Real Estate Legal Update – Summer 2021
A welcome from the editor…
Welcome to the latest edition of the Real Estate Legal Update.
This quarter, we revisit a number of cases we’ve seen before, including cases about triggers for option notices, the interplay between commercial use of land and use as a town or village green, and reverter of sites. And of course, the Update would not be complete without another case on restrictive covenants!
In the Landlord & Tenant round-up, again we have a case we’ve seen before, on relief from forfeiture and a new case on forfeiture in the context of the very topical – and controversial – permitted development rights that allow conversion from commercial to residential use. The fallout from the COVID restrictions has also started to filter through to the courts, despite the Government’s exhortations that landlords and tenants ‘play nicely’, so we look at a series of cases on the issues that have been litigated so far.
In the Tax Tips, we also look at appeal decisions for two unlucky taxpayers (spoiler alert!)
CASE LAW UPDATE
Development – trigger for option to purchase: Fishbourne Developments Ltd v Stephens
- An option is a right to buy or sell land for a fixed price or at a price to be ascertained by an agreed calculation method
- Option agreements often provide that the right to buy or sell is ‘triggered’ by a specified event, such as obtaining planning permission
- It’s important to be clear and precise when defining trigger events
In the first of the cases we are revisiting in this bulletin, the Court of Appeal considered the wording of an option agreement for the purchase of 117 acres of farmland. The buyer’s (FDL’s) ability to exercise the option was triggered by the grant of planning permission permitting “any development” of the property.
FDL obtained planning permission for minimal development of one building on the farm, which it never intended to implement and which it let expire. However, FDL argued that the grant of planning consent enabled it to exercise its option to buy the farmland from S and, under other provisions in the agreement, at a discount from its market value.
The High Court found in favour of S, and FDL appealed. This appeal was dismissed. The Court of Appeal said it was contrary to commercial common sense to allow any planning permission for any development to trigger the option, and in the context of the facts of the case, ‘development’ had to mean something that would enhance the value of the property.
It is important that documents reflect the intentions of the parties, particularly when negotiating and drafting option agreements that may have a life span of many years. This becomes even more critical when a buyer is given the option to acquire land in parts – consideration should be given to how a site is divided up, whether there is a maximum area and whether the seller could potentially be left with land that it cannot make use of.
Restrictive covenants – ‘practical benefits’: Re Copleston’s Application
- Where land is burdened by restrictive covenants affecting its use, the owner 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, amongst other things, the covenant secures ‘any practical benefit of substantial value or advantage’ to the benefiting owner
C owned a semi-detached house (Gorsebrook) and had planning permission to build a new house in the garden. The land was subject to a restrictive covenant, imposed in 1960, preventing the construction of any buildings ‘other than a garden shed summerhouse conservatory greenhouse or private garage’.
H owned a substantial property over the road and the restrictive covenant benefited H’s property, albeit just the gardens and grounds, not the house itself. When C applied to have the covenant modified, H objected because of the impact the development would have on their enjoyment of their house (i.e. a loss of privacy) rather than their enjoyment of the garden and grounds.
C’s application was unsuccessful; although the restrictive covenant did not benefit all of H’s property, H had bought the house and garden as a single property and had occupied it as such, so, in this particular case, it was appropriate to consider it as a whole and not make a technical distinction between the parts that benefited and the parts that did not.
The practical benefits that could be protected by a restrictive covenant should be given a wide interpretation and there is nothing in the relevant statutory provision limiting those practical benefits to the benefited land. Although ownership of some benefitting land is necessary, the statute refers to ‘persons’ benefitting from the restriction, not specifically to their land.
As we’ve seen before, developers or enterprising homeowners should not press ahead regardless and should open a dialogue, at an early stage, with neighbours who have the benefit of restrictions. In this case, C has gone to the effort and expense of obtaining planning permission for a house they cannot build!
Each quarter brings its own share of cases on modification of restrictive covenants, 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.
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 heirs)
- The School Sites Act 1841 is the relevant Act in this particular case
- That Act says 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 appeal case, this time one that has gone all the way to the Supreme Court.
Land had been conveyed in 1914 for the purposes of providing a school in Oxfordshire. In the early 2000s, OCC decided to build a new school on a neighbouring site that it already owned. OCC stopped using the original site in February 2006 and relocated the pupils to the new school. It sold the original site a year and a half later, in September 2007.
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 building the new school on its neighbouring site.
