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Articles Real Estate 31st Oct 2019

Real Estate Legal Update – Autumn 2019

A welcome from the editor….

Welcome to the autumn edition of the Real Estate Legal Update. This quarter, we look at cases involving the rating of stripped out premises, the amenity value of covenants against development, overage triggers and prescriptive easements. For landlords and tenants, we look at cases involving the reservation of rights out of a tenancy, contracting out of the Landlord & Tenant Act 1954 and a service charge dispute over the replacement of a central heating system. The planning points cover a case involving another use of Proceeds of Crime Act 2002 in the context of a planning enforcement and prosecution by a local authority, whether it is lawful to make non-material amendments to reserved matters approvals and some new Community Infrastructure Levy Regulations. There are a couple of tax tips, which look at when a property development trade is not a property development trade and some new regulations on structures and buildings allowances.

The update brings together highlights from our popular Nottingham 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 – stripped out premises: Jackson (Valuation Officer) v Canary Wharf Ltd

Key points:

  • For rating purposes, a hereditament is a unit of property which falls to be shown as a separate item in the valuation list
  • One question the Valuation Office has to ask is whether that unit is capable of beneficial occupation
  • The rateable value of a hereditament is related to an assumed rental value

CWL owns property at One Canada Square, Canary Wharf. The dispute in this case related to two floors of that 46-storey building, which, in accordance with its standard practice, CWL had stripped out when the previous tenant vacated. CWL left the premises in a “shell” state so that an incoming tenant could fit them out. The premises were incapable of occupation for a period of over three years, from February 2011 to November 2014.

The Valuation Office wanted to give the premises a rateable value on the basis of an “assumed state of repair”. This would’ve given a value of £1.83m! CWL appealed, arguing that the actual condition of the premises should be the deciding factor and, as they were incapable of beneficial occupation, they should, in fact, be valued as premises undergoing redevelopment.

The Tribunal agreed with CWL and directed that the premises should be listed with a rateable value of £1.

Practical implications:

The Valuation Office had accepted that the premises were not capable of beneficial occupation, which is where the story should have ended. The concept of an assumed state of repair did not come into play.

If a property is incapable of beneficial occupation, it is not actually a hereditament at all and the only basis on which it can be added to the rating list is under a convention that such properties remain listed with a nominal rateable value purely for administrative purposes.

Development – restrictive covenants: Signature v Wragg

Key points:

  • It is possible to apply under section 84(1) of the Law of Property Act 1925 for restrictive covenants affecting land to be modified if they impede a reasonable use of the burdened land
  • There are various statutory grounds for modification, including that the covenant does not secure any practical benefit of substantial value or advantage to the beneficiary (and that money is adequate compensation for any loss or disadvantage) and that the proposed modification would not injure the beneficiaries
  • The Tribunal will consider a number of different factors when considering an application, and expert evidence can be key

S acquired a site and obtained planning permission for the construction of a care home. However, the site was subject to covenants imposed in 1910 that restricted the use and density of development. The covenants also affected other land nearby.

Since 1910, there had been a lot of development in the area in breach of the covenants, particularly the density restrictions, such that there were 19 detached houses and a block of flats on land that was subject to an aggregate covenanted limit of just 14 houses. S applied for the covenants to be modified to allow it to implement its planning permission. A number of local residents (W), who owned substantial detached houses with large rear gardens – a number of which backed onto the site, and had views across the site – objected to the application.

It was common ground between the parties that implementation of the planning permission would be a reasonable use of S’s land and that, unless the restrictions were modified, that use would be impeded. The parties also agreed that the covenants did secure a practical benefit to W, for example in terms of preserving the outlook from W’s property and preventing it being overlooked.

So, the question for the Tribunal was were those practical benefits of substantial value or advantage to W? The answer was yes, and the Tribunal refused S’s application. The Tribunal members visited the site and viewed it from W’s property and also placed weight on the evidence given by W’s expert, and found that S’s proposed development would affect the amenity of W’s property to a significant degree.

Practical implications:

In this case, the Tribunal focussed on the physical nature of the proposed building, which it felt would have a much greater adverse impact on the amenity of W’s property than the construction of three or five detached houses on the site, which was the likely alternative use if S’s application for modification was unsuccessful.

Whilst each case will of course turn on its own facts, and there have been many cases on modification of covenants, decisions have often been based on the number of proposed buildings. Here though, it was the size and “institutional” nature of the proposed building and the impact on W’s outlook from their properties that swayed the Tribunal in favour of the objectors.

