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Articles 6th Dec 2022

Travis Perkins – Real Estate Bulletin – December 2022

In this bulletin, we look at landlord and tenant cases covering the importance of paying any VAT due on break payments and of serving notices on the correct tenant. We also look at a case on the ability to claim for repair costs under a collateral warranty.

Landlord & Tenant – VAT on break payment

As highlighted in our March bulletin, 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 the tenant 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.

The landlord appealed, and the Inner House, Court of Session overturned the original decision and found that the tenant’s break was not valid.

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 – 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 – in relation to break payments under leases, if a landlord has opted to tax the property and the lease requires a tenant to pay VAT on lease sums, VAT is payable on break payments


Landlord & Tenant – service of notice to quit

A tenant had an oral tenancy of farmland; after the lease had been running for some time, the tenant incorporated a company of which he was the sole shareholder and director; the company’s registered office was the tenant’s home address. The tenant then assigned the lease from himself to his company.

The landlord, who did not know about the assignment, served a notice to quit on the individual, which was delivered by hand to his home address. The company argued the notice was invalid, as it was addressed and given to the individual, not to the company.

The High Court found against the company, taking the view that a reasonable recipient would have understood the notice to have been addressed to the company, but the Court of Appeal has overturned the decision. Service of a notice on the correct tenant is a formal condition that must be complied with for the notice to be valid.

Practical tips:

  • Practical tip – where a notice does not comply with formal requirements, it will not be valid even if a reasonable recipient may have been aware of the error and understood the correct intention
  • Practical tip – an otherwise defective notice can sometimes be saved if there are typographical errors, as these are requirements to impart information rather than formal conditions, but it’s best to get them right in the first place
  • Practical tip – most commercial leases require the tenant to obtain the landlord’s consent before assigning, so it should be harder for landlords to get it wrong but it’s important for both parties to ensure notices are correctly served


Development – collateral warranties

A contractor gave a collateral warranty to a funder in relation to works carried out to convert a 1970s office building into apartments and commercial units. The warranty was assignable and included a provision that the contractor agreed not to argue that any assignee would be precluded or prevented from recovering any loss or damage resulting from any breach by the contractor.

The benefit of the warranty was ultimately assigned to a management company, established to acquire and hold a long lease of the property and provide management and maintenance services in the usual way.

The management company became aware of defects in the cladding, which needed replacing, and sought to recover the cost from the contractor under the warranty. The contractor argued the damage was too remote – the warranty had originally been given to a funder and the only losses recoverable under it were those which might foreseeably be suffered by someone in the position of a funder (so diminution in the value of the security in the property, rather than the cost of repairs).

The management company was successful in getting that part of the contractor’s defence struck out, and we may see a settlement ahead of a full trial.

Practical tips:

  • Practical tip – the benefit of a collateral warranty is often assignable, sometimes for a specified number of times and with the contractor’s consent; usually notice of assignment must be given to the warrantor
  • Practical tip – sometimes assignment can mean that the loss contemplated is in fact too remote, and it is important to check the wording of any warranties you have the benefit of when seeking to rely on them
  • Practical tip – for further advice, contact a member of our Construction team.

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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