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Articles Real Estate 2nd Aug 2018

Real Estate Bulletin – Summer 2018

A welcome from the editor….

Welcome to the Summer edition of the Real Estate Bulletin.  This quarter, we look at cases involving damages for breach of contract, reasonable endeavours in the context of overage payments, temporary interference with a right of way and using restrictive covenants to protect a business interest.  For landlords and tenants, we look at cases involving the termination of leases by break (or not, as the case may be) and forfeiture and a case on occupation by a controlled company.  The planning points cover the concept of repair in an enforcement context and the scope of a local planning authority’s duty to give reasons when making planning decisions.  In the tax tips, there’s a case about how to apply VAT when a contract is novated.

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

Contracts – damages for breach: Conway v Prince Eze

Key points:

  • Damages for breach of contract are designed to put the non-defaulting party in the same position they would have been in had the contract been performed, provided this can be achieved by a monetary award
  • The non-defaulting party will only get damages for a loss that can properly be said to have been caused by the breach of contract
  • Even where the loss is caused by the breach, no damages will be awarded if the loss is too remote – the question is whether the loss was a ‘not unlikely’ consequence of the breach
  • The non-defaulting party is also under a duty to mitigate its losses

Mr and Mrs C owned a property in London, which they were looking to sell.  PE, a Nigerian prince, wanted to buy the property.  The parties exchanged contracts at a purchase price of £5M, but prior to completion, PE withdrew and failed to respond to a notice to complete.

Mr and Mrs C took out bridging finance to fund the purchase of a new house.  They exchanged contracts to sell their original property for a price of £4.2M, but a delayed completion date for that transaction of over a year meant the actual price reduced to £3.7M.  Mr and Mrs C sued PE for breach of contract.  Despite an argument by PE that the contract was invalid because of an alleged ‘bribe’ paid by Mr and Mrs C to PE’s agent, Mr and Mrs C were successful in part.

Practical implications:

Mr and Mrs C were awarded £800,000 in damages for loss of bargain (i.e. the difference between the original £5M price and the price ultimately achieved).  They also received the costs, interest and charges incurred in relation to the bridging loan, although these were not recoverable in full because Mr and Mrs C had not mitigated their loss and could have moved more quickly to complete the ultimate sale.  An award was also made to cover additional costs such as legal and surveyor’s fees and the costs incurred in maintaining and insuring the property until the ultimate sale completed.  Credit was given for the £500,000 deposit PE had paid on exchange.

Where there is a breach of contract, the non-defaulting party is entitled to recover losses arising naturally from the breach and loss which is fairly and reasonably within the contemplation of the parties as a probable consequence of the breach, at the time they entered into the contract.  The court in this case found that the possibility of Mr and Mrs C having to obtain bridging finance to fund the purchase of a new property after PE pulled out was a not unlikely consequence.

Mr and Mrs C’s failure to mitigate their losses meant they did not recover all costs, and this serves as a reminder that a non-defaulting party cannot expect to recover every last penny where it does not take steps to lessen the impact of the breach.

Development – overage: Gaia Ventures Ltd v Abbeygate Helical (Leisure Plaza) Ltd

Key points:

  • Agreements, particularly those relating to development, often include obligations on the parties to use ‘reasonable endeavours’ to achieve agreed outcomes within agreed timescales
  • The sheer volume of case law on what ‘reasonable endeavours’ means indicates that the phrase is open to interpretation depending on whether you are on the endeavouring or the receiving end!
  • Dragging matters out to suit your own financial circumstances is unlikely to be considered to be using reasonable endeavours

A joint venture company, AH, intended to acquire and develop a site in Milton Keynes.  The scheme involved a number of agreements to acquire various land interests and to vary other rights.  The ultimate aim was a forward sale to Aviva.

Back in 2003, AH acquired the leasehold interest in an ice rink that formed part of the proposed development site for £1.525M and also entered into an agreement with the outgoing tenant to pay overage.

Under this overage agreement, AH had to pay the outgoing tenant an additional sum of £1.4M on a defined trigger date.  The trigger date was the date on which an ‘Acceptable Planning Permission’ became immune to challenge – i.e. could not be judicially reviewed.

AH agreed to use reasonable endeavours to obtain such a planning permission.  There was a further condition around gathering in and/or varying the various other property interests.  Therefore, the trigger date for the payment of the £1.4M would be postponed until 10 working days after this site assembly condition was satisfied.  To this end, AH was to use reasonable endeavours to negotiate and agree deals with the various landowners and interested parties as soon as reasonably practicable.

