Real Estate Legal Update – Summer 2019
A welcome from the editor….
Welcome to the summer edition of the Real Estate Legal Update. This quarter, we look at cases involving business rates, breach of development obligations in an agreement for lease, overage, reverter and, of course, town or village greens! For landlords and tenants, we look at cases involving the termination of leases by forfeiture and an opposed lease renewal on ground (f), and some new legislation for residential landlords and letting agents. The planning points cover the implications of knowingly relying on a clerical error in a planning permission and an innovative way of dealing with someone who has breached a TPO.
The Real Estate Legal Update 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, please get in touch.
Case Law Update
Business rates – ATMs: Cardtronics Europe Ltd & Others v Sykes & Others (Valuation Officers)
- In the context of business rates, there is a concept known as the ‘landlord-control principle’: even where a third party occupies part of a particular property, the owner is in sufficient control of that part to be treated as being in rateable occupation of that part
- Most plant and machinery has no effect on the rateable value of the property in which it is installed
- The Courts have recently considered how properties hosting ATMs should be rated
This case involved ATMs in various supermarkets, convenience stores and petrol stations. Before 2014, the ATM sites in numerous locations had not been distinguished from the host stores (including Sainsbury’s, Tesco & the Co-op). In 2014, the Valuation Office amended the 2010 ratings list and created separate entries in respect of the ATM sites – basically, the ATM sites became separate hereditaments with their own rateable values.
The supermarkets and CEL (which operated ATMs in other stores and petrol stations) challenged this decision in the Upper Tribunal, but were unsuccessful, so they appealed to the Court of Appeal, where they won. The Court of Appeal considered the concept of control and occupation and found that, in relation to each ATM site, the retailer, not the relevant bank or ATM operator, was in rateable occupation and retained sufficient control of each site.
Whilst ATMs are themselves not rateable (as they are plant and machinery, which are exempt from taxation for these purposes) and are, accordingly, to be disregarded when assessing a hereditament’s rateable value, their presence is not to be ignored when considering whether a separate hereditament exists. The courts will look at the contractual, physical and functional circumstances of each site individually.
The decision is good news for supermarkets, retailers and ATM operators – those involved in this case expected to receive around £300M in rates rebates and many more were looking to get their money back. It’s also good news for those of us who benefit from using free cash machines when we are out and about.
A further word of caution – this isn’t the last we will hear of this case, because the Valuation Office has been given leave to appeal to the Supreme Court. Given the size of the potential rebate, there is a lot at stake for local authorities who are already struggling with funding. We will keep you updated in future bulletins.
Business rates – mitigation schemes: Rossendale BC v Hurstwood Properties (A) Ltd
- The person liable to pay business rates on an empty property is the property ‘owner’
- The property ‘owner’ is the person entitled to possession of the property
- There is an exemption from empty rates where the owner is a company in liquidation
- Companies have their own legal personality, separate to that of their shareholders and directors and parent and subsidiary companies. The courts will only look behind this ‘corporate veil’ in very limited circumstances
HPL had granted leases of properties to Special Purpose Vehicles (SPVs), which had no assets (other than the leases) and which never carried on any business at the properties. Some of the SPVs where then placed in voluntary liquidation, to take advantage of the empty rates exemption. The leases were left in place. Other SPVs were dissolved, with the leases vesting bona vacantia in the Crown.
As you can imagine, the local authorities in the areas where the properties were situated were not happy about this. RBC claimed that HPL had adopted the schemes specifically to avoid paying business rates by incorporating a company as a SPV for the sole purpose of holding a commercial lease of an unoccupied hereditament.
In the High Court, the arrangement was found not to be a sham, but the separate corporate existence of the SPV could potentially be disregarded by piercing the corporate veil. HPL appealed and the Court of Appeal found in its favour, refusing to look beyond the separate legal personality of the SPVs and attribute liability to their shareholders (the ultimate property owners who had set up the scheme). Also, whether the SPVs were placed into liquidation or dissolved did not matter as, without further steps, the leases did not re-vest in HPL.
Since the introduction of empty rates liability, we have seen many and varied schemes intended to mitigate the burden of this cost. Some have been more successful than others, but this particular case was a test case and there are many similar cases pending before the courts, so there will be far-reaching consequences.
Business rates reform is, unfortunately for ratepayers, not at the top of the Government’s priority list but one thing it may be quick to consider is anti-avoidance legislation to close this particular loophole.
Development – breach: Mears Ltd v Costplan Services (South East) Ltd & Others
- A lot hangs on the concept of ‘practical completion’ when it comes to newly-constructed properties
- It triggers completion of a lease of the property under a pre-let agreement, release of retention monies and the start of the defects liability period
- It’s important to be clear when defining practical completion
A contractor was appointed under an amended JCT D&B 2011 Contract to build student accommodation in Plymouth. CSSE was appointed as Employer’s Agent.
