Real Estate Legal Update – Spring 2021

 

A welcome from the editor…

Welcome to the latest edition of the Real Estate Legal Update.This quarter, we cover a case about calculating the contributions developers can be required to make to the local community when carrying out new development and a couple of cases on restrictive covenants aimed at preventing new development.In the Landlord & Tenant round-up, we look at what can happen to a lease when the tenant company is dissolved but then restored to the register at Companies House and at cases involving the remedies available both to a landlord where a tenant is in breach of its lease obligations and to a tenant where it’s the landlord in breach.The Planning Points cover a decision on how not to get round affordable housing requirements and the Tax Tips highlight a few headlines from the Budget.

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CASE LAW UPDATE

Development – calculating section 106 contributions: Morris Homes v Cheshire West & Chester Council

Key points:

• Agreements made under s106 of the Town and Country Planning Act 1990 between local authorities and developers contain ‘planning obligations’

• These obligations can impose restrictions on the use of land or on the operation of the development, or can require the developer to make financial contributions towards local facilities or infrastructure

MH had outline planning permission to build new homes in Cheshire and had entered into a section 106 agreement, which was later varied. Under the agreement, MH was required to make three financial contributions, including an education contribution and an affordable housing contribution, which was to be calculated according to an agreed formula, which required MH to bring into account the ‘total sales revenue received from the disposal of the Units’.As is common on residential developments, some of the plots were sold on a freehold basis and others on a leasehold basis, and a dispute arose about how the ground rents should be treated when calculating the ‘total sales revenue’. An independent expert, appointed under the section 106 agreement, decided that the ground rents – whether receivable or actually received – should be capitalised and form part of the sales revenue.MH was unhappy with this decision and challenged it in the courts, but was unsuccessful in both the High Court and the Court of Appeal. The parties would have known that the plots could be sold freehold or leasehold, not least because the planning permission provided for flats as well as houses. If the ground rents were not taken into account, the local community would’ve missed out on the benefits the agreement was intended to secure.Practical implications:As with many cases we cover in this bulletin, clearer or alternative drafting could have been used if the intention of the parties had been different, but it’s worth noting that the decision is relevant not just to planning agreements and obligations, but to other real estate transactions where a future payment needs to be calculated on the basis of sales revenue, such as overage. 

Restrictive covenants – modification: Creebay Ltd v Deninson

Key points:

• Where land is burdened by restrictive covenants affecting the use of that land or buildings on it, a landowner can make an application for the covenant to be modified or discharged if certain criteria are satisfied (section 84 of the Law of Property Act 1925)

• The Upper Tribunal has discretion to modify or discharge where the covenant impedes the reasonable use of the land

• Where this is the case, the Tribunal will then consider whether the covenant secures a practical benefit of substantial value or advantage to the benefiting landowner, or is in the public interest, and whether money would be adequate compensation

C owned a vacant plot of land (Oldways) that was subject to a restrictive covenant preventing building in front of a building line. The building line was 50 feet away from the rear boundary.There had been a house on Oldways, but this had been demolished in 2008 and C had obtained planning permission to build a six-bedroom house over three storeys. Most of the footprint of the proposed new house, which was bigger than the original house that had been there, was in front of the building line.The restrictive covenant benefited the next door property (Severalls), which was owned by D, and when C applied to have the covenant modified, D objected on the basis that they would be able to see the new house, despite the large hedge separating the two properties, and that the new house would overlook Severalls, thus affecting their privacy and the value of Severalls.C’s application was unsuccessful; whilst the covenant impeded a reasonable use of Oldways, it did secure a practical benefit to Ds which the Upper Tribunal found was of substantial advantage to D. The whole character of Severalls, with its leafy outlook and lack of intrusion from surrounding buildings, would be changed if a large house was allowed to be built next door in front of the building line.Practical implications:Each quarter brings its own share of cases on modification of restrictive covenant, and whilst each will turn on its specific facts, developable land – whether for housing estates or individual dwellings – is in shorter supply than the demand for houses, so the issue is bound to crop up time and time again.Remember that whilst a planning permission will go to whether a proposed development is a reasonable use of land, it doesn’t mean that restrictive covenants on the title will necessarily be changed or removed in order to allow that development to go ahead. As we saw last time, in the Alexander Devine case, developers should not press ahead regardless and should ideally bring something to the table to accommodate objecting neighbours. 

Restrictive covenants – land that benefits: Bath Rugby Ltd v Greenwood

Key points:

• Freehold restrictive covenants do what they say on the tin – they restrict the use of one person’s land for the benefit of another person’s land

• Generally speaking, such covenants are binding on and enforceable by the original parties to the deed that created them as a matter of contract

• Where the benefiting land is sold, it becomes necessary to establish whether the benefit of the right to enforce the covenant has passed to the new owner

• For covenants that were imposed prior to 1 January 1926, this means checking the deed that contains them for express words of ‘annexation’ – i.e. attaching the benefit of the covenant to the land – or for other words that infer annexation, and being able to identify the benefiting land