There was also a long stop date of 10 years after the date of the 2003 agreement, so no overage could be triggered after 4 July 2013.  Things rumbled on and although arguably AH had obtained an Acceptable Planning Permission by May 2013, AH didn’t satisfy the site assembly condition until 8 July 2013, so four days after the long stop date…

The benefit of the overage agreement was assigned to G for a payment of £200,000, so G brought proceedings against AH for breach of contract, arguing AH had not used its reasonable endeavours to satisfy the site assembly condition as soon as reasonably practicable as required by the overage agreement.  The court agreed with G and ordered AH to pay damages of £1.4M (the original overage sum) plus interest.

Practical implications:

The evidence led the judge to the conclusion that since 2011, AH had been looking at how it could reduce its obligation to pay the overage or get out of it altogether.  The site assembly was a bit like a jigsaw, but AH had been in control of the site assembly and had deliberately slowed things down to suit its own purposes, so could not be said to have used reasonable endeavours.

When negotiating overage arrangements, bear in mind that some projects can take many years to get off the ground, so an appropriate overage period should be agreed.  Where the trigger for making an overage provision is the grant of an ‘acceptable’ planning permission, developers should be wary of claiming a permission is unacceptable unless the terms or the conditions of the permission itself are a genuine impediment to the proposed development.

Easements – temporary interference: Brothers Enterprise Ltd v New World Hospitality UK Ltd

Key points:

  • The presence of easements over land can restrict an owner’s ability to use that land for its own purposes
  • 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
  • It is generally better to come to a practical negotiated settlement, particularly where the interference is temporary

A restaurant operator (B) leased premises adjoining a hotel.  The restaurant premises did not have any toilet facilities for customers but the lease included a right of way for B’s customers to use the hotel’s toilets, which were accessed through an internal door in the restaurant.

In 2016 major refurbishment works began at the hotel, the last phase of which required the right of way to be closed off for seven weeks.  The parties discussed the issue and the hotel operator (N) proposed an alternative access solution, which B rejected as unworkable as it would reduce the restaurant’s kitchen area.

N gave B five days’ written notice that the right of way would be closed off.  B claimed not to have received the letter and when the right of way was blocked off, applied for an injunction to keep it open.  The judge granted B an interim injunction to stop the works continuing during the restaurant’s opening hours so the matter could be reviewed.  At a restored hearing, the High Court refused to grant an injunction on basis that access had only been temporarily interfered with as a result of the works which were to be expected for a property of that age.  N had also proposed an alternative solution for duration of the works, which appeared feasible and if B’s right could not be interfered with, the works would be seriously hampered or prevented altogether.

Practical implications:

The test of an actionable interference is not whether what the person with the benefit of the right is left with is reasonable, but rather whether that person’s insistence on being able to continue to use the whole of what they contracted for is reasonable.

An injunction is an equitable remedy.  It is discretionary and the courts will not generally grant an injunction where damages would be an adequate remedy.  In considering whether to award damages in lieu, a court will take into account matters such as whether damages would be an appropriate remedy, if there has been unconscionable delay by the claimant and whether the interference is of a temporary and/or trivial nature.

It’s clearly better to come to an agreed solution rather than have to litigate the issue, particularly as we all have to work alongside our neighbours every day!  Whether looking at constructing new sites or doing works to existing units, always factor in what property rights other owners and occupiers have and start the conversation early.

Restrictive covenant – modification: Pendennis Shipyard (Holdings) Ltd v A&P Falmouth Ltd

Key points:

  • The Law of Property Act 1925 provides a mechanism to apply for the modification of restrictive covenants on various grounds
  • The Upper Tribunal has to consider, amongst other things, whether the restrictive covenant in question secures practical benefit of substantial value or advantage to those with the benefit of it
  • Protecting a commercial business interest may be considered to be a practical benefit

P owned a large area of land at Falmouth Dockyard.  P’s business was building, repairing, restoring and refitting yachts (superyachts in particular) and other leisure craft.  The respondent, APF, owned adjoining land at the dockyard, where it built and repaired sea-going vessels, primarily commercial and military vessels.

The dockyard was developed in the 1980s and at that time, various covenants were imposed on the landowners to ensure they did not compete with each other.  The nature of the vessels that the parties to this case deal with meant that this all worked out fine.  However, P’s property was made up of two areas of land burdened by different covenants.  Part of P’s land was subject to a covenant that allowed P to build or fit out the hulls of yachts, commercial, military and pleasure craft.  The other part (the Application Land) was subject to a covenant preventing any kind of boat building on that particular part.  For operational reasons, P applied to modify the Application Land covenant so that it mirrored the other one.