The High Court agreed with OCC; even though the original site was not being actively used, the fact that it was to be sold and the proceeds 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 in the Court of Appeal, which found that given the time that had elapsed between closing down the original school and selling the land, 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.
OCC then appealed to the Supreme Court (there was over £1.26m at stake), which took a ‘purposive’ approach: the original site did not cease to be used as a school, because OCC intended throughout to use the sale proceeds for the benefit of the new school.
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, but there is no immediate exchange of land or there will be a delay in the sale of the original site, it is important to evidence the intention to use the sale proceeds to meet the costs of buying or improving the new site.
In 1987, the Reverter of Sites Act abolished the concept of ownership of the site reverting to the original grantor or their heirs and substituted what is now a trust of land, meaning that the sale proceeds are held on trust for the grantor/heirs. In order to 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 – ‘give and take’: TW Logistics Ltd v Essex County Council & Tucker
- Registration of land as a town or village green (TVG) means the landowner’s ability to develop the land is severely restricted
- This doesn’t mean a landowner cannot continue to use the land for its commercial activities, provided this is not incompatible with the public’s recreational use
Another case we’ve seen before, and another one that has gone all the way to the Supreme Court! Readers may recall that TWL owned and operated two quays in the port of Mistley in Essex and had fenced off an area of the quayside because the Health & Safety Executive had raised concerns about employees and others falling into the water (the area in question was used as part of TWL’s operations, but also by local residents for recreational purposes).
An area of land, including the quayside, was later registered as a TVG, and TWL applied for de-registration on the basis that it was impossible for two different uses (i.e. commercial and recreational) to co-exist, either practically or legally. Unfortunately for TWL, none of the courts agreed, and the Supreme Court confirmed the previous decisions finding the quayside had been properly registered as a TVG.
To address the issue of seemingly conflicting uses of land, the Supreme Court highlighted the principle of ‘give and take’ on both sides – so, a landowner can continue to undertake activities of the same general quality as before registration, and can also undertake new or different ones, provided they do not interfere with the recreational use of the land by the public.
We usually see TVG cases in the context of the problems they can present developers looking to develop land over which local residents have acquired rights, so it is interesting to look at how the same issue impacts on landowners carrying on existing commercial operations.
LANDLORD AND TENANT ROUND-UP
Relief from forfeiture – delay: Keshwala & Another v Bhalsod & Another
- Leases usually contain a right for the landlord to terminate (forfeit) if the tenant breaches its obligations
- Landlords can forfeit by ‘peaceable re-entry’ or by issuing court proceedings (subject to any restrictions in the Coronavirus Act 2020)
- Relief from forfeiture is an equitable remedy, available to tenants (and third parties with an interest in the property) at the court’s discretion
- Where a lease has been forfeited by peaceable re-entry, a tenant should make any application for relief in a timely fashion and within the required timescale for the relevant court
The facts of this case are summarised in our Winter 2020 Update, but in short, a landlord (B) forfeited tenant K’s lease and K belatedly applied for relief from forfeiture. K was successful on appeal to the High Court, which granted relief, but the Court of Appeal has overturned that decision and has found for B.
As we said last time, the case serves as a useful reminder for tenants to act in a timely fashion when it comes to applying for relief. The fact that there is a time limit doesn’t mean you should wait until the eleventh hour to make an application – indeed, as relief is discretionary, the courts may well look more favourably on a tenant where they have forewarned their landlord that an application will be made and have provided a plausible explanation for the delay.
Forfeiture – change of use under permitted development rights: Zash Properties Ltd v Landau Medical Consultancy Ltd
- There is a different forfeiture process where a property is used for residential, rather than commercial, purposes
- The courts will look at the nature of the premises and the use permitted under the terms of the lease as at the date the lease was granted, in determining whether a property is residential or commercial and which process applies
- Permitted development rights allow development works to be carried out without the need for planning permission
ZPL owned a three-storey building in London. The top two floors were flats and the ground floor was a shop, which was let on a 999 year lease. The lease prohibited the tenant from using the premises for anything other than a shop without the landlord’s consent, such consent not to be unreasonably withheld.
Despite this, the tenant at the time converted the shop into two flats without consent, and sold them on long sub-leases for a substantial amount of money.
ZPL served a notice (under section 146 of the Law of Property Act 1925) to forfeit the lease and then issued forfeiture proceedings. The lease was quickly assigned, first to a third party, then to LMCL.
