Real Estate Legal Update – Winter 2019/20
A welcome from the editor….
Welcome to the winter edition of the Real Estate Legal Update. This quarter, we revisit cases on expert determination, forfeiture of licences, landlord’s consent to planning applications and what exactly is a ‘mast’, all of which have been back before the appeal courts since previous bulletins. We look at new cases involving the potentially binding nature of heads of terms and email signatures, termination of contracts where a corporate party is struck off the register, modification of leasehold covenants and the duties of LPA receivers. For landlords and tenants, we also look at what happens when a lease is granted to an unincorporated association and to a company that doesn’t exist. The planning points cover the interpretation of local development plans and the tax tip helps clarify the question, when is a garden not a garden?
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
Contracts – heads of terms: Abberley & Others v Abberley
- There are specific statutory requirements for contracts for the disposition of land, set out in Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989
- These requirements include that all the terms agreed must be incorporated in one written document (or two identical documents)
This case involved the settlement of a dispute that arose as a result of a falling out between various members of a farming family. The parties agreed to attend a mediation and, at the end of a very long day, the mediator drew up heads of terms reflecting what the parties had been able to agree during the course of the day. The heads contemplated further documentation, including a transfer and a farm business tenancy.
The lawyers acting for parties signed the heads in the presence of the mediator and their respective clients, but there was then a delay in drawing up the formal agreements. One of the parties later argued that the heads of terms were not intended by the parties to be legally binding, as they merely set out some matters agreed in principle and, in any event, they could not comprise a contract relating to land as they didn’t satisfy the requirements in Section 2.
The Court disagreed, finding that the heads of terms were set out with sufficient certainty to be capable of amounting to a binding agreement. Even though the heads contemplated further documentation, a further formal agreement with regard to the terms themselves was not contemplated.
Whilst the position of an agreement made at a mediation is slightly different to the agreement of terms in your usual property transaction, some important issues arise that are worth a reminder.
It is important to ensure that heads of terms are not legally binding – this would defeat the purpose of having them in the first place and would mean the parties had an impromptu agreement that might not properly reflect their requirements or expectations. To put the matter beyond doubt, and to avoid finding yourself in the situation of the unhappy Abberley brother, ensure that heads of terms are labelled “subject to contract” but also include a provision that states they are not intended to be legally binding.
Contracts – electronic signature: Neocleous v Rees
- Another requirement for a binding land contract under Section 2 is that the document incorporating the terms must be signed
- In the 21st Century, what amounts to ‘signed’ is an evolving animal
Mr and Mrs N own land on the eastern side of Lake Windermere. R owns a property over the road, as well a small area of land with a jetty on the bank of the Lake. R claimed she had a right of way over Mr and Mrs N’s land to get to the jetty. To settle a dispute that arose between the parties, Mr and Mrs N offered to buy that small piece of land from R for £200,000, although this was later revised to £175,000.
The lawyers acting for the parties exchanged emails that contained the terms on which the land was to be transferred – including the price, the extent of the land and a requirement to use best endeavours to complete the transfer as soon as possible.
Not unusually, the respective emails included the automated ‘sign off’ of both of the lawyers.
The original dispute had been listed for hearing in front of the First Tier Tribunal, but on the basis of the settlement, the hearing was vacated. However, the parties’ lawyers never managed to agree a Consent Order and R’s lawyer asserted that a settlement had not been reached and asked the Tribunal to re-list the matter for hearing. Mr and Mrs N then issued proceedings for specific performance of the settlement agreement and the transfer of the land to them.
The question to be decided was whether a contract for the disposition of land had come into effect by virtue of the email ‘signatures’ of the two lawyers on behalf of the parties, so as to comply with Section 2.
The Court found that a signature automatically generated by Microsoft Outlook on an outgoing email could be regarded as a person’s signature for the purposes of Section 2 and ordered specific performance of the settlement agreement for the transfer of the land.