APF objected to the proposed modification as P would have greater scope to carry out works to commercial or military vessels on the Application Land in direct competition with its own business.  The basis of P’s application was that it did not intend to compete with APF’s business, but rather that it wanted to be able to build recreational crafts on the whole of its site.

The Upper Tribunal found that the covenants on the Application Land didn’t secure a practical benefit of substantial value in relation to yachts and pleasure craft for APF, so the covenants could be modified to enable P to do this on the Application Land.  However, the Tribunal did find that the covenants did secure a benefit for APF in relation to military and commercial vessels, so P did not succeed entirely.

Practical implications:

It’s unusual for a Tribunal to consider the protection of economic interests by way of a restrictive covenant on land, but it is useful to know that this may be taken into account when submitting an application for modification.

It is also interesting to note that in this case, the Tribunal didn’t modify the covenants as requested by P but rather decided to re-write the covenants as they were cumbersome and unwieldy and it was preferable to start again.

 

LANDLORD AND TENANT ROUND UP

Break right – registration gap problems: Sackville UK Property Select II (GP) No. 1 Ltd v Robertson Taylor Insurance Brokers Ltd

Key points:

  • Some transactions must be registered at the Land Registry so as to have legal (rather than equitable) status
  • The period between completion of the transaction and registration at the Land Registry is called the registration gap
  • During this gap, only the legal owner – usually the seller or the outgoing tenant – can take certain actions to deal with the legal estate and this causes all sorts of issues in a landlord and tenant context

A 10 year lease, granted on 14 March 2013, contained a break right enabling the tenant to terminate it on 14 March 2018 by giving not less than nine months’ prior written notice to the landlord.  The current tenant acquired the original tenant’s business and took an assignment of the lease on 29 March 2017, but did not apply for registration of the assignment until July 2017.  The current tenant became the registered proprietor of the leasehold interest on 7 July 2017 but purported to exercise the break option before then, on 2 May 2017.  The landlord argued that because the break notice had been served by someone who wasn’t the ‘tenant’ but simply the beneficial owner of the lease, it was invalid.

The court agreed with the landlord, so unfortunately the current tenant is stuck with the lease until it expires in 2023!

Practical implications:

The court in this case found that in order for it to be effective, the former tenant should have served the break notice instead.  Similar problems can arise where a new landlord has acquired the freehold reversion and wants to serve statutory notices under the Landlord & Tenant Act 1954.  Where this is likely to be an issue, outgoing and incoming tenants or buyers need to co-operate and cover operational matters off in the contract.

With the current backlog of applications at the Land Registry, the registration gap is becoming longer and is affecting more and more transactions.  It is important to provide all required post-completion information to allow both SDLT and Land Registry submissions to be made as soon as possible so as to minimise the period where a buyer or tenant is effectively in limbo and day-to-day management of properties is much more complicated as a result.

Forfeiture – contractual default notices: Toms v Ruberry

Key points:

  • Landlords can forfeit a lease by peaceably re-entering the premises (i.e. changing the locks) or by obtaining an order from the court
  • Leases usually set out certain trigger events that allow the landlord to forfeit (generally, tenant default and insolvency)
  • There are procedural restrictions on the right to forfeit and landlords must comply in order to successfully terminate a lease

The tenant had a lease of a pub in Cornwall, which she had taken an assignment of in 2005.  The lease required the tenant to keep the interior and exterior of the pub in good repair and condition.

The lease provided for the landlord to re-enter the premises if the tenant breached any obligations and failed to remedy the breach within 14 days of receiving a default notice.  The landlord alleged that the tenant had not complied with the covenants on maintenance and repair and served a notice specifying various breaches, including failure to keep the gardens well-tended, failure to maintain test certificates for fire alarms and emergency lighting and failure to redecorate.

The landlord served two notices on the tenant – a default notice under the lease and, at the same time, a notice under section 146 of the Law of Property Act 1925 (a forfeiture notice).  The forfeiture notice required the tenant to remedy the breaches within seven weeks, which the tenant failed to do, so the landlord brought proceedings for possession.

At the first hearing, the court found that the forfeiture notice was invalid because the landlord served it at the same time as the contractual default notice.  The lease allowed the tenant a 14 day period for remedying breaches, so the right to re-enter and forfeit could not arise before that period expired.  The landlord appealed, but was unsuccessful.

