26/11/2021

Real Estate Legal Update - Autumn 2021

Author

Heloise Horton

Managing Associate, Knowledge Management Lawyer

A welcome from the editor…

Welcome to the latest edition of the Real Estate Legal Update. This quarter, we look at a series of cases on the feudal doctrine of escheat, which, much like buses have come along three at once. And of course, we have the obligatory case on restrictive covenants – this time looking at what compensation is available to a beneficiary if a covenant is discharged. In the Landlord and Tenant round-up, we look at the Court of Appeal’s interpretation of ‘vacant possession’ in the context of a tenant’s break right; the nature of an implied periodic tenancy and some unfortunate drafting in an index-linked rent review clause that might have had eye-watering consequences for the tenant. In the Planning Points, we look at immunity from enforcement proceedings where there has been a breach of a planning condition on part of a site and for Tax Tips, we look at when a property stops being residential and becomes mixed use for SDLT purposes. We also pick out some recent highlights from our Real Estate blog.

CASE LAW UPDATE

Escheat – foreign companies: Lizzium Ltd v The Crown Estate Commissioners

Key points:

Escheat arises in relation to freehold land that doesn’t have a traceable owner
A common situation is where freehold land vests in the Crown as ‘bona vacantia’ when a company is dissolved, and the Crown then disclaims the interest
This terminates the dissolved company’s rights, interests and liabilities in relation to the land
Companies can be restored and land can be re-vested

A company (C), registered in Gibraltar, was the owner of two freehold properties in Cambridgeshire – a larger property known as the Towers, and a bungalow that was formerly the gatehouse. In 1997, a corporate restructuring took place and C transferred the Towers to Jersey-registered LL. The intention had been to transfer the bungalow as well, but due to an administrative error, this didn’t in fact happen. In 1998, C was dissolved and was struck off the Register of Companies in Gibraltar. As C was still the owner of the bungalow at this point, the bungalow escheated to the Crown. It wasn’t until LL tried to sell the Towers and the bungalow, which LL had treated as a single title, in 2015, that the issue came to light. In 2020, C was restored to the Register of Companies in Gibraltar and LL sought a vesting order to vest the legal estate to the bungalow in it. The High Court refused to grant the order in favour of LL, although it would have been willing to exercise its discretion to vest the property back in C. LL was arguing that it was entitled to the estate had it continued to exist, because the bungalow was intended to have been transferred by C to LL in 1997. The Court felt that this was not sufficient – LL had no legal or enforceable entitlement to the bungalow.

Practical implications:

Dissolved companies registered in England and Wales can be restored to the register. Where this happens, the company is deemed to have continued in existence as if it had never been dissolved and any property that had become bona vacantia automatically re-vests in the company (assuming the Crown has not disposed of it in the meantime). Companies registered overseas can also be restored, but this does not have the same effect of automatically re-vesting property in the company. LL had therefore used a different method in an attempt to get the bungalow vested in it, but didn’t have sufficient standing.

Escheat – easements: Pall Mall 3 Ltd v Network Rail and Another

Key points:

Escheat has the effect of extinguishing or terminating a freehold estate
A recent case looks at what happens to easements that benefitted land before the land escheated to the Crown and whether they survive when a new freehold is created and sold to a buyer

A company (NCNA) owned some freehold land near Hackney Wick Station in London (the Site). NCNA became insolvent in 2016. The liquidator disclaimed the freehold, so the freehold estate vested in the Crown as bona vacantia. The Crown later disclaimed the freehold, so the Site escheated to the Crown.In 2019, the Crown sold the Site to PM3 – a new freehold estate was conveyed because the old one had been extinguished by the escheat. NR owned Hackney Wick Station, under which there were drains serving the Site. The Site had benefited from a drainage easement, but NR had carried out works to the station which rendered the drain inoperable.PM3 claimed that the easement had benefited NCNA’s former freehold estate and therefore, the Crown’s transfer of the Site to PM3 also included the benefit of that right. The High Court agreed.

Practical implications:

Easements benefit the physical land itself and do not depend on the continued existence of the benefiting legal estate in the land. This makes sense when you think about it – if land had the benefit of easements before escheat, it’s highly likely any new owner would want the same easements in order to fully enjoy and use the land once it has been transferred.Escheat is a feudal doctrine and modern commentators question whether it should still be relevant today. Periodically, the Law Commission suggests this area of law should be reformed, but we are where we are for now. One thing that may change, however, is the Land Registry’s practice of making a note on the title of ‘new’ freeholds that the benefit of any easements is subject to the possible effects of escheat, now that the courts have clarified the position.