When buying land for development, remember that getting planning permission is just one step in the process. The title may be burdened by restrictions that prevent you implementing that permission and that modification, or discharge, is not guaranteed even where there have been other breaches in the surrounding area.

Development – overage triggers: Loxleigh Investments Ltd v Dartford Borough Council

Key points:

  • Although in common usage, the term “detailed planning permission” is not defined by planning legislation
  • In the absence of a statutory definition, it’s important to be precise about terms used in development documents

In March 2013, a developer (L) acquired land with the benefit of outline planning permission for the construction of five detached houses from a local authority (D). When it sold the land, D required L to enter into an overage agreement whereby L would make an additional payment if a “Planning Permission” was granted during the defined overage period of five years. The idea was that if L obtained planning permission to build larger units, D could receive an additional £50,000 per unit.

“Planning Permission” was defined as “any detailed planning permission…”

In October 2013, L obtained approval of reserved matters pursuant to the outline permission and a couple of years later, also obtained permission to vary a condition of that planning consent. D claimed that both of these amounted to “detailed” planning permission and that the overage had been triggered and the Court agreed.

Practical implications:

An expensive exercise for L, who argued that a planning permission that left certain matters to be determined at a later date could not fall within the definition of “detailed”. However, it’s a useful reminder that, when negotiating overage agreements or conditional contracts, it is important to be clear about what will trigger payment or completion, especially when referring to events that are not statutorily defined. The Court took a pragmatic approach to interpreting the phrase used here. As a High Court decision, it is only persuasive rather than binding on other courts, hence the need for precise drafting.

Easements – prescription and intensification of use: Stanning v Baldwin

Key points:

  • A prescriptive easement arises through long user (see below)
  • Because, by nature, such an easement is not expressly described, disputes can arise when the benefitting (or dominant) landowner changes the use of their land but still seeks to use the prescriptive rights
  • If there is no impact on the nature or extent of the use of the right, the burdened (or servient) landowner cannot complain

S owned a property called The Coach House in Gerrards Cross, which benefited from a right of way on foot and with vehicles over a track across Gerrards Cross Common, which was owned by B. The right had arisen by prescription, having been exercised by successive owners since 1906.

S obtained planning permission to demolish The Coach House and build four new houses, with underground parking for nine cars. The intention was that access would continue to be over the track across the Common, and a dispute arose when B claimed the new intensified residential use would be “self-evidently excessive”

Practical implications:

In relation to prescriptive easements, the servient landowner cannot complain about increased usage of the dominant land alone, but excessive use of an easement by the dominant landowner can amount to a nuisance and be restrained by injunction.

If there is a change in the use of the dominant land, but that change does not impact on the nature or extent of the use of the easement, the dominant landowner(s) will still be able to exercise it.

However, if there is a radical change of use in the dominant land and this is coupled with a substantial increase or alteration in the burden on the servient land, the right to use the easement will be lost or at least suspended whilst the changed use is operative.

Easements – prescription and drainage rights: Stanning v Baldwin

Key points:

  • A prescriptive easement arises after 20 years’ use that is ‘as of right’ – i.e. without force, without permission and without secrecy
  • Whilst much easier to identify in relation to rights of way, rights of drainage can also arise by prescription

Staying with S and her Coach House redevelopment, she also wanted to connect the drains of the new houses into the existing drains of The Coach House, which connected into the public sewer via drains that ran – you guessed it – under the Gerrards Cross Common.

S claimed The Coach House also benefited from a right of drainage under the Common by prescription, but the question was whether the right had been enjoyed “as of right” (so without force, secrecy or permission) for the required 20 year period.

Drains under the Common that served the original residential property on The Coach House land had probably been connected to the public system in 1906, when that property had been built. It was to be presumed, at that time, that the owner of the Common must have permitted those works, meaning the use of the drains was not “as of right”. However, because permission is in effect a personal licence by the landowner at the time, a change in ownership of the Common in 1962, caused that permission to lapse and B was unable to show that since 1962, use of the drains had been with any sort of permission.

But what about the secrecy hurdle…? For prescriptive rights to arise, use must be open and visible, which is quite tricky when it comes to drains! The Coach House was built in 1978 and had been connected to the drains then. At that time, the then owner of the Common did not ask about drainage, despite being aware of the construction works. The Court felt this would have been an “obvious enquiry” to make in the circumstances and that was enough to impute to the owner of the Common sufficient knowledge of the drains such that ongoing use of them was without secrecy.

So S was successful on the drainage easement too.