Practical implications:

The tenant was clearly in breach of covenant and had clearly failed to remedy them within the 14 day notice period, but the landlord had been premature in its service of the statutory forfeiture notice and had not correctly identified the breach relied upon to entitle the landlord to terminate the lease.  The relevant breaches were not the various failures to repair and maintain, but the failure to remedy them in accordance with the default notice.

The landlord has appealed the decision again, so we may well revisit this case in future bulletins, but it is always important to follow statutory procedures.  A right of re-entry must exist before a forfeiture notice is served – landlords cannot rely on a right that will arise in the future.

Terminating leases can be a tricky business and the consequences of getting it wrong will often be catastrophic for one or other parties, so do contact a member of our Real Estate Litigation Team for advice whether you are serving or receiving any type of notice under a lease.

Security of tenure – occupation by a controlled company: Smyth-Tyrrell v Bowden

Key points:

  • Business tenancies have statutory protection known as security of tenure
  • This means a business tenant has the right to a new lease and that the landlord can only refuse to renew the lease on certain grounds
  • The tenant must satisfy certain grounds set out in Part II of the Landlord & Tenant Act 1954

Individual tenants took a lease of some land and derelict buildings.  They used the land for the purposes of a holiday cottage business, rebuilt the derelict house on it and then granted a sub-tenancy over the building to a company they controlled, which carried on the holiday rental business.

Before the end of the lease term, the landlord served notices to quit stating he intended to carry on the holiday rental business on the land, relying on section 30(1)(g) of the Landlord & Tenant Act 1954 (LTA 1954).

The tenants sought a declaration which included, amongst the things, that their occupation was protected as a business tenancy under Part II of the LTA 1954.  The relevant section (section 23(1A)) enables the carrying on of a business by the tenant to be satisfied: (a) by a company in which the tenant has a controlling interest; or (b) where the tenant is a company, by a person with a controlling interest in the company.

The tenants were unsuccessful in getting the declaration and the court found for the landlord.  The company controlled by the tenants did not carry on a business in the tenants’ premises but rather it did so in its own premises, namely the house the subject of the sub-tenancy granted to the company.

Practical implications:

Section 23(1A) is not relevant where: (1) an individual tenant has sub-let to its company; or (2) where the company has sub-let to its controlling shareholder.  In either of those two cases, it would be for the sub-tenant to claim security of tenure rights by virtue of its own tenancy and occupation.  This is something to bear in mind when considering granting sub-leases within a group of companies, particularly where money will be spent on fit-out and branding.

 

PLANNING POINTS

Enforcement Notices – repair: Hargrave House Ltd & Chaim Reiner v Highbury Corner Magistrates’ Court

Key points:

  • 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

HHL bought a residential property in a conservation area, which it intended to renovate and sell.  The renovation works included rendering and painting the exterior of the property.  HHL applied for retrospective planning permission for the works, but Islington LBC refused on the basis that the works would have a detrimental impact on the visual appearance of the building and would cause unacceptable harm to the character and appearance of the conservation area.

The Council subsequently served an enforcement notice requiring the removal of the concrete render and the repair of any damage to the fabric of the building with materials to match the original.  HHL failed to comply with the notice, relying on the statutory defence in section 179(3) of the Town & Country Planning Act 1990 that it had done everything it could be expected to do to comply with the notice on the basis that the removal of the render would irreparably damage the bricks underneath and would mean the walls would have to be demolished and rebuilt.

The Magistrates found against HHL – the word ‘repair’ in the enforcement notice could encompass the rebuilding of the front and rear walls of the building with replacement bricks.  HHL appealed to the High Court, which unfortunately upheld the Magistrates’ decision.

Practical implications:

The Town & Country Planning Act 1990 does not define ‘repair’ but the courts are prepared to give the word a wide meaning, particularly in the context of a breach of planning procedure, where the only repair that will satisfy the enforcement notice is one that makes good the activity that has led to the breach.  Obviously it’s better not to be the recipient of a notice in the first place – where you need planning permission or conservation area consent for works, obtain this before you start slapping on the render and the paint.

Planning permission – material consideration: Forest of Dean DC v R (on the application of Wright)

Key points:

  • Local planning authorities must have regard to material considerations when deciding on planning applications
  • Material considerations include financial considerations
  • However financial considerations must fairly and reasonably relate to the development site in order to be ‘material’

Readers may recall this case from the end of 2016: in January 2015, R applied for planning permission to install a single 500kW community-scale wind turbine on what was then agricultural land in Tidenham.  R proposed a package of socio-economic benefits, including an annual local community donation based on 4% of turnover.