This is the first decision looking specifically at the use of automated email signatures. As mentioned in the Abberley case above, it is best practice to mark all correspondence relating to the proposed transfer of land “subject to contract”. You may also wish to include a disclaimer in your email sign-off that you don’t intend to create legally binding relations by virtue of your email correspondence – part of the problem for R here was that the parties had already conceded that they intended to be bound by the settlement agreement.
Contracts – expert determination: Great Dunmow Estates Ltd v Crest Nicholson Operations Ltd & Others
- Conditional contracts and option agreements often provide for the sale price to be agreed between the parties in accordance with a valuation process set out in the agreement
- The agreement will also provide a process to be followed when the parties can’t agree the price – usually the appointment of an independent third party
Readers may recall this case from the Spring 2019 Bulletin. Parties exchanged a contract that was conditional on the grant of planning permission, free from challenge, and on the parties agreeing the price for the land, with a provision that, if they could not agree the price, a third party expert would be appointed.
As it turned out, the parties couldn’t agree the price and a third party expert was appointed to determine it, based on a statement of agreed facts provided by the parties. One of the facts the parties agreed was that the correct valuation date was the date of the expert’s valuation, but after taking Counsel’s opinion, the expert provided a valuation as at an earlier date (being the date of the expiry of any challenge period in relation to the grant of the planning permission).
This valuation suited CNOL, the buyer, but GDEL challenged the valuation and sought a declaration that the expert was bound by the agreed statement of facts. The High Court agreed with GDEL but CNOL appealed, and the Court of Appeal has overturned the High Court’s decision.
Where parties submit statements of agreed facts or other ‘agreements’ as part of the expert determination process, they need to consider whether what they are in fact doing, is varying the terms of the underlying contract – in this case, the date of valuation. Many contracts will contain provisions governing how variations can be made – usually, this requires formal variation by way of written agreement or deed, depending on the form of the original contract. Here, the statement of facts did not meet the required formalities, so the Court looked back to the original definition of the valuation date.
As we mentioned in the bulletin last Spring, where a valuation is required, an agreement needs to clearly state the date of the valuation in order to avoid this sort of dispute. In this case, the drafting wasn’t particularly clear and the valuation date was open to interpretation.
Contracts – termination: Bridgehouse (Bradford No. 2) v BAE Systems PLC
- Companies can be struck off the register at Companies House for various reasons
- They can also be restored to the register within a six-year time period
- This can cause serious issues for those who have contracted with a company that has been struck off or dissolved
BAE agreed to sell a portfolio of properties to BB. The agreement contained a termination clause giving BAE power to terminate the agreement if BB suffered an “event of default”, including being struck off the companies register.
BB was in fact struck off for failing to file its annual accounts and BAE served a notice of termination under the agreement.
Following an application by its directors, BB was restored to the register a couple of months later and challenged the validity of the termination in view of Section 1028(1) of the Companies Act 2006, which provides that a company that has been administratively restored to the register is deemed to have continued in existence as if it had not been struck off.
So, if BB was deemed never to have been struck off, did that mean that the sale agreement had never been terminated? The Court thought not.
The judge distinguished between the “direct and automatic consequences” of dissolution and the “secondary or indirect consequences” of it, which included a decision of a third party to exercise a right to terminate a contract, and which would not be reversed by restoration to the register.
The decision gives certainty – if you are selling land under a contract that contains similar provisions, you will be able to terminate the deal, effective immediately, in these circumstances without the possibility of the agreement being resurrected at some point during the six year period for restoration.
The decision is also of comfort to landlords, as leases often provide that the striking off or dissolution of a corporate tenant will trigger the landlord’s right to forfeit the lease.
Although the reason behind a company’s striking off does not really come into the argument, the case does also contain a salutary reminder for company officers. The registered office of BB was the address of their former lawyers, with whom the directors had had a falling out. It is important to ensure that the details held at both Companies House and the Land Registry are kept up to date to ensure that correspondence and important notices, such as those warning that your company is about to be struck off the register, are received and are actioned within the relevant deadlines.