Practical implications:

It is important to investigate the basis of all the rights required to occupy and operate from a property before acquisition, particularly if redevelopment is contemplated. It is equally important to be aware, as far as is reasonably possible, of whether, how and to what extent neighbouring owners have – or may acquire – rights over your land, as these will also have an impact on any plans you may for development.

LANDLORD AND TENANT ROUND UP

Leases – reservation of rights: Windsor Clive, Earl of Plymouth v Rees

Key points:

  • Leases usually contain ‘reservations’ – rights reserved (or, strictly speaking, re-granted by the tenant) in favour of the landlord, allowing entry onto the demised property for various purposes
  • Where such rights are reserved “for all reasonable purposes”, those reasonable purposes must relate to the landlord-tenant relationship

Tenants (R) farmed land that was intended to be part of a new garden city outside Cardiff. Outline planning permission had been applied for and access to the land had been obtained in connection with this permission.

A dispute arose between R and the landowner (W) when R encountered two ecologists on the land carrying out a habitat survey on the instructions of W, culminating in an interim injunction preventing R from interfering with W’s access rights. These rights were reserved out of the tenancy agreements in terms that allowed W to enter onto any part of the farm or premises “at all reasonable times for all reasonable purposes” and for the purposes of inspecting the premises, making roads, sewers or drains or “for any other purpose connected with [W’s] estate”.

The next dispute was over the interpretation of these provisions – were they wide enough to permit W to carry out surveys and the like in relation to the proposed redevelopment of the land or were they more confined?

The Court found that the phrase “for all reasonable purposes” should be interpreted in the context of the landlord/tenant relationship, not for all reasonable purposes that a landowner may have and did not extend to activities that would damage the land or interfere with R’s use of it as a working farm. It did not grant W a permanent injunction.

Practical implications:

The courts have a difficult balancing act in these sorts of cases. They have to try to give effect to the reserved rights, which after all, are expressly agreed and set out in the lease, whilst not enabling a landlord to derogate from its grant or breach its quiet enjoyment covenant. Landlords need to be aware of the nature of the rights that are reserved to them, and the context in which they can exercise them. This is particularly important when the land in question has been earmarked for development, where landlords may wish to carry out activities that are wider in scope than those permitted under the lease.

Security of tenure – contracting out: TFS Stores Ltd v BMG (Ashford) Ltd & Others

Key points:

  • In certain circumstances, tenants of business premises have security of tenure under the Landlord & Tenant Act 1954 (Act)
  • This means that they have statutory rights to remain in occupation and to take a new lease at the end of the term
  • It is possible to ‘contract out’ of security of tenure, provided the correct procedure is followed
  • This procedure involves the landlord serving a notice on the tenant and the tenant providing a declaration and including a clause in the lease confirming this has been done

TFS held leases of units in six designer retail outlets. The procedures for contracting the leases out of the security of tenure provisions of the Act were followed, in that the landlords served the relevant notices and a senior employee at TFS gave the necessary declarations. When the leases came to an end, the landlords decided they did not want to grant new leases to TFS, but instead wanted to grant leases to one of its competitors. TFS sought to argue, on various grounds, that the leases had not been validly contracted out in the first place and that they were therefore entitled to new leases.

TFS’s arguments were rather technical and were based around whether their solicitors had authority to accept service of the landlords’ notices, whether the person at TFS who made the tenant declarations had authority to do so and whether the declarations were valid in any event, because they did not specify a fixed term commencement date for the leases.

The Court did not like any of these arguments and found that all of the leases had been validly contracted out, such that TFS was not entitled to new leases.

Practical implications:

The current contracting out procedure was introduced in 2004, replacing a system which required the parties to get a court order rubber stamped by the County Court before completing the lease, but despite the time that has passed, there is very little case law on the ‘new’ rules.

One aspect of the 2004 rules which has always been uncertain is how to describe the term commencement date for the lease in the tenant’s declaration, given that the parties will not necessarily know when completion will take place. Market practice has evolved to try and deal with this, for example, by referring to the term commencement date “contained in the lease” or by saying something vague like “a term commencing on a date to be agreed by the parties” which was a phrase used in one of the declarations in this case. The Court held that such mechanisms are valid, which is good news for landlords who have been contracting out their leases for the past 15 years!

The lesson for tenants is that the courts may well take a robust approach to questions of whether or not a lease has been validly contracted out, so it is critical that they understand the rights that they are giving up and the freedom this gives a landlord at the end of the term.