The turbine was intended to meet the local community’s energy needs only, so was not industrial-scale, and R had already installed a similar turbine on a similar basis nearby at St Briavels.  The money from that operation had financed various projects, including a defibrillator and playgroup equipment.

In September 2015, the local authority granted planning permission for the Tidenham turbine and included the donation as a material consideration.  W challenged the decision on the ground that the donation was not a material consideration that the authority could lawfully take into account when deciding whether to grant planning permission.  W’s argument was that it was a financial donation which did not serve a planning purpose, was not related to the use of the land and had no real connection with the proposed development.

The High Court agreed with W and found the planning permission to be unlawful, so R appealed.  The Court of Appeal upheld the High Court’s decision and said the planning permission should be quashed.

Practical implications:

For a donation to be taken into account, it must be for a planning purpose and reasonably related to the proposed development.  Off-site benefits will only be material where they are related to or connected with the proposed development, otherwise they don’t really do anything to help address the physical or social impacts of the development.

Planning decisions – scope of duty to give reasons: Dover DC v CPRE Kent; CPRE Kent v China Gateway International Ltd

Key points:

  • Local planning authority officers making decisions involving the grant of planning permission are required to produce reasons for the decision and details of any alternative options they have considered or rejected
  • Where a planning application involves an Environmental Impact Assessment, additional duties apply in terms of giving reasons for decisions
  • There is no common law duty on a local planning authority to give reasons for the grant of planning permission, but in certain exceptional cases, a duty may arise
  • Where reasons are required, they must be intelligible and adequate, but they can be brief!

The Council received an application for planning permission to build over 500 houses in an Area of Outstanding Natural Beauty (AONB). The location, nature and extent of the proposed development meant that an Environmental Impact Assessment (EIA) was also required. The Council’s planning officer recommended planning permission be granted, but with a cap of 365 on the number of houses, but the planning committee resolved to grant permission for the original 500 houses.

The planning permission was a long document (over 50 pages!) and included 183 conditions.  However, it didn’t make any reference to the duty to give reasons under the EIA Regulations and did not contain any statement of the reasons for the grant.

An unsuccessful application was made to have the planning permission judicially reviewed due to the lack of reasons, but on appeal, the Court of Appeal quashed the planning permission.  The circumstances of this particular case – the fact that the application site was in an AONB, the departure from the planning officer’s recommendation and the specific requirements of the EIA Regulations – meant that the Council should have given clear reasons for its decision.  The Supreme Court agreed and upheld the decision to quash the permission.

Practical implications:

As mentioned in the key points, public bodies have no general obligation to give reasons for decisions, but a common law duty may typically arise in relation to a decision to grant planning permission where that permission has been granted in the face of substantial public opposition, against the advice of planning officers and for schemes that involve major departures from a development plan or from other policies of recognised importance, particularly regarding protection of the natural environment.

 

TAX TIPS

VAT – novation of a contract: Hanuman Commercial Ltd v HMRC

Key points:

  • Novation takes place when one party to a contract releases the other party from its obligations in consideration for a third party assuming those obligations
  • Parties shouldn’t assume that the VAT status of the novation is the same as that of the original contract

S entered into a contract to sell an office building for £2.8m to H.  Before completion, H entered into a contract with C for the onward sale of the property for £5.5m.  All three parties then entered into a deed of novation, so that C would acquire the property directly from S (this was done to obtain TOGC treatment of the transfer from S to C).  On completion C paid £2.8m to S and £2.7m to H.

H believed it had acquired an interest in the property which it had not opted to tax and, therefore, its supply to C was exempt from VAT.  HMRC’s view was different – they said it was a standard rated supply.

The Tribunal found in favour of HMRC.

Practical implications:

Here, the novation was not a supply of an equitable interest in land but rather a transfer of all of H’s rights and obligations under the initial contract.  This meant that the initial contract between H and S came to an end and a new contract between S and C came in to existence.

H had supplied the right or opportunity for C to enter into an agreement with S and that was not a supply of goods but rather a supply of services and, in this case, the supply of services was standard rated.

In the case of a contract for the sale of land, a novation is to be treated as a separate supply from the underlying supply of the land and may be subject to different VAT treatment.

Our Tax Team can provide specialist advice on VAT – get in touch if you have any queries.


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.
Heloise Horton, Professional Support Lawyer

Author: Heloise Horton

Senior Associate, Professional Support Lawyer

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