Escheat – actual occupation: Rock Ferry Waterfront Trust and Another v Pennistone Holdings Ltd

Key points:

When land is transferred between parties, the seller retains the legal title until the transfer is registered at the Land Registry
Pending registration, a buyer has only a beneficial or equitable interest in the land
Where an offshore company that owns land in England and Wales is dissolved, the land escheats directly to the Crown, without the need for disclaimer

A company (TL) owned a large area of land in Birkenhead, part of which had been an oil storage facility. TL was incorporated in the Isle of Man and was associated with an individual (DM). In 2015, TL transferred the land to PHL (a company registered in England and Wales, and controlled by DM) for £2,750.DM decided that PHL would not register the 2015 transfer at the Land Registry, as he did not want his association with the land to be a matter of public record, as there were extensive environmental liabilities. This meant the legal title remained with TL, which was dissolved in 2016 and so escheated to the Crown. In 2019, the Crown transferred the land (or rather, as we saw in the case above, conveyed a new freehold title) to RFWT for £5,000. This transfer was registered. PHL then claimed it had an equitable interest as a result of the 2015 transfer, which was binding on RFWT as PHL was in ‘actual occupation’ of the land and was entitled to be registered as the owner of the land. Unfortunately, PHL’s definition of ‘actual occupation’ fell far short of what both the High Court and the Court of Appeal were looking for, consisting, as it did, of an unpaid caretaker purportedly looking after the land for a small number of days a week with no discernible evidence of occupation. The only items on the site were a digger and a couple of shipping containers, and even then, there was nothing to indicate that these belonged to PHL.

Practical implications:

In this case, the point about escheat was really secondary to the issue of actual occupation. It is possible for an entity to occupy land through an agent or representative, such as a caretaker or guardian, but the extent of that person’s occupation still has to be examined. The courts will look at what functions that person carries out and whether that amounts to occupation. A regular physical presence, with some indication of who the caretaker was working for might’ve helped PHL in this case.

Restrictive covenants – compensation: Father’s Field Developments Ltd v Namulas Pension Trustees Ltd

Key points:

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

In 2001, NPTL sold a golf course to FFDL. In the transfer, FFDL covenanted that, for a period of 30 years, it would not carry out any residential development without first obtaining NPTL’s written consent and would not sell any part of the burdened land without obtaining a deed of covenant from any buyer that it would comply with the same covenant. The transfer also provided that FFDL did not need NPTL’s consent to residential development that was built for occupation by FFDL or members of the families of the owners of FFDL, or by someone employed at the property. There was a separate obligation on FFDL not to allow residential occupation by anyone other than these categories of people. FFDL obtained planning permission in 2019 for the construction of two houses. At the hearing, it was indicated that one of these houses would be occupied by the owner of FFDL and the other by her granddaughter. Under the terms of the 2001 transfer, NPTL’s consent wasn’t required but FFDL applied for the covenants to be extinguished permanently, so that other people could live in the houses before the expiry of the 30 year period. The basis of the application was that the covenants impeded a reasonable user of the land and secured no practical benefits of substantial advantage or value to NPTL. NPTL had not retained any benefiting land when it originally sold the golf course to FFDL, so its interest was purely financial. It was happy that the covenants be removed, but wanted financial compensation in the form of a share of the development value of the land. The Upper Tribunal discharged the covenants and declined to award any compensation to NPTL.

Practical implications:

It is well-recognised that the right to demand a payment or a share of development value for the release of a covenant is not a ‘practical benefit’ for the purposes of section 84. The Upper Tribunal offered advice – too late for NPTL in this case, but a useful reminder to us all generally – that the appropriate way to secure a negotiated share of the development value is by way of an overage covenant.

LANDLORD AND TENANT ROUND-UP

Break right – vacant possession: Capitol Park Leeds Ltd v Global Radio Services

Key points:

A tenant’s break right in a lease may be conditional on the tenant giving vacant possession of the demised premises
‘Vacant possession’ in this context is very much tied to the way the lease defines the demised premises
Usually, a dispute arises if the tenant leaves things behind, but a recent case considers the position where the tenant has taken away too much
Failure to comply with any conditions on break can mean the break is ineffective and the tenant is stuck with the lease until the next break opportunity or the end of the term

We first looked at this case back in Winter 2020. GRS had a lease of commercial premises in Leeds, which was due to expire in 2025. GRS had the right to break the lease in November 2017, subject to giving vacant possession of the premises. The lease defined the premises as including the original building on the site, any landlord’s fixtures and fittings and all additions and improvements to the premises.GRS served its break notice and started stripping out the premises to try and avoid or minimise liability for terminal dilapidations. GRS removed significant elements of the property, including landlord’s fixtures, such as ceiling tiles, flooring, lighting and radiators. GRS had intended to replace some of the items, but ultimately did not do so. When it came to the crunch, CPLL argued that GRS had not given vacant possession of the ‘premises’ because it had handed back “an empty shell of a building which was dysfunctional and unoccupiable”. The High Court agreed, but GRS appealed and was successful.

Practical implications:

The Court of Appeal’s judgment has provided clarity in relation to interpreting vacant possession conditions, confining it to returning premises free of “the trilogy of people, chattels and interests” rather than relating it to the physical condition of the premises. Whilst current market practice is to limit the conditions on a tenant’s right to break, particularly around vacant possession, if a lease does require this, tenants have to look carefully at the wording of the lease and how the break provision interacts with other clauses in the lease on repair and yield up.For a short multi-media summary of this case, listen to Tomkins Talks presented by our Head of Property Litigation, Paul Tomkins.