M entered into an agreement for lease of the accommodation, with completion of the lease linked to practical completion of the construction works. M was entitled to terminate the agreement for lease if practical completion was not certified by 11 September 2018.
By June 2018, CSSE viewed works as practically complete, but M alleged about 50 rooms had been constructed smaller than the agreement permitted. M sought declarations from the court, including that any breach enabled it to terminate the agreement and that no valid certificate of practical completion could be issued whilst there were material and substantial breaches of the agreement concerning the works.
Clause 6.2.1 of the agreement for lease prohibited the landlord (the second defendant in this case) from making any variations that would materially affect the size, layout or appearance of the property. The agreement also expressly provided that “a reduction of more than 3% of the size of any distinct area shown upon the Building Documents shall be deemed material”.
Fifty-six rooms had been built more than 3% smaller than specified on the drawings that had been submitted with the request for planning permission.
The High Court found against M – CSSE was entitled to certify practical completion and M did not have an automatic right to terminate the agreement. The judge noted that the property could not be rebuilt and M may be forced to take the lease, but that M did have other remedies including under the collateral warranties from the building contractor and an action against the Employer’s Agent, CSSE, who certified practical completion.
M appealed, arguing any departure from clause 6.2.1 had been deemed to be a material breach of contract – whether a breach was serious enough to enable termination in relation to the 3% tolerance was not a matter of fact and degree, but of contractual stipulation. Unfortunately, M was unsuccessful in the Court of Appeal.
The Court of Appeal agreed that it is possible for parties to contractually stipulate whether a breach of a particular clause amounts to a ‘substantial’ or ‘material’ breach of the contract, but this was not what had happened here. In clause 6.2.1, what was deemed to be ‘material’ was the reduction in size of the rooms, not the breach of contract. Any reduction greater than 3% was a breach of contract so there had been 56 separate breaches of contract, but whether those breaches, taken individually or together, constituted a material breach of contract enabling M to terminate, was a matter of fact and degree, not a matter of construction of the agreement for lease.
Parties to a contract are entitled to agree that a breach of a particular clause amounts to a repudiatory breach of the contract (entitling the ‘innocent’ party to terminate the contract), but, if this is the case, the drafting must be very clear.
This may not be the end of this particular case as, if the landlord seeks an order for specific performance of the agreement for lease, M may seek to argue that the effect of the landlord’s breaches (a combination of “material variations”) together amounted to a repudiatory breach of contract!
Development – overage: Gaia Ventures Ltd v Abbeygate Helical (Leisure Plaza) Ltd
- 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.
Regular readers of this bulletin may recall this case from last summer. 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 High Court agreed with G and ordered AH to pay damages of £1.4M (the original overage sum) plus interest.
AH appealed, arguing that an obligation requiring the use of reasonable endeavours meant it was entitled to have regard to its own commercial interests, including ensuring sufficient funding was in place. The Court of Appeal was having none of that – the way AH had structured the deal meant that any restriction on funding had been self-imposed.
The evidence heard in the High Court 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 come together, so an appropriate overage period should be agreed. Where the trigger for making an overage payment 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.
Reverter – school sites: Rittson-Thomas & Ors v Oxfordshire County Council
- Rights of reverter were created by various pieces of Victorian legislation as a way to encourage landowners to dedicate land for public purposes; if the land stopped being used for such purposes, ownership would ‘revert’ to the original grantor (or their successors)
- The School Sites Act 1841 is the relevant Act in this particular case
- The Act does, however, provide that the dedicated land can be sold or exchanged for another ‘more convenient or eligible site’ and the proceeds can be used to buy another site or improve other premises used for the purposes of a school…but the timing of events is critical
Another case we’ve seen before! In this one, land was conveyed in 1914 for the purposes of providing a school in Oxfordshire. In the early 2000s, OCC decided to relocate the school to a neighbouring site that it already owned. OCC spent money developing the site in order to accommodate the new school.
OCC stopped using the original site in February 2006 and relocated the pupils to the new school. The following September, OCC sold the original site, using the sale proceeds to cover some of the development costs.
The heirs of the original grantor claimed that a reverter had been triggered in February 2006 when OCC stopped using the site as a school, because no exchange of land had taken place and the sale took place well after the original school had been closed. OCC’s argument was that it had defeated the reverter because it held ‘a firm and settled intention’ to sell the old site and use the sale proceeds to defray the costs it had incurred in improving its own site to build the new school.
The High Court agreed with OCC – an empty site (i.e. the original school) with a view to a sale where the proceeds would be used for the benefit of the new school did constitute use of the land for the purposes of a school and the right of reverter in favour of the heirs had not been triggered.