Covenants – modification: Shaviram Normandy Ltd v Deane & Basingstoke Borough Council
- There is a statutory procedure for modifying or discharging restrictive covenants
- This procedure is available in relation to covenants that affect freehold and certain leasehold estates
SNL acquired a headlease, granted in 1985, of an office block in Basingstoke. The building is adjacent to two other office buildings and close to a number of existing apartment blocks.
The lease restricted the use of the building to offices and contained tenant covenants to keep it in good and substantial repair and to use its best endeavours to keep the building fully let – not something you would usually see in a commercial lease, but the landlord, DBBC was entitled to receive 15.5% of the net annual income received from the occupiers of the building so wanted to ensure full occupancy. The lease also required the tenant to obtain the landlord’s consent to any sublettings, with such consent not to be unreasonably withheld.
In fact, the building was in a state of disrepair and had been vacant since 2013. SNL wanted to convert it into 114 residential apartments, for which there were permitted development rights from a planning perspective, but DBBC, wearing its landlord hat, wanted the building returning to commercial use and refused to vary the lease. DBBC was concerned that allowing the conversion might weaken its ability to enforce similar covenants in leases of other buildings it owned nearby, which it argued was a practical benefit of substantial value.
SNL successfully applied to the Upper Tribunal to modify the user covenant, extending it to allow use as “a residential building comprising 114 flats” or similar wording to be agreed between the parties. The Upper Tribunal considered valuation evidence looking at the likely capital value and income for both office and residential use and found that the covenant did not secure a practical benefit of substantial value to DBBC.
We don’t often see modification/discharge cases in relation to leasehold covenants, so this case is a useful reminder that a tenant of a lease of more than 40 years can apply for modification or discharge once 25 years of the term have elapsed. Provided the statutory requirements are met, this is a further option for developers wanting to develop leasehold land in circumstances where landlords are reluctant to vary the lease.
However, it wasn’t entirely good news for SNL. The Upper Tribunal only has jurisdiction to modify or discharge covenants that are restrictive of the user of land. Part of SNL’s application related to the covenant restricting subletting without the landlord’s consent. As this restriction did not go to user, the Upper Tribunal refused to modify it, meaning that, going forward, SNL will need to get consent to sublet each of the 114 apartments!
Insolvency – receivers: Devon Commercial Property Ltd v Barnett & Belcher
- A receiver appointed by a lender owes a duty of good faith to the borrower
- The receiver also has a duty to take reasonable care to obtain a proper price for property it is appointed to manage
- Provided a receiver meets these duties, it is lawful for them to sell the charged property to the lender
DCPL had defaulted on its mortgage and the lender appointed receivers (B) over the charged property, a cider factory in Devon.
B marketed the property for several months but received little interest. Ultimately, B sold the property to a company associated with the lender and DCPL claimed damages from B, alleging various breaches of duty on their part, including that a conflict of interest had arisen and B had not acted in DCPL’s interests. DCPL also claimed that the burden should be on B to prove they had acted in good faith, rather than DCPL having to prove B had acted in bad faith, and that B had failed to market the properly, so that the property was sold at an undervalue.
The High Court did not find favour with any of DCPL’s allegations.
A useful decision confirming there is no self-dealing and no conflict of interest where a receiver sells a property to an appointing lender, because the lender and the receiver are separate persons and the receiver does not benefit directly. This is provided, of course, that the receiver has met its overriding duties of good faith to the borrower and has taken reasonable care to obtain a proper price for the property in question.
If a borrower alleges a receiver has not acted in good faith, it’s for the borrower to prove this. The burden of proof is not reversed. The borrower will be required to show some intentional conduct on the part of the receiver that goes beyond negligence and either an improper motive or an element of bad faith (although not necessarily dishonesty).
