Real Estate Bulletin: Summer 2017

A welcome from the editor….

Welcome to the Summer edition of the Real Estate Bulletin.

This quarter, we revisit a case about business rates that has made its way to the Supreme Court.

We also look at decisions concerning oral contracts, badly drafted option agreements, deliberately-flouted restrictive covenants and a case that answers the burning question “how many gates are too many gates?”

In a Landlord & Tenant context, we look at misrepresentation and non-reliance clauses, side letters and penalties and the judicial asides that continue to cause confusion in relation to whether or not you can assign your lease to your guarantor.

The Bulletin brings together highlights from our popular quarterly update training sessions, so if you are local to the East Midlands or pass through every now and again and would like details of our next event in September, please get in touch.

Case Law Update

Business rates - Refurbishment: Newbigin (Valuation Officer) v S J & JMonkKey points

Where business premises are empty, the rateable value is based on the amount of annual rent reasonably obtainable for the premises

Various assumptions are made, including that the premises are in a reasonable state of repair

However, this may conflict with what is known as the ‘reality principle’, which means that a property is to be valued as it exists on the material day

Practical implications

The Supreme Court made it clear that where a property is undergoing redevelopment and is incapable of being occupied, the assumption of repair does not displace the principle of reality. This is a welcome decision for developers and property owners, especially those whose appeals are awaiting determination pending the decision in this case, or whose cases were decided on the basis of the earlier Court of Appeal ruling. However, do remember that whether a building is undergoing redevelopment or reconstruction or is merely being repaired, is a question of fact in each case. Always consult a rating surveyor to advise in these circumstance

Contracts - formalities: Matchmove Ltd v Dowding and ChurchKey points Contracts for the sale of land must usually comply with certain statutory requirements to be valid

However, where these formalities are not met, a trust can arise if there is an express agreement between two parties about ownership of the land, which one party relies on to its detriment such that it would be unconscionable to deny that party’s ownership of the land

Practical implications

The director of M was a respected business man, who regularly conducted deals ‘on a handshake’ and D and C were not criticised for assuming that the land ‘belonged’ to them, even though the formalities were still outstanding. D and C had incurred considerable expense in clearing and fencing the meadow, erecting a temporary barn for stabling horses and applying for planning permission for a permanent stable. However, it is always best to ensure the paperwork is in place before handing over any cash

Easements - Interference with right of way - Kingsgate Development Projects Ltd v Jordan

Key points Interference with a private right, such as a right of way, gives rises to an action in nuisance In order to take action, the interference must be substantial – this need not amount to a complete inability to use the right but must be more than trivial

Practical implications

If you acquire land that is subject to rights that benefit other properties, you cannot just do what you like with it, even where the property that benefits is unoccupied – in this case, Kingsgate Farm had been an operational poultry farm when the right was originally granted, but had fallen into disuse by the time K purchased it. Easements attach to property, not to owners, so it is important to check the nature and extent of any rights that benefit others before carrying out works to your own land

Option agreement - Validity of option notice - Helix 3D Ltd v Dunedin Industrial Property Nominee Ltd and Another Key points

Option agreements usually contain pre-conditions about the form of option notice, the information it should contain and any payments that need to accompany it

Definitions and the mechanisms for determining the purchase price and for a valid and certain exercise of the option must be clear

Where the wording of an agreement is commercially absurd, the courts will step in to clarify

Practical implications

The wording of the option was particularly badly drafted. Both parties agreed on this point at least - even D’s counsel described the drafting as ‘thoroughly inept’ - and both agreed that further interpretation would be needed in order to make the agreement work.

Although the drafting of such agreements is down to the lawyers, parties need to be clear when negotiating the deal about the mechanism for agreeing the purchase price and the timing of any valuation. The better course here would have been for the valuation exercise to be carried out before the option was exercised.

Remember that the courts won’t interpret an agreement in a particular way just to get a party out of a bad deal, but they will read words in or alter them in order to try and make it make sense

Development - Modification of restrictive covenant - Millgate Developments Ltd v Smith and The Alexander Devine Children’s Cancer Trust Key points

Where land is burdened by restrictive covenants, a landowner can make an application for the covenant to be modified or discharged if certain criteria are satisfied

When considering such an application, the Tribunal will take account of whether the covenant secures practical benefits of substantial value or advantage for the beneficiaries and whether it is contrary to the public interest

The Tribunal will generally be less inclined to modify or discharge where the landowner has deliberately flouted the restrictions, but each case will turn on its facts

Practical implications

Public interest played a key part in the Tribunal’s decision in this case. The Tribunal felt it was not in the public interest for houses that were available to those who may well have been waiting a long time for accommodation to be left empty. This, in conjunction with M’s offer of compensation (which would now have to be paid to the Trust), was sufficient to justify the outcome even though M had deliberately breached the covenant...normally a factor that would count against the applicant!