Service charge – provision of services: London Borough of Southwark v Baharier

Key points:

  • Whether works carried out by landlords are “repairs” or “improvements” can be a contentious issue, as the interpretation often dictates who has to pay for them!
  • A covenant to provide services may include obligations that go beyond keeping plant and equipment in repair

B has a 125 year lease of a flat in a block of 40 units, built in 1968. Her landlord is LBS. The lease contains the usual covenants on the part LBS to repair the structure and exterior of B’s flat and of the block. The lease also contains a covenant to provide specified services to or for the flat and “to ensure so far as practicable that they are maintained at a reasonable level and to keep in repair any installation connected with the provision of those services”. The cost of providing the services was recoverable from the tenants in the usual way through the service charge.

The central heating and hot water system in the block was worn out and the cost of replacing it was £800,000. LBS asked B to contribute a sum of just under £24,500 by way of an advance service charge, which B challenged. LBS argued that the provision of heating was a “service” as defined in the lease.

The First Tier Tribunal (FTT) heard the dispute, where neither party was legally represented. The FTT decided that the issue it needed to consider was whether the proposed works amounted to “repair” or “improvement” (the latter being irrecoverable through the service charge). Having identified this as the issue, the FTT found for B and LBS appealed.

The Upper Tribunal overturned the FTT’s decision. The lease required LBS to provide services that included heating and hot water, and to maintain those services to a reasonable level and required B to pay the costs of providing the services. It was for the landlord to decide how the service should be provided, and if complying with this obligation went beyond keeping the relevant plant and equipment in repair, so be it.

Practical implications:

The Upper Tribunal refused to remit the matter to the FTT to enable B to argue that the decision to replace the whole of the heating and hot water system was irrational (this was not something she had raised during the proceedings), so it looks like she will have to get her cheque book out.

The decision turned on the wording of the lease, but these are common provisions and the key practical point is that an obligation to provide services can be wider and more onerous than a covenant to keep something in repair; in order to comply, the covenantor (usually the landlord or a management company) may need to do works that go beyond what is usually considered to be repair. Something for tenants to be aware of when taking on a lease, particularly in older buildings.

PLANNING POINTS

Enforcement notices – Proceeds of Crime Act 2002: Wokingham Borough Council v Scott & Others

Key points:

  • The Proceeds of Crime Act 2002 (Act) sets out a confiscation regime aimed at depriving criminals of the proceeds of their crimes
  • Local authorities are entitled to receive 37.5% of any confiscation order made by the courts
  • The prospect of receiving a sum of money should not come into an authority’s decision to prosecute under planning legislation

S owned and ran a garden centre known as Hare Hatch Sheeplands, near Reading (and in the green belt). The authorised planning use was as a horticultural nursery, a farm shop and a café, but over the years the business had expanded (without planning permission) to include the operation of cafés and restaurants, a pet store and a children’s play area.

WBC issued an enforcement notice against S and other business operators on the site, requiring them to stop the unauthorised use. S appealed but later withdrew his appeal, after informal discussions with WBC, on the basis that WBC would issue a certificate of lawfulness of existing use or development (CLEUD) if it considered S had a substantive case.

Unfortunately for S, withdrawing the appeal meant that the enforcement notice took effect and so WBC could not legally issue the CLEUD! WBC then started proceedings against S and the other operators, obtaining an injunction to secure compliance with the enforcement notice and also issued criminal proceedings, which included an application for a confiscation order under the Act.

S applied to stay the criminal proceedings, claiming an abuse of process. The Crown Court agreed they were, because WBC had induced S to withdraw the appeal against the enforcement notice to his detriment and had also failed to comply with various procedural requirements of the Code for Crown Prosecutors (Code), and so stayed the proceedings.

WBC appealed to the Court of Appeal, which found that WBC had been influenced in its decision making by the prospect of obtaining a confiscation order, it had not adhered to the Code and had induced S to withdraw his appeal.

Practical implications:

Regular readers of our bulletin may remember Mr Wilson and his Tree Preservation Order, where the Act came into play in a way that we had not really seen previously. The possibility of obtaining a confiscation order, or delaying enforcement action in the hope of receiving a larger sum of money, should not come into the process when deciding whether to prosecute.

The decision has been covered widely in commentary and local authorities should take note of the Court’s comments on other aspects of this case, including the behaviour of WBC’s councillors in inducing S to withdraw the appeal and the knowledge of officers from the planning department of this behaviour.

Reserved matters – non-material amendments: Fulford Parish Council v City of York Council

Key points:

  • Section 96A of the Town and Country Planning Act 1990 (Act) enables local planning authorities to make a “non-material change” to any planning permission or any permission in principle
  • In deciding whether a change is material or not, the authority must consider the effect of the change (and any previous changes made under the same section) on the permission as originally granted
  • Changes can include imposing new conditions or removing or altering existing conditions

In May 2007, the Secretary of State granted outline planning permission for the construction of around 700 new dwellings at a site in Fulford.

