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Articles 20th Dec 2022

Tarmac Real Estate Bulletin – Winter 2022

Welcome to the Winter Edition of the Tarmac Real Estate Bulletin.

This quarter, we look at a couple of Landlord and Tenant cases dealing with VAT on break payments and the service of a notice to quit. We also look at recent cases dealing with town or village green registration and conservation covenants and we have included links to Freeths Blog articles looking at the impact of the Hillside Parks planning case.


Landlord & Tenant – VAT on break payment

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 – town or village green registration

A housebuilder applied for judicial review of a decision by a county council to register some land it owned as a town or village green (TVG). It argued that the adopted local plan included a policy statement that identified its land for potential development, and so the right to make an application to register it as a TVG was suspended.

The policy statement at issue related to ‘Green Gaps’ (areas of land outside urban areas which are subject to restraints on development to prevent coalescence between separate settlements). The statement said that development ‘will be permitted’ where it didn’t ‘significantly affect the open character of the Green Gap or lead to coalescence between existing settlements, or result in new isolated and obtrusive development within the Green Gap’.

The housebuilder took this to mean that the land had been identified for development, but the Court of Appeal disagreed. The policy didn’t identify the land for development, it simply set out the circumstances in which it might be permitted.

Practical tips:

  • Practical tip – registration of land as a TVG can have serious consequences for the development of land
  • Practical tip – restrictions on the registration of land as a TVG were brought in in 2013, such that the right to make a TVG application is suspended if certain ‘trigger events’ occur, such as an application for planning permission on the land in question or the allocation of land for potential development in a local or neighbourhood plan
  • Practical tip – how land is allocated for planning purposes could be key when negotiating sales to developers


Local land charges – conservation covenants

A new type of local land charge has been created – the conservation covenant. Conservation covenants are private, voluntary agreements between the freeholder of land and a ‘responsible body’ (such as a local authority or conservation charity) which impose specific conservation obligations in relation to the land. These obligations are binding on future owners, regardless of whether the covenants are positive or negative.

It is anticipated that conservation covenants will play a part in the delivery of biodiversity net gain on new developments (a requirement that comes into effect as a planning condition in November 2023) but other uses might include keeping open land as a nature reserve for public use, preserving land with archaeological interest and protecting wild habitats.

Practical tips:

Practical tip – for further information on conservation covenants and the impact of biodiversity net gain requirements, speak to a member of our Environmental Team.

Articles provided by: Freeths’ Professional Support Lawyers

Freeths Blogs

Please also note the latest developments referred to in the following blogs:

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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