The decision has been appealed, but will not be heard until Spring 2018, so watch this space.

Landlord & Tenant Round Up Assignment - Guarantors: EMI Group Ltd v O & H Q1 Ltd Key points

The Landlord and Tenant (Covenants) Act 1995 changed the way the liability of landlords and tenants works once a tenant has assigned the lease If the assignment is lawful, the assigning tenant (and any guarantor) is ‘off the hook’, unless it signs up to an authorised guarantee agreement It is not possible to contract out of the 1995 Act, which contains anti-avoidance provisions HMV had a lease of premises, which was guaranteed by EMI. Sadly for those of us old enough to remember the iconic high street brand, HMV went into administration, following which the lease was assigned to EMI. EMI claimed the tenant covenants in the lease were unenforceable against it in light of comments made in a previous case (K/S Victoria) which cast doubt on the possibility of a valid assignment to a guarantor.The court in the EMI case found that the assignment was void, so the lease remained vested in HMV and EMI remained liable as guarantor. The case was due to go to appeal, but the parties have – unhelpfully for us – reached a confidential settlement, so the position remains a muddle.


Practical implications:

There may be commercially sensible reasons for a guarantor wanting to take an assignment of a lease, rather than allowing the tenant to go into liquidation and waiting for the landlord to require the guarantor to take a new lease, not least because there are Stamp Duty Land Tax implications. However, as things stand, such an assignment would be void. This is something to bear in mind when carrying out corporate or portfolio restructuring.Similarly, call options in leases that require a tenant to transfer the lease to the guarantor if called upon to do so by the guarantor to remedy the tenant’s default will be void and guarantors may have to take an overriding lease instead. Again, this may have SDLT implications.As well as causing operational issues for tenants and guarantors, the current state of affairs has implications for buyers looking to purchase investment portfolios. Buyers and their advisors will need to investigate the history of occupational leases to ensure there have been no void assignments in the past that might impact on the value of the asset

Misrepresentation - Non-reliance clause: First Tower Trustees Ltd v CDS (Superstores International) Ltd

Key points

Tenants will rely on information provided during due diligence when entering into a lease

Landlords should provide accurate information and update tenants when they become aware of new facts

Practical implications

Although a sometimes painful exercise, providing replies to enquiries is a key part of most property transactions, not least because the acquiring party will rely on the information put forward and will be entitled to remedies if it is inaccurate. Sellers and landlords should keep replies to enquiries under review until exchange or completion and update buyers and tenants if they become aware of changes to any information provided.

It is usual for contracts to include clauses that attempt to limit the ability of a buyer or tenant to rely on statements made pre-exchange but these must be fair and reasonable in the circumstances. This is a question of fact.

Note that in this case, T also claimed that L was in breach of its covenants for quiet enjoyment and non-derogation from grant, but the Court pointed out that these are only relevant to a landlord’s actions after a lease has been granted, not before

Side letters - Penalties: Vivienne Westwood Ltd v Conduit Street Development Ltd

Key points

The Supreme Court recently changed the test for penalty clauses Penalty clauses will be unenforceable if they impose a detriment on the defaulting party that is out of all proportion to any legitimate interest of the injured party

The courts will look at the effect of the penalty as well as the amount

Practical implications

The Supreme Court ruled on a dispute about a parking overstay penalty recently (see coverage of the Parking eye case in our Winter 2015 Bulletin) and established that penalties should protect the legitimate interest of the injured party. In the Vivienne Westwood case, the detriment to T was out of all proportion to any legitimate interest of L.When negotiating side letters, well-advised landlords should take care to ensure that a tenant’s primary obligation is always to pay the rent reserved by the lease and that the lease is not permanently varied. Landlords should also review any existing side letters, and in particular the termination provisions, to check for enforceability. For tenants, remember that side letters often document a personal concession that will not pass on to benefit an assignee, which is something to bear in mind if you are looking to assign your lease.

Meanwhile, over on th Freeths Real Estate Blog...agile working and crowdfunding, and a guest post from Aberdeen Asset Management on PropTech or join the growing list of subscribers by simply entering your email address on the blog page.

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.