LANDLORD AND TENANT ROUND UP
Licences – forfeiture: The Manchester Ship Canal Company Ltd v Vauxhall Motors Ltd
- We usually think of the remedy of relief from forfeiture as being available to tenants of leases…
- …but in certain circumstances, it can also be claimed by someone with a possessory, rather than necessarily a proprietary, interest in land
VML, the operator of a car manufacturing plant adjacent to a canal, had a licence that permitted it to discharge surface water into the canal. The licence was granted by MSCC in 1962, in perpetuity for an annual payment of £50. Under the terms of the licence, VML installed the drainage infrastructure and MSCC was entitled to terminate the arrangement if the annual payment fell into arrears.
In 2013, VML failed to pay the £50 and MSCC terminated the licence. The parties then entered into negotiations for a new licence, but this time, MSCC was looking for annual payments of over £500,000! Unsurprisingly, VML wanted to explore other options, so sought relief from forfeiture in respect of the termination of the original licence.
MSCC argued that because the original agreement was merely a licence, and did not create any proprietary rights like a lease or an easement did, relief from forfeiture was not available.
This is another case that has gone all the way to the Supreme Court since our coverage in the Autumn 2018 Bulletin. The High Court initially granted relief and both the Court of Appeal and the Supreme Courts dismissed MSCC’s appeals.
This decision does not mean that all licensees are entitled to relief from forfeiture or that licensors can never terminate what they thought were merely contractual arrangements. The nature of the licence in this case was unusual – it was granted in perpetuity and VML had a high degree of control over the subject matter of the grant – i.e. the drainage system and the land on which it had been installed. Each case will turn on its own facts.
Landlord’s consent – planning applications: Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd
- Landlords usually seek to restrict the ability of their tenants to do certain things at the property without the landlord’s consent, in order to protect things like the property’s value, its reputation or its structural integrity
- Such restrictions are usually qualified by a requirement for the landlord to act reasonably when considering an application for consent
- It is expected that the landlord’s considerations will only take account of things that are directly relatable to the landlord and tenant relationship, rather than serving a collateral purpose
Readers may recall this case from the Autumn 2018 Bulletin. A tenant, HL, had a lease of the whole of a building for a term of 100 years from 25 December 1985 at a peppercorn rent; residential use was permitted under the terms of the lease.
The building itself comprised six floors and HL had sub-let the whole. The third and fourth floors had been used for residential purposes since the beginning of the lease and the sub-tenant used the rest of the building for business and ancillary uses.
The sub-tenant wanted to maximise its income from the building, but in order to use the first and second floors for residential purposes, it needed planning permission for change of use. The lease provided in clause 3(19) that any application for planning permission could only be made with the landlord’s consent, which could not be unreasonably withheld.
The landlord, at the time called RNL, refused consent, arguing consent may facilitate a claim by HL to acquire the freehold of the building under the Leasehold Reform Act 1967 and this would damage the value of the SNL’s investment portfolio (the Soho Estate).
The case has gone all the way to the Supreme Court. The Court of Appeal had found that SNL’s refusal to give consent was unreasonable; the main purpose of clause 3(19) was to protect SNL from unwanted planning enforcement proceedings and the Court of Appeal decided that SNL was seeking to achieve a collateral purpose. However, the Supreme Court disagreed (by a 3:2 majority), finding that the lower courts’ interpretation of the Lease was too limited.
For landlords, the Court’s decision does provide useful guidance on the approach to take when considering applications for consent under leases – the withholding of consent needs to be reasonable in light of the circumstances at the time the tenant applies for it, it doesn’t need to be right or justifiable.
For tenants, the decision is a reminder that even a seemingly wide and permissive clause (such as a residential user clause) may be restricted by the impact of other clauses within the lease, therefore, when negotiating a premium for the grant or assignment of such a lease, it is important to be aware of the interplay between different clauses and not look at any one clause in isolation.
Tenant’s capacity – unincorporated associations: Panton v Brophy
- An unincorporated association has no separate legal personality
- As such, it cannot own land or take the grant of a lease
Hounslow London Borough Council purported to grant a lease of a boathouse to The Thames Tradesmen’s Rowing Club (an unincorporated association). The lease was granted (or not, as we will see) in 1987 for a term of 30 years. In 1990, the Rowing Club, which wanted to be able to share the use of the boathouse, agreed to assign the lease to itself and the Hounslow Hockey Club Limited (a company) as joint tenants. The landlord consented to the assignment, which took place in 1993, and the position was also recited in a deed of variation of the lease the parties entered into in 1996 in order to extend the length of the term.