Implied tenancy – basis of occupation: Smoke Club Ltd and Others v Network Rail Infrastructure Ltd

Key points:

Where an ‘acquiring authority’ implements a Compulsory Purchase Order, all parties who have an interest in the affected land are entitled to claim for compensation
This can include parties with a leasehold interest, but will depend on the nature of that interest
It is a question of fact in each case whether a periodic tenancy has arisen and the courts will apply an objective test when considering the contractual intentions of the parties

In late 2008/early 2009, SCL moved into premises comprising arches beneath London Bridge railway station. No lease or licence was formally granted, but SCL took occupation on the back of discussions with NR (the freeholder) and TL (the then tenant of the premises) believing a binding agreement had been concluded that it would be granted a 20-year lease at a rent not exceeding £50,000 per year. SCL spent between £1.2M and £1.5M fitting out and improving the premises, and opened a nightclub in May 2009.In 2013, NR exercised its powers of compulsory purchase and took possession of the premises as part of its Thames Link project. A dispute arose about the extent to which SCL had a compensable interest in the premises at the time they were compulsorily acquired.SCL, which went into administration in 2016, and its creditors, argued they were entitled to compensation because SCL had acquired a 20-year lease of the premises under the doctrine of proprietary estoppel or constructive trust, or that it had acquired an annual periodic tenancy which had protections under the Landlord and Tenant Act 1954. NR’s position was that SCL was simply occupying as a tenant at will during negotiations for a lease that never completed.The Upper Tribunal found that SCL had an annual periodic tenancy as at the date NR took possession of the premises, and would therefore be entitled to compensation.

Practical implications:

Typically, tenancies at will arise where a tenant occupies premises during the negotiations for a formal lease. This could be to accommodate fitting out works (which are done entirely at the risk of the ‘tenant’) or where a tenant remains in occupation after a tenancy, which doesn’t have security of tenure, comes to an end. However, it’s important for both parties to document the basis of occupation so everyone is clear about the nature of the interest, if any, the tenant has in the premises and about the rights and obligations that apply.

Rent review – indexation: Monsolar IQ Ltd v Woden Park Ltd

Key points:

Courts will not re-write a contract to enable a party to get out of a bad bargain
However, if the contract clearly contains a drafting mistake that has an irrational and absurd result that the parties couldn’t have intended, and it is clear how the mistake ought to be corrected, the Court may correct the drafting
Index-linked rent reviews can be complex and often subject to misunderstandings by the parties as to their operation and outcome

MIL had a lease of a solar farm. The lease term was 25 years and six months, and MIL had a break option, exercisable on six months’ notice. The starting rent of £15,000 was subject to annual review and the lease set out the rent review formula, calculated by reference to the Retail Prices Index.The formula was expressed in such a way that, during the term, cumulative annual inflation increases would come into the calculation. Based on an assumed average RPI increase over the 25-year term, MIL calculated the rent would increase from £15,000 to £76 million, rather than the c£30,000 with non-cumulative RPI increases! MIL issued proceedings for the proper interpretation of the rent review clause, claiming that the formula should be read so that the rent was indexed in line with RPI and so correcting, by construction, a clear mistake in the drafting. Unsurprisingly, WPL didn’t see a problem with the way the formula was worded, arguing there was no mistake in the drafting and that MIL had a break right, which it could exercise if it felt the clause to be unfair.The High Court agreed with MIL, taking the view that “something had gone wrong” with the drafting, and the lease was to be read so as to remove its arbitrary and irrational effects. The Court of Appeal dismissed WPL’s appeal.

Practical implications:

The lease in this case was not drafted by a solicitor – one of WPL’s directors produced the draft based on a document he had found on the internet – and was not reviewed by a solicitor on behalf of MIL, as, when the lease was completed, WPL and MIL had a common sole director and the lease was part of a package to enable a sale of a wider development project. Whilst the parties don’t get involved in the actual lease drafting, it is helpful for all concerned if leases that provide for index-linked rent reviews contain worked examples. This should tease out any mistakes in the drafting, but will also illustrate to the parties how the rent might increase over the term of the lease, based on assumed index figures.

PLANNING POINTS

Planning conditions – partial breach: Royale Parks Ltd v Secretary of State for Housing, Communities and Local Government

Key points:

Unlawful development can become immune from enforcement action if the local planning authority (LPA) doesn’t act within the statutory time limit
In relation to a breach of planning condition, the time limit is 10 years
The courts will interpret enforcement provisions so as to produce a result that is desirable in a planning context

RPL owned a 15-unit caravan site in Christchurch. Use of the site was restricted, by a condition attached to a planning permission, to holiday use only, so full-time residential use was prohibited. Four of the caravans had been used for permanent residential accommodation for over 10 years. Initially, the LPA issued enforcement notices, but these four particular units had become immune from action and the LPA ultimately issued a ‘lawful development certificate