BR wanted to redevelop its home ground, the Rec, by building a new 18,000-capacity stadium, along with riverside regeneration, community use and a car park under a raised pitch. Part of the site was burdened by restrictive covenants prohibiting various business uses, and preventing nuisances or annoyances. The covenants were contained in a conveyance from 1922.G, who was one of eight objectors, owned property near the Rec and sought to enforce the covenants. BR applied for a declaration that the covenants no longer affected the site. The High Court had to consider whether G’s land had the benefit of the covenants and therefore had to establish whether the benefit had been ‘annexed’ to G’s land.There were no express words of annexation in the 1922 conveyance, but other wording used in the deed was sufficient for the Court to infer an intention to benefit the land: for example, the covenant was expressed to be for the benefit of the seller and ‘his successors in title’. The Court also found that the benefited land was sufficiently identified: in this case, the words used to describe the benefiting land were ‘other buildings and land of the vendor and his tenants adjoining or near to’ the land being sold.Practical implications:The practical implications for BR are quite stark: its redevelopment plans have been blocked, and it remains to be seen if there will be an appeal.For covenants that were created after 1 January 1926, in the context of transmission of covenants by annexation, statute comes into play (section 78 of the Law of Property Act 1925 to be precise), provided – again – that the benefiting land is identifiable from the deed that created the covenants. If you think about it, it’s only right that if someone buys burdened land, they should be able to work out who can enforce the covenants against them and potentially thwart plans for development.The case highlights that old covenants can still impact new schemes and the importance of addressing this thorny issue at an early stage.

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LANDLORD AND TENANT ROUND-UP 

Dissolution of companies – disclaimer of lease: Mistral Asset Finance Ltd v Registrar of Companies

Key points:

• When a company is dissolved, any property that the company beneficially owned immediately before the dissolution passes to the Crown (‘bona vacantia’ or ‘ownerless goods’)

• The Crown has power to disclaim title to the property that has become bona vacantia

• If the company is restored to the register, property can revert to the company provided it has not yet been disclaimed by the Crown

• Where the property in question is a lease, that lease can still revert back to the company on restoration, even where the Crown has disclaimed it

MAF had a mortgage over a 999 year lease of some property in Folkestone. The tenant, BCL, was struck off the register of companies on 31 December 2019 and was dissolved on 7 January 2020. BCL’s interest in the lease therefore vested in the Crown as bona vacantia.In March 2020, the Treasury Solicitor, who deals with these matters on behalf of the Crown, filed a notice of disclaimer and served it on MAF on 19 May 2020. MAF then issued proceedings for an order that BCL be restored to the register or, alternatively, for an order that the lease be vested in MAF. By the time of the court hearing, BCL had in fact been restored to the register as a result of an independent application for administrative restoration made by a former director of BCL.The High Court found that the Crown disclaimer had not actually taken effect, because MAF had made its application for a vesting order within 14 days of receiving notice of the disclaimer. This meant that the title to the lease was still with the Crown and therefore revested in BCL, with MAF’s mortgage still intact.Practical implications:Even if the disclaimer had been effective, MAF’s mortgage would have survived. Crown disclaimer terminates the rights, interests and liabilities of the company in the property, but will not affect the rights or liabilities of third parties, such as mortgagees and the Court’s view was that notwithstanding an effective disclaimer, the lease would have revested in BCL on its restoration to the register in any event.An interesting twist would have presented itself if the landlord had re-let the property to a new tenant following the dissolution of BCL. Although not an issue in this particular case, the headaches this would cause for all parties involved make it well worth landlords taking a proactive approach and forfeiting the lease immediately following a dissolution or approaching the Treasury Solicitor to negotiate a surrender of the lease. 

Forfeiture – waiver: Faiz v Burnley Borough Council

Key points:

• Most commercial leases will reserve an express right for the landlord to terminate (or forfeit) the lease for breach or for tenant insolvency

• It can be easy for landlords to ‘waive’ the right to forfeit by acting in a way that suggests the lease is continuing; demanding and accepting rent can be a particular problem

• The statutory process for forfeiting a lease is set out in section 146 of the Law of Property Act 1925

BBC was the landlord of a building from which F operated a café. The lease of the café, which was due to expire on 20 February 2020, contained an absolute covenant against sub-letting and also contained a forfeiture clause.F sublet the premises to a company F owned – this took place sometime between late September and early October 2019. BBC was not aware of the subletting until 18 October 2019, when F sent BBC a copy of the sublease. Prior to this, on 26 September 2019, BBC had issued a demand for insurance rent to cover the period up until the end of the term, which F was due to pay (but didn’t) on 2 October 2019.When BBC found out about the unlawful subletting, it started the statutory process for forfeiting the lease by serving a section 146 notice on F on 30 October 2019. In early November, BBC also recalculated the amount of insurance rent just to cover the period up to 18 October, and issued a revised demand, which F did actually pay.When BBC then tried to forfeit the lease, F argued it had waived its right to do so by demanding and then accepting payment of the insurance rent.The High Court found that BBC had not waived the right to forfeit, so F appealed, but the Court of Appeal took the same view as the High Court.Practical implications:This case was all about the timing of the events: about who knew what, when and what they did next. A landlord will be found to have waived its right to forfeit when it demands or accepts rent after it becomes aware of the breach – here, F had sought to argue that the recalculated insurance rent invoice issued in November amounted to a waiver, as BBC knew about the unlawful subletting at this time. The Courts gave this short shrift – the November rent demand was simply a recalculation of the one the BBC had sent out in late September, well before it knew of the breach.As we are all aware, the current economic situation brought about by the pandemic means more rent than ever remains unpaid and there are ongoing restrictions on landlords in terms of forfeiture, but as and when some normality returns, this decision is a useful one for landlords looking to preserve their options when it comes to tenant breaches.For further advice on forfeiture scenarios, please contact a member of our Property Litigation Team. 