The Hockey Club was later dissolved, with its assets passing to the Crown ‘bona vacantia’, in the usual way. The Council, taking the view that the Hockey Club was the tenant under the lease, asked the Crown to disclaim the lease, which it did, and the Council told the Rowing Club it had no interest in the boathouse so it would have to vacate.
Some members of the Rowing Club successfully applied to court for an order that they be appointed as trustees of the lease and that the lease be vested in them for the benefit of the members.
The 1987 ‘grant’ did not create a legal estate in land in favour of the Rowing Club, because the Rowing Club was incapable of holding such an estate. Nor did the assignment in 1993 regularise the position by somehow granting a lease to the Rowing Club and the Hockey Club, because the Council as landlord was not party to the assignment. However, the court looked at the various dealings that had taken place over the years in the round and found that there was an intention that there be a grant to both clubs on a joint and several basis and, as the Rowing Club could not hold a legal estate, this grant would take effect as the grant of a lease to the Hockey Club to hold on trust for the benefit of itself and the members of the Rowing Club.
Landlords, and indeed tenants, can avoid this sort of legal mess by ensuring leases are granted properly in the first place, namely, where an unincorporated association, such as a sports club, is involved, to named trustees of the club. Landlords may also want to see a guarantor of the trustees’ liabilities under the lease so that it has recourse in the event that they are unable to pay the rent, etc. From a club’s perspective, consider a separate agreement between the trustees and members making provision for the purposes to which the premises can be put and imposing obligations on the members to indemnify the trustees in respect of their liabilities under the lease, where this is not already covered by the club rules.
Remember also that if you enter into a deed of variation in order to extend the term of an existing lease, this will trigger a legal mechanism known as surrender and regrant which can, depending on the nature of the existing lease, have unforeseen – and not good – consequences!
Tenant’s identity – companies: Seafood Shack Ltd v Darlow
- Agreements, including leases, can be rectified in three ways
- For rectification by construction or interpretation, there must be a clear mistake on the face of the document and it must be clear what correction ought to be made to cure it
- For rectification of a common mistake, there must be a consensus between the parties to the document that remains unaltered but is not reflected in the way the document is drafted
- For rectification in the case of a unilateral mistake, the aggrieved party must establish that the other party knew there was a mistake, which was to its benefit, and failed to draw it to the aggrieved party’s attention
Landlord, D, and a company called Seafood Shack UK Ltd (SSUKL) agreed terms for the grant of a 25 year lease of premises in Cardiff and the lease was completed in 2017. Unfortunately for all concerned, SSUKL did not exist as a company. Another company, Seafood Shack (Cardiff) Ltd actually traded from the premises until it went into liquidation, at which point the liquidator disclaimed any interest the company had in the lease. D changed the locks and let the premises to someone else (who did exist).
SSL (parent company of Seafood Shack (Cardiff) Ltd) claimed that it should have been the tenant and that the lease should be construed as such and rectified to correct the ‘mistake’. SSL also claimed damages from D for unlawfully repossessing the premises.
The Court found that D had not acted unlawfully and SSL was not entitled to rectification of the lease.
Whilst the judge agreed that reference in the lease to a non-existent company was indeed a mistake, it was not clear what the correction should be, as none of the tests set out in established case law had been met.
Landlords, their agents and, to be fair, their lawyers, should check that proposed tenant companies are incorporated and registered at Companies House – it is obviously extremely important to make sure you are granting a lease to an entity that a) exists and b), as we saw in the case above, is able to hold a legal estate in land.
