Travis Perkins – Real Estate Bulletin – March 2022

In this bulletin, we spend some time north of the border considering landlord and tenant cases on the enforcement of keep open clauses and on the requirement to pay VAT on break payments. Back in England and Wales, we also look at cases on opposing lease renewals, the enforceability of old restrictive covenants and an unsuccessful challenge to planning changes introduced by the government back in 2020.

• Landlord & Tenant – keep open clauses
• Landlord & Tenant – lease renewals
• Landlord & Tenant – VAT
• Planning – use classes
• Restrictive covenants – benefitting land

 

Landlord & Tenant – keep open clauses

An anchor tenant had a 99 year lease of a retail unit in a shopping centre in Glasgow. The lease in question was granted in 1972 and contained a tenant covenant to keep the store open during normal business hours, and to trade from the store until the end of the term.

The retailer had strategic plans to rationalise its portfolio in the Glasgow area (including closing down this particular store) and, whilst it kept the store open for the sale of food during the initial COVID restrictions, it didn’t fully re-open the store once restrictions started to ease.

The landlord obtained an interim injunction requiring the tenant to re-open the whole of the premises, to keep them open for business during normal business hours and to keep them sufficiently stocked and staffed. In response, the tenant decided to use the unit as an outlet store, selling no food and only limited stock for clearance at reduced prices. It also kept the entrance door into the shopping centre locked, blacked out the windows into the centre and reduced its staffing levels.

The landlord brought the matter back to court claiming that the tenant had breached the injunction and was therefore in contempt of court. The Outer House, Court of Session found that the tenant had breached the order, but was not in contempt of court, as it had taken legal advice before reopening the store as an outlet unit and had not sought to deliberately defy the injunction despite its half-hearted efforts.

Practical tips:

• Practical tip – as we know, the courts in England and Wales have long been reluctant to enforce keep open covenants by way of injunction, partly because it can be difficult to define with precision what must be done to comply – as the fact that there was a second set of proceedings in this case demonstrates
• Practical tip – south of the border, aggrieved landlords who can prove they have suffered loss are awarded damages instead and, as a third set of Scottish proceedings will be needed to determine what compliance by the tenant looks like, it seems unlikely that there will be any change in this approach

 

Landlord & Tenant – lease renewals

A tenant occupied restaurant premises in Exeter under a 25-year lease. The contractual term of the lease had expired on 22 August 2020, but continued by virtue of the Landlord & Tenant Act 1954 (the 1954 Act). The landlord served a notice under section 25 of the 1954 Act seeking to bring the lease to an end with effect from 22 October 2020 and opposed the grant of a new lease, relying on ground 30(1)(g), stating that it intended to use the premises as a bistro.

The matter came before the County Court, where the judge had to consider whether the landlord had the requisite intention – and decided that it did not. The landlord appealed to the High Court, but fared no better there.

Practical tips:

• Practical tip – tenants who have security of tenure are entitled to a new lease at the end of the contractual term
• Practical tip – landlords can refuse to grant a new lease on certain statutory grounds – some are fault-based (such as where there are rent arrears) but others are based on the landlord’s future plans for the property, including an intention to occupy the property for the purpose of its business (or as a residence)
• Practical tip – the landlord’s intention must be firm and settled, must have a reasonable prospect of being achieved and must not be conditional
• Practical tip – when seeking to oppose a lease renewal on the own-occupation ground, landlords need to evidence their intention, by providing things like business plans and financial projections (neither of which the landlord in this case produced)

Landlord & Tenant – VAT

A tenant had a 10-year lease of premises at a rent of £450,000 a year. The landlord had opted to tax the property and the tenant had been paying VAT on the rent and other payments due under the lease.

The lease contained a tenant’s break option, which required a break payment of £112,500 ‘together with any VAT properly due thereon’. The tenant served its notice to terminate and paid £112,500 by BACS transfer to the landlord, but didn’t pay VAT on the break payment.

The landlord alleged the break option had not been validly exercised, as it had not paid the VAT of £22,500 on the break payment and this was properly due following HMRC’s change in policy on termination payments. The tenant argued that as at the break date, no VAT was due on the break payment. The Outer House, Court of Session agreed, on the basis that although HMRC had indicated, in guidance published in September 2020, that it would be changing its policy on termination payments to bring them within the scope of VAT, that guidance was updated in January 2021 to postpone the change in policy to an unspecified future date.

Practical tips:

• Practical tip – VAT is a tax on the supply of goods and services (including, in certain circumstances, the supply of land), but historically, payments made to terminate agreements for the supply of goods or services where generally outside the scope of VAT

• Practical tip – there has been a confusing sequence of announcements from HMRC on the issue of early termination payments, but it has now published updated guidance that will come into effect on 1 April 2022
• Practical tip – the main impact is that fees charged for early termination will be regarded as further consideration for the contracted supply, and will be liable to VAT
• Practical tip – the key question to be answered in determining whether a payment is subject to VAT, is whether that payment is directly linked to a supply – speak to a member of our Tax Team for further advice in the context of break payments

 

Planning – use classes

Back in 2020, a campaign group made an unsuccessful High Court challenge to the Government’s measures introduced to bring flexibility to the planning system by extending permitted development rights and making changes to the Town and Country Planning (Use Classes) Order 1987.

The campaign group applied for judicial review of three statutory instruments implemented to make significant changes to the 1987 Order, and to introduce new permitted development rights for upwards development and for the demolition and replacement of office building with residential ones. The basis of the challenge was that Parliament hadn’t had sufficient time to properly consider the proposed legislation (the statutory instruments were laid before Parliament the day before the summer recess in 2020) and that strategic environmental assessments had not been carried out.

The Court of Appeal has dismissed the campaign group’s appeal, finding that the Secretary of State had not acted unlawfully.

Practical tips:

• Practical tip – the changes introduced by the statutory instruments came into effect (in England only) on 1 September 2020
• Practical tip – however, we have been in a state of limbo whilst the various court hearings have been going on, particularly in the context of drafting leases that use the shorthand of the Use Classes Order to define the permitted use and any changes of use
• Practical tip – read more about the changes to use classes in this article written by our Planning & Environmental Team at the time

 

Restrictive covenants – benefitting land

A rugby club wanted to redevelop its home ground 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 and activities that ‘otherwise prejudicially affect the adjoining premises or the neighbourhood’. The covenants were contained in a conveyance from 1922.

Eight people, who owned property near the ground, objected to the propose development and sought to enforce the covenants. The club applied for a declaration that the covenants no longer affected the site. The High Court found that the covenants remained enforceable by the current owners of various parts of the benefiting land.

Given the impact on the proposed redevelopment, the club appealed to the Court of Appeal, which found that the word ‘neighbourhood’ was not sufficient to identify the land to be benefited and so the covenants couldn’t be enforced by the local residents.

Practical tips:

• Practical tip – the decision provides useful guidance in terms of the passing of the benefit of the right to enforce restrictive covenants, particularly those created before 1 January 1926
• Practical tip – the Law of Property Act 1925 introduced statutory annexation to assist with the passing of the benefit of restrictive covenants created after that date, but the benefiting land must still be ascertainable from the deed that creates the covenants or, potentially, extrinsic evidence
• Practical tip – you can listen to a Tomkins Talks review of this case here.

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