The heirs appealed, and were successful. The Court of Appeal found that there had been no exchange of land and, as the sale of the old site did not take place until over a year after OCC had stopped using it as a school, it wasn’t realistic to say the land ‘continued to be used as a site for a school or otherwise for the purposes of education’ as required by the Act.
Local education authorities need to be aware of schools in their ownership that may still be subject to rights of reverter. Where a school is to be relocated, it is permissible to sell and buy simultaneously, but, to avoid triggering the reverter, the use must not have ceased before the time of the sale.
In 1987, the Reverter of Sites Act abolished the concept of ownership of the site reverting to the original grantor or their successors and substituted what is now a trust of land, meaning that the sale proceeds are held on trust for the grantor or their successors. In order to overreach, or take free from, the trust, anyone buying an old school site would need to pay the purchase price to two trustees or a trust corporation.
Town or village green – trigger events: Wiltshire Council v Cooper Estates Strategic Land Ltd
- Registration of land as a town or village green (TVG) means the landowner’s ability to develop the land is severely restricted
- Certain statutory trigger events can prevent land being registered as a TVG
- These statutory provisions can also be used to challenge a registration that has been made
CES owned 380 sq metres of land in Wootton Bassett that had been used as amenity land in a residential area, prior to the land being fenced off and gated. WC accepted an application to register the land as a TVG, which the landowner challenged on the basis that a statutory trigger event had occurred.
The trigger event CES relied on was that the land in question had been identified in a development plan document for potential development. CES asserted that two policy documents forming part of the Wiltshire Core Strategy 2015 identified the land for potential development.
Both the High Court and the Court of Appeal found the land had been identified as suitable for development. WC had erred in law and should not have accepted the application for registration and the registration should be cancelled.
Changes to the Commons Act 2006 introduced by the Growth and Infrastructure Act 2013, provide greater protections for landowners and developers by suspending the right to make a TVG registration application once a “trigger event” has occurred in relation to the land. For further advice on TVG applications, contact Mark Brown in our Milton Keynes office.
Landlord And Tenant Round Up
Forfeiture – contractual default notices: Toms v Ruberry
- 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, for obvious reasons, procedural restrictions on the right to forfeit and landlords must comply in order to successfully terminate a lease
We revisit this case from summer 2018. A tenant, R, had a lease of a pub in Cornwall, which she had taken an assignment of in 2005. The lease required R to keep the interior and exterior of the pub in good repair and condition.
The lease provided for the landlord, T, 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. T alleged that R 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.
T served two notices on R – a default notice under the lease and, at the same time, a notice under section 146 of the Law of Property Act 1925 (forfeiture notice). The forfeiture notice required R to remedy the breaches within seven weeks, which R failed to do, so T brought proceedings for possession on the basis that the lease was forfeit under section 146.
At the first hearing, the court found that the forfeiture notice was invalid because T served it at the same time as the contractual default notice. The lease allowed R a 14-day period for remedying breaches, so the right to re-enter and forfeit could not arise before that period expired. T appealed to the High Court, but was unsuccessful. Undeterred, T then appealed to the Court of Appeal…and lost again!
R was clearly in breach of various covenants and had failed to remedy them within the 14 day notice period, but T had been premature in serving the statutory forfeiture notice and had not correctly identified the breach relied upon to entitle T 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.
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, no matter how dilatory their tenants have been in complying with their lease obligations.
Terminating leases can be a tricky business and the consequences of getting it wrong will often be catastrophic for one or other party, 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.
Opposing lease renewal – ground (f): Warwickshire Aviation Ltd & Others v Littler Investments Ltd
- Business tenancies have statutory protection, known as security of tenure, under the Landlord & Tenant Act 1954
- This means, provided certain conditions are met, a business tenant has the right to a new lease when the old one expires and that the landlord can only refuse to grant the new lease on certain grounds
LI owned an airfield which was occupied by WA and various other business tenants under tenancies with security of tenure. LI sought to terminate the leases as it intended to demolish some of the buildings occupied and promote the site for residential development. Note that in this case, due to an Article 4 direction issued by the Local Planning Authority (LPA), the demolition works required planning permission.
WA and the other tenants applied for new leases with 15-year terms and LI opposed the renewals on Ground (f) – the redevelopment ground. The Court had to consider LI’s chances of getting planning permission for the works. L had indicated that even if the residential development did not ultimately go ahead, it would promote the site for other commercial uses such as vehicle storage, car parking and driver training and would not return the buildings to aviation-related use.
The LPA’s development plan included a principle to keep aviation-related facilities at the airfield but the plan’s policy conferred a broad discretion on the LPA, and a material consideration would be the actual likelihood of aviation-related use being reinstated in the buildings if planning permission for demolition was refused.
Based on the evidence presented, the Court found that, on legitimate and substantial economic and commercial grounds, there was no realistic prospect of LI reinstating aviation-related use of buildings if planning permission for demolition was refused, so the tenants were not granted new leases.