Permitted development – communications masts: R (on the application of Mawbey) v Cornerstone Telecommunications Infrastructure Ltd
- The General Permitted Development Order 2015 (GPDO 2015) grants deemed planning permission for the installation, alteration or replacement of electronic communications apparatus
- However, there are exclusions, including where works relate to a building that is less than 15 metres in height and the mast would be within 20 metres of the highway
- Where such works are not permitted development, planning permission is required
Here is another case we first looked at in the Autumn 2018 Bulletin. A social housing provider managed a block of flats on behalf of Lewisham Council and granted CTIL a licence to install telecommunications apparatus on the plant room on the roof of the block. The apparatus included nine antennae supported by poles and attached, by a yoke arm, to central support poles. These central poles were held in place by steep tripods bolted to concrete plinths.
M asked the Council to take enforcement action, on the basis that the installation of the apparatus was not permitted development. The Council refused, taking the view that the apparatus in question did not comprise a ‘mast’ and M sought judicial review of the Council’s decision. M was successful in the High Court and CTIL took the matter to the Court of Appeal, which dismissed the appeal.
A useful case for local authorities and telecoms operators on the interpretation of the word ‘mast’ in the context of the GPDO 2015. Ultimately, the courts will initially look to give a disputed word its natural and ordinary meaning and then look at whether there is anything in the relevant statutory context to displace that meaning.
Development plan – allocation: Gladman Developments Ltd v Canterbury City Council
- A development plan sets out agreed planning policies for a particular area
- Local planning authorities must determine planning applications in accordance with the plan, unless material considerations indicate otherwise
GDL applied for planning permission to build 85 residential dwellings on a greenfield site outside a village. CCC’s local plan provided that residential development would be permitted on allocated sites and on previously-developed land within urban areas. GDL’s proposed development did not fall within an allocated area and CCC refused GDL’s application. However, on appeal, the Planning Inspector did grant conditional planning permission, finding that the proposed development, whilst not expressly compliant, was not in conflict with the development plan. CCC argued that because certain areas were identified for development, it followed that all other locations were precluded.
The High Court agreed with CCC’s position and, when GDL appealed, so did the Court of Appeal.
Obviously a negative decision for GDL in this particular case, but one that might shed light on how councils should determine planning applications in future. The purpose of having development plans and policies is to ensure consistency in decision-making, so it is incumbent on decision-makers to examine, understand and apply all relevant development policies.
Stamp Duty Land Tax – gardens and grounds: Hyman v Revenue & Customs
- Lower rates of Stamp Duty Land Tax (SDLT) apply to non-residential and mixed-use property
- Residential property includes land the forms part of the gardens and grounds of a dwelling
H bought a farmhouse with 3.5 acres of land in St Albans for a price of £1.515 million. On completion of the purchase, H paid SDLT at residential rates but were later advised that they had overpaid, as the property could be classed as mixed-use, with a lower rate of SDLT. H therefore claimed a tax refund of just under £35,000.
The property consisted of the house, its garden, a meadow, an old barn and a bridleway between the garden and the meadow. The meadow was overgrown but was used for walking the family dog and keeping chickens. The barn was dilapidated, but H used it to store garden equipment.
The barn, the meadow and the bridleway were physically separated from the house by hedges. The bridleway was open to the public and subject to public rights of way, and the barn and the meadow were not integral parts of the house and garden; in fact, the barn, viewed in isolation, would be classified as non-residential and would need planning permission to be converted to residential use.
HMRC refused to pay the refund, arguing the whole of the land was residential. The First Tier Tribunal agreed with HMRC’s position.
There can be significant advantages in land being classed as non-residential from an SDLT perspective, but as we saw above, the courts and tribunals will look to give words their ordinary meaning. The ordinary meaning of ‘gardens and grounds’ was, according to the judge in this case, ‘land attached to or surrounding a house which is occupied with the house and is available to the owners of the house for them to use’ although there was no requirement for active use of the land as such.
It’s worth bearing in mind however, that if you buy land that does comprise a genuinely non-residential element that is used for a separate, commercial purpose, a lower rate of SDLT will apply.
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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