Repair obligations – specific performance: Blue Manchester Ltd v North West Ground Rents Ltd

Key points:

• A tenant has various potential options if its landlord is in breach of its repairing covenants in a lease

• One of those options is to apply to the Court for an order for ‘specific performance’, requiring the landlord to carry out the works in accordance with the terms of the lease

• Specific performance is a discretionary remedy, which is available where monetary damages would not adequately compensate the claimant

In January 2019, NWGR was ordered to carry out repair works to Beetham Tower in Manchester, a 47-storey building housing a Hilton Hotel on the first 23 floors and residential units above. The tower was completed in 2006 and has fully glazed external elevations. The glass panels are a combination of double-glazed units and single-glazed shadow box units (SBUs), attached to a frame by a structural sealant around the edges.BM operates the Hilton Hotel and has a 999-year lease granted for a premium of £60 million, with an annual rent of £20,000. The lease contains a landlord covenant to keep the external façade of the building ‘in good and substantial repair and when necessary as part of repair to reinstate replace and renew where appropriate’.NWGR acquired the freehold reversion of the building in 2010 for £400,000. The main contractor involved in building the tower later discovered the sealed bond was failing in some of the SBUs and BM obtained an order specifying a scheme of works that NWGR was required to carry out by July 2020, although NWGR was able to make an application to vary the scheme of works if it transpired that they were ‘not reasonably practicable other than at disproportionate cost’.NWGR made such an application just before the deadline for completing the works, and asked the Court to vary the order and substitute a different scheme that it claimed would be easier, safer, quicker and cheaper to carry out.BM objected to NWGR’s proposals on the basis that they would change the aesthetic appearance of the building. The Court did not accept NWGR’s contention that the original works had proved to be disproportionately costly, but it did extend the deadline for completion of the works to July 2022.Practical implications:This is a useful example of a tenant successfully claiming specific performance.It is worth noting that the Court had previously made the point that when NWGR bought the freehold reversion as a ground rent investment vehicle, it had taken on the risk of liability for repairing inherent defects or design and construction-related risks as part of the package.The Court also took into account the design intent of the building, as clearly aesthetic considerations were key in relation to this particular building, and accepted the evidence of the joint experts that just because works might be ‘extremely challenging’ this didn’t necessarily make them ‘not reasonably practicable’.For further advice on breach of covenant scenarios, please contact a member of our Property Litigation Team. Our own David Marsden acted for the successful tenant in this case!

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PLANNING POINTS

Affordable housing trigger – wider residential development: PINS: APP/P0240/W/20/3247284

Key points:

• Planning obligations for affordable housing should only be sought for ‘major’ residential development

• Currently, major development is defined as development where 10 or more homes will be provided (although there may be variations in designated rural areas)

• Artificially dividing a site to avoid triggering the threshold isn’t necessarily the answer!

H submitted a planning application for the construction of 10 dwellings at a site that included the appeal site and additional land to the north and east. He later withdrew this application and planning permission was then granted for nine dwellings on the additional land. The Council, Central Bedfordshire, did not seek any affordable housing provision, nor any contribution to local infrastructure, because the proposals fell below the threshold.Four months later, H applied for planning permission to demolish an existing bungalow and build three detached houses on the appeal site. The Council took the view that this was a deliberate attempt on the part of H to divide the sites to avoid triggering the threshold for affordable housing provision and financial contributions. The application was refused because there was no section 106 agreement to cover these.H appealed and the Planning Inspector had to consider whether the second proposal formed part of a larger residential development and, if it did, whether it should make provision for affordable housing and local infrastructure.Ultimately, the Planning Inspector decided to dismiss the appeal because: on the ground, the two sites appeared to be one, with no boundary features dividing the two; the completed development on the appeal site would be dependent on the access and drainage that was being installed as part of the development of the additional land; and the style, design and materials for the houses were the same on both sites.Practical implications:It’s a matter of planning judgment whether a site should be combined with an adjoining development for the purposes of affordable housing provision. Following a case involving Westminster City Council back in 2003, there are three ways in which a conclusion can be reached, based on: whether the sites are in single ownership (they weren’t in this particular case, but the transfer of the additional site had only taken place after the first planning permission had been granted and the second application submitted); whether the sites constitute a single site for planning purposes; and whether the proposed development can be said to constitute a single scheme.You can contact a member of our Planning Team for further advice.

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TAX TIPS

For a summary of the key points from the Budget, delivered by the Chancellor on 3 March, please click here.