Where a landlord intends to oppose lease renewal under Ground (f) on the basis that it intends to redevelop, there are two main requirements: firstly, a project of works that falls within the language of Ground (f); and, secondly, evidence of the landlord’s intention, and ability, to carry out those works.
Any intended development must be a legally viable proposition and, if planning permission is needed, there must be a reasonable chance of a landlord obtaining it – the courts will take account of both local planning policy and the NPPF. Specialist planning advice is key in these circumstances – contact a member of our Planning Team for further advice.
New legislation – PRS: Tenant Fees Act 2019
- Most provisions of the Tenant Fees Act 2019 came into force on 1 June
- The Act relates to assured shorthold tenancies, tenancies of student accommodation and most licences to occupy housing in England only
- The Act is aimed at reducing upfront expense tenants can face at the start of a residential tenancy and removing ‘hidden’ costs throughout the term
- It bans certain letting fees and caps the amount of deposits paid by tenants
- Local authorities are responsible for enforcing the new laws and can impose fines of up to £5,000 if a landlord or letting agent has charged a “prohibited payment”, as well as requiring the payments to be repaid to tenants with interest
- In addition, landlords will not be able to serve a section 21 notice to obtain possession of let properties until they have repaid any prohibited payments
- You can find further guidance on the Act here.
Planning permission – clerical error: R (on the application of Thornton Hall Hotel Ltd) v Thornton Holdings Ltd
- Where a local planning authority has made a mistake in the exercise of its statutory planning powers, it is in the public interest for the court to be able to rectify that error
- Time limits in relation to planning enforcement are strict, but in some cases, there may be justification for bringing action out of time
Another case that has gone to the Court of Appeal.
TH owned Thornton Manor. THH owned the nearby Thornton Hall Hotel. Both venues host wedding events and other functions. TH applied to WMBC for planning permission to erect three marquees on its site.
The planning report recommended permission be granted, subject to certain conditions, including a condition that the permission be limited to a period of five years from the date of grant.
In December 2011, WMBC granted unconditional planning permission for the three marquees in the grounds of Thornton Manor. This was due to an unexplained error by one of the Council’s officers. TH was aware of this error, but chose to remain silent about it, not least because it has accepted events bookings up to 2020 on the basis of the unconditional planning permission!
THH discovered the error in favour of its competitor some five years later and applied to have the planning permission quashed. THH was successful.
TH appealed, on the basis that THH’s application was well outside the six-week time limit for judicial review and the Court should not have extended the time limit for the claim to be brought, but the appeal was dismissed. TH was aware of the error and chose to rely on the incorrect planning permission at its own risk and WMBC had itself acted unlawfully, as it had initially tried to ‘correct’ matters by generating a fictitious decision notice and manipulating the planning register!
A short point here: in cases of deception and concealment in planning enforcement, the courts will look to ensure no one benefits from an error by keeping quiet about it and hoping that the deadline for taking action, either by judicial review or enforcement, expires. That said, the Court of Appeal did make the point that a court would ‘insist on promptness in bringing such [judicial review] challenges in all but the most exceptional circumstances’.
Note that there is no power to withdraw a planning permission once granted, on the basis of an administrative error in the decision making process and that an effective planning permission, once issued in error, cannot be altered by issuing an amended notice of planning permission. However, a planning permission issued in error and without proper authority is invalid and may be declared so or quashed.
Tree Preservation Order – prosecution: Samuel Wilson
- A Tree Preservation Order (TPO) is an order made by a local authority in relation to a tree/trees of amenity value, which prohibits lopping, topping or felling without the local authority’s consent
- The Proceeds of Crime Act 2002 sets out a confiscation regime that is aimed at depriving criminals of the proceeds of their crimes
In 2016, W added a Juliet balcony to the master bedroom at his luxury home in Canford Cliffs, Dorset. The balcony was shaded by a 42ft oak tree. The tree was the subject of a TPO, which W decided to ignore, cutting branches some 12 feet in length from the tree without the necessary consent from PBC, leaving it ‘practically destroyed’.
A neighbour reported W and PBC brought proceedings against him for causing wilful damage to a protected tree. On pleading guilty, he was fined £1,200. PBC then prosecuted W under the Proceeds of Crime Act to seize the amount of money by which he had benefited from his crime, namely increase in value of his home, due to the presence of the balcony.
Two valuers estimated the increase at £21,750 and £30,000 respectively. W was ordered to pay £21,750 in respect of the proceeds of his crime, as well as a further £15,000 in legal costs.
Although unreported, other than in the local and national press, this is the first time proceedings have brought under the Proceeds of Crime Act for such a case. The message is simple: don’t ignore a TPO! Anyone found guilty, if convicted in the Magistrates’ Court, is liable to a fine of up to £20,000, even if a local authority does not pursue the offender under the Act.
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