At the court hearing, LMCL claimed it was unaware of the forfeiture proceedings, but defended them on the basis that the premises were residential by the time ZPL served its section 146 notice, so ZPL had not followed the correct process and the notice was invalid. LMCL also applied for relief from forfeiture on the basis that the landlord’s consent to the change of use couldn’t be unreasonably withheld, arguing it was entitled to relief on condition that it paid ZPL compensation and was allowed to retain the use as flats.
The County Court found for the landlord on both counts; the residential forfeiture process was not applicable for various reasons, including that the lease was not a lease of a dwelling, but a lease of a shop and the flats were not occupied at the time ZPL served its notice. The Court also found that LMCL would be entitled to relief on condition that the premises were reinstated to shop use, as well as payment of compensation and costs.
Had the ground floor been allowed to stay as residential use, it would have had significant implications for the landlord in light of various statutory rights and protections that are afforded to residential tenants under long leases, including the right to purchase the freehold.
Although only a County Court decision, the case is a useful reminder for landlords to actively monitor their portfolios and how properties are being used. Permitted development rights are topical and controversial, particularly because they’ve recently been extended to allow changes from commercial, business or service purposes to use as dwelling houses. However, tenants should not overlook their contractual obligations in their leases, even where development or change of use is permitted for planning purposes.
COVID-19 – rent arrears: Commerz Real Investmentgesellschaft mbh v TFS Stores Ltd
- During the pandemic, the Government has introduced, and extended, a series of laws to protect commercial tenants suffering loss of business as a result of lockdown
- There are still some remedies open to landlords
- The message from Government is very much that tenants who can pay their rent, should pay their rent!
TFS was the tenant of retail premises in the Westfield Shopping Centre, London. It had not paid rent and service charge (totalling over £166,000) during the period of lockdown when it was not able to trade due to various extensions of the Coronavirus Regulations.
CRIM issued proceedings to recover the sum, with interest, and TFS put forward a number of defences, none of which were successful. TFS claimed:
- CRIM had not followed the Government’s Code of Practice for commercial property relationships during the COVID-19 pandemic – this didn’t work because the Code is voluntary and does not alter the contractual obligations between landlords and tenants;
- CRIM was exploiting what it called a ‘loophole’ in the Coronavirus Act that imposed restrictions on certain landlord remedies – this didn’t work because there was no loophole. In fact, the ability to sue for rent arrears has remained one of the few remedies still available to landlords during the pandemic;
- CRIM was obliged to insure against loss of rent arising from a notifiable disease and therefore, the rent suspension clause in the lease would kick in – this didn’t work because the lease contained what we used to think of as the ‘usual’ (pre-pandemic) insurance and rent suspension clauses, which covered physical damage caused by an insured risk.
CRIM was awarded summary judgment.
A further case was heard in the High Court a week after the TFS decision; three tenants, all household names (Cineworld, Mecca Bingo and Sports Direct) ran similar arguments and were similarly unsuccessful. There is no legal justification for commercial tenants to withhold rent as a result of COVID-19 closures and the courts will not look to re-write leases that were entered into at a time when a pandemic of such proportions as we’ve experienced over the last 18 months was not even envisaged.
In June, following a call for evidence on commercial rents and COVID-19, the Government announced a series of measures to help businesses most in need in England. These included the extension of restrictions on forfeiture and Commercial Rent Arrears Recovery to 25 March 2022. They also include a proposal to ring-fence COVID-related arrears where tenants were obliged to close their premises, with a view to there being legally binding arbitration to set agreements between landlords and tenants as to how these will be dealt with. Further legislation is needed, so it’s a case of watch this space for the detail, but you can read the responses to the call for evidence and the Government analysis here.
We look now at three cases relating to COVID-19 in the context of lease renewals:
WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellsschaft mbh
In March 2018, WSRHL served a notice under section 26 of the Landlord and Tenant Act 1954 to renew its lease of premises at the Westfield Centre in Shepherd’s Bush. It operated a large store from the Centre, part of which was a post office (and therefore classed as essential retail and not affected by lockdown restrictions).
The parties had agreed most of the terms for the renewal lease, including the principle that it should contain a pandemic rent suspension clause. However, the parties couldn’t agree on what the trigger for the rent suspension should be, nor could they agree on the amount of rent to be payable under the new lease.
In relation to the rent suspension clause, the County Court found that the trigger should be the closure of non-essential retailers (CRIM had argued for rent suspension only if WSRHL was required to close, but the judge pointed out, given the presence of the post office, which is classed as essential retail, the rent suspension would never kick in).