FPC was very much opposed to the development, which was controversial locally, hence the involvement of the Secretary of State. For the history buffs amongst you, the site was thought to have been the location of the battle of Fulford, which King Harald Hadrada won in 1066 before being defeated by King Harold at the battle of Stamford Bridge!

The planning permission was subject to a large number of conditions, and, as is usual, approval of certain reserved matters. In particular, in 2015, CYC had approved a bat mitigation strategy, which involved providing safe corridors for bats to pass through the development. In 2018, CYC approved a non-material amendment to the bat mitigation strategy.

FPC, which had mounted a number of unsuccessful challenges to the development over the years sought judicial review of CYC’s decision, arguing that Section 96A of the Act did not empower it to make changes to a reserved matter approval, only to planning permissions and permissions in principle.

The Court of Appeal did not agree and so the amendments to the reserved matters approval stand.

Practical implications:

Whilst it was accepted that the approval of reserved matters is not the grant of a “planning permission”, the planning permission to which Section 96A refers is the whole bundle, being the planning permission itself and any conditions to which it is subject. The Court of Appeal took a pragmatic approach in this case and has brought some certainty to a question on which different authorities have taken different positions, namely whether Section 96A includes power to make non-material amendments to a conditional approval of reserved matters. I suspect the residents of Fulford, and the members of the parish council, will be less happy with the outcome.

New legislation – Community Infrastructure Levy (CIL): Community Infrastructure Levy (Amendment) (England) (No. 2) Regulations 2019

These Regulations came into force on 1 September, amending the Community Infrastructure Levy Regulations 2010. The amendments include:

  • Imposing a surcharge for failing to provide a commencement notice before starting development, rather than penalising this by loss of reliefs
  • Requiring councils to publish an annual CIL rate summary showing the rates of CIL in their areas adjusted for inflation from 31 December 2020
  • Removing the restriction on the number of Section 106 agreements a charging authority could enter into in relation to funding particular infrastructure
  • Contact a member of our Planning & Environmental Team for further advice on all things CIL.

TAX TIPS

Annual Tax on Enveloped Dwellings (ATED) – relief: Hopscotch Ltd v HMRC

Key points:

  • ATED was introduced in the Finance Act 2013 and was designed to discourage individuals from buying and holding high value residential property (currently £500,000 or above) through companies
  • Companies holding such property are required to file an annual return and pay tax each year (or for each “chargeable period”) whilst they own the property
  • Certain reliefs and exemptions are available, including two separate reliefs for property owners who carry on a “property development trade”

In 1993, HL bought a residential property for £1.25m as an investment. In 2011, HL decided to sell the property and marketed it for £13.5m. There was no interest and so, in 2014, HL decided it would redevelop the property to make it more marketable. It obtained planning permission in December 2015, began works the following April and completed them in September 2017. HL then marketed the property for sale again, although at the date of the hearing, the property had not been sold.

HL had submitted ATED returns for the first three years after the tax was introduced (so from April 2013), but for the chargeable periods commencing April 2016 and 2017, applied for property development trade relief.

Whilst HMRC accepted that the work carried out was “development”, it did dispute the contention that HL was engaged in a property development “trade”. The First Tier Tribunal agreed with HMRC.

Practical implications:

A property development trade consists of buying and developing for resale residential or non-residential land, which is run on a commercial basis, for profit. The Tribunal’s view was that HL was not carrying on a property development trade and that the development in question was a one-off in relation to a property asset held on capital account which did not relate to a trade that HL otherwise carried on.

It’s worth noting that since ATED was introduced, the threshold for a ‘high value residential property” has been reduced from over £2m to £1m and then to its current rate of £500,000. Companies holding such property can contact a member of our Tax Team for further advice on their filing and payment obligations.

New legislation – Capital Allowances: Capital Allowances (Structures and Buildings) Regulations 2019

These Regulations came into force on 5 July:

  • The Regulations introduce capital allowances on the construction, renovation or conversion of non-residential buildings or structures (or purchases of a relevant interest in the same)
  • There is some element of retrospectivity in that, generally, allowances are available for qualifying expenditure incurred on or after 29 October 2018 (the date of the Autumn 2018 Budget), provided that construction also began on or after that date
  • As an aside, HMRC is also consulting on simplifying the administration of the capital goods scheme, including increasing the threshold for land and buildings (currently £250,000)
  • For advice on capital allowances, please contact a member of our Tax Team

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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