of the alleged breach and in terms of the requirements on the recipient of the notice
- It is possible for enforcement notices to be amended, but not if such amendments are extensive or cause injustice to the recipient
In 2012, S carried out unauthorised works to his property. RLBC served an enforcement notice on him requiring him to remove a two storey side extension and a single storey rear extension, along with other additions, on the basis that S would never get planning permission for the works.
S did not appeal against the enforcement notice, nor did he remove any of the additions. In 2015, RLBC issued a summons against S alleging failure to comply with the enforcement notice. At the hearing before the District Judge, S argued that the enforcement notice was a nullity because it was ‘hopelessly vague and ambiguous, inherently contradictory and did not clearly specify [what S was required to do]’. The main strand of S’s argument was that he hadn’t even built a two storey side extension! RLBC countered that by saying that the notice could be corrected without any injustice to S. The judge agreed with RLBC and held the notice to be valid and S was convicted.
S appealed to the High Court and was successful. The Court found that the enforcement notice did not enable S to know what he was required to do – it required removal of a two storey side extension that didn’t exist and was also confusing as to the requirements in relation to the rear extension. The notice could not be saved by the statutory provisions allowing for amendment without causing injustice to S.
There is a lesson for local authorities here – it is important to get enforcement notices right. Property owners should also bear in mind that once an enforcement notice has been entered in the register of Local Land Charges (as they are required to be), and for as long as it remains on the register, the notice is binding on future owners and will blight the property.
Enforcement Notices – errors: Oates v Secretary of State for Communities & Local Government
- If there are errors in an enforcement notice, the next thing to consider is whether the notice is invalid but capable of correction, or if it is a nullity and therefore ineffective
- The context and materiality of the ‘defective’ part of the notice will be key in determining whether the error is sufficiently serious to render the whole notice a nullity
As we saw in the case above, it’s important for local authorities to be clear and accurate when issuing enforcement notices as they may be rendered a nullity if they cannot be amended without causing injustice to the recipient. In this case, O carried out substantial conversion works to three chicken sheds, which had permitted use rights for residential use (but not for operational development). The Council had served an enforcement notice stating the breach of planning control was ‘the erection of three new buildings’ and requiring O to demolish them and make good the land underneath the three former buildings.
O appealed against the notice on the basis that it was inaccurate – he had not erected three new buildings – and vague in relation to the making good of the land. The Inspector removed the making good requirement, but took the view that although it was a conversion, the outcome was in effect three new buildings. O appealed against the Inspector’s decision, arguing that if one aspect of the enforcement was vague, the whole thing was a nullity.
The High Court disagreed with O, refused his appeal and refused permission to appeal further.
The practical implications for O are that he will need to demolish his shiny new ‘chicken sheds’! For the rest of us, it is worth bearing in mind that a building doesn’t have to be completely demolished and rebuilt in order to be a ‘new’ building. It is a question of fact and degree as to whether works go beyond alteration. Where there is uncertainty around an enforcement notice, the court will give weight to any decision of the relevant planning inspector to amend the notice in order to save it. The two cases also show the approaches different judges will take when considering similar issues – unfortunately for O, the High Court did not want to take an unduly technical or formulistic approach when deciding whether the notice was a nullity.
Retrospective planning applications – section 70C Town & Country Planning Act 1990: Banghard v Bedford BC
- Local planning authorities have a statutory discretion under section 70C of the Town & Country Planning Act 1990 to decline to determine a retrospective planning application where the works in question are already the subject of an enforcement notice and therefore in breach of planning control
- This is so that applicants don’t get two bites of the cherry in terms of having the merits of a development considered- once by appealing against any planning refusal and twice by appealing against the enforcement notice on the ground that planning permission should be granted
- The statutory discretion also seeks to prevent an applicant making a retrospective planning application to delay enforcement action
B was granted planning permission in 2010 for the construction of an outbuilding for storage purposes. B built a building but it did not accord with the planning permission and, from the outset, B used it as a house not for storage. BBC issued an enforcement notice and required B to stop the residential use and demolish the building. B appealed, unsuccessfully, against the notice.
B later applied for planning permission to retain certain parts of the building, but with a view to actually using it for storage rather than living there (the 2010 permission had expired due to non-implementation). BBC exercised its discretion under section 70C and declined to determine B’s application and B sought judicial review of this decision on the basis that the matters specified in the enforcement notice (unauthorised construction of a dwelling) were different to the subject matter of the later planning application (storage use). The High Court found in favour of B.
Section 70C did not come into play and BBC did not have jurisdiction to decline to determine the later planning application. In relation to the storage use, this was B’s first and only bite of the cherry! The case is useful for developers in that it clarifies the scope and purpose of section 70C, but obviously the ideal position is not to be on the receiving end of an enforcement notice in the first place…
Wales – new Land Transaction Tax
- Land Transaction Tax replaced SDLT in Wales on 1 April 2018
- The regime is similar in many respects to SDLT
The Welsh Revenue Authority is the body responsible for the collection and management of devolved Welsh taxes. On 1 April, land transactions in Wales became subject to Land Transaction Tax and returns are now submitted to the WRA, not HMRC.
LTT mirrors SDLT in many respects, although the rates and bandings are slightly different:
|£0 – £150,000||0%|
|£150,001 – £250,000||1%|
|£250,001 – £1 million||5%|
|Net present value of rent||Rate|
|£0 – £150,000||0%|
|£150,001 – £2 million||1%|
Whilst the lawyers and the accountants are getting to grips with the technicalities of the new tax, those buying and leasing property in Wales will need to take it into account when budgeting for new projects. A particular practical issue arises where properties straddle the border between England and Wales, in which case two tax returns are needed and any tax needs to be apportioned on a ‘just and reasonable basis’. You will need valuation advice to support the basis of the apportionment. Similarly, where you’re buying a portfolio of properties, some of which are in England and some in Wales, you will need to submit separate returns and make sure the amount of chargeable consideration is correctly applied across the portfolio.
Our Tax Team can provide specialist advice on LTT – get in touch if you are buying or leasing property in Wales.
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.
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