In relation to the rent, the argument had been around whether there should be an uplift to take account of the benefit of the rent suspension clause. Here, the judge found an uplift was not appropriate as the market already priced this in.
Click to listen to Tomkins Talks coverage of this case.
This is the first published court judgment of a lease renewal looking at the question of ‘pandemic clauses’ and the impact of COVID-19 on rent levels and is particularly useful for tenants, although it’s only a County Court decision. However, it’s already been referred to in the next case we are going to look at.
Poundland Ltd v Toplain Ltd
Again, the parties in this case had agreed most of the terms for a renewal of PL’s lease of premises in Twickenham, and again, one of the sticking points was the inclusion of ‘pandemic clauses’.
PL wanted a clause which would reduce the rent and service charge payable by 50% in the event of a Government-imposed lockdown. Its position was that this would ‘modernise’ the lease in light of the lockdowns experienced during the current pandemic. It also referred to the WH Smith case in support of its argument.
However, the County Court saw a distinction with the WH Smith case, as in WH Smith, the parties had already agreed to an inclusion of a pandemic clause, they just couldn’t agree on the trigger.
There is some scope for ‘modernising’ a lease on renewal, in accordance with the long-established authority set out in the case of O’May v City of London Real Property Co Ltd in 1983, but the party seeking to depart from the terms of the previous lease must show that any changes are fair and reasonable in the circumstances. In this case, the judge decided the inclusion of the pandemic clause would not be.
Click here to find out what Tomkins Talks has got to say about this case too.
S Franses Ltd v The Cavendish Hotel (London) Ltd
After protracted court proceedings that ended up in the Supreme Court in 2018, SFL established its right to a new tenancy of its premises in Jermyn Street, London, which it had occupied under two leases. The parties then agreed renewal terms, save for the rent payable under the new lease and the interim rent (i.e. the rent payable when a tenancy comes to its contractual termination date but is continued under the security of tenure provisions of the Landlord and Tenant Act 1954). Interim rent was payable by SFL from January 2016.
In relation to the rent under the renewal lease, the County Court held that this should be reduced from £220,000 (the passing rent under the previous lease) to £102,000 per year. The valuation was approached using traditional zoning methodology, rather than assuming any particular percentage reduction in value attributable to COVID-19.
The interim rent was set at £160,000 per year, which took account of 3½ years when rents were close to their market peak and also the impact of COVID in the period since March 2020.
Although all of these cases are at County Court level, and therefore not binding, they give an idea of how the courts are starting to approach the issues arising out of the pandemic situation and their attempts to find a balance between the parties following an unprecedented period in modern times.
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 that forms part of the gardens and grounds of a dwelling, even if that land is not actively used as such
Readers may recall from our Winter 2019/20 update that H bought a farmhouse with 3.5 acres of land, some of which was physically separate from the farmhouse, for a price of £1.515 million. On completion of the purchase, H paid SDLT at residential rates on the whole of the property but later claimed a tax refund of just under £35,000, having been advised the transaction should’ve been treated as ‘mixed use’, therefore benefiting from the lower commercial rate of SDLT.
HMRC refused to pay the refund, arguing the whole of the land was residential. The First Tier Tribunal agreed with HMRC’s position and on appeal, the Upper Tribunal has upheld this decision.
There can be significant advantages in land being classed as non-residential from an SDLT perspective, but there is no wording in the relevant legislation that imposes a requirement that land can only be part of the ‘garden or grounds’ of a dwelling if it is needed for the reasonable enjoyment of that dwelling. H’s argument was that certain parts of the land were not integral parts of the house and garden, but courts and tribunals will look to give words their ordinary meaning.
Contact a member of our Tax Team for further advice.
Annual Tax on Enveloped Dwellings (ATED) – relief: Hopscotch Ltd v HMRC
- 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”
This is another tax case we have seen before, this one in Autumn 2019. Here, HL bought a residential property for £1.25m as an investment. After an unsuccessful attempt to market it for £13.5m in 2011, HL carried out redevelopment works between April 2016 and September 2017 to make the property more saleable.
HL had submitted ATED returns for the first three years after the tax was introduced, but for the chargeable periods commencing April 2016 and 2017, when the works were being done, 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 and so, recently, has the Upper Tribunal.
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. Where the development in question is a one-off in relation to a property asset held on capital account, which does not relate to a trade that the owner otherwise carries on, no relief is available.
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, although the annual charge starts at £3,700 and goes up to £237,400 for properties worth over £20m. Companies holding such property can contact a member of our Tax Team for further advice on their ongoing filing and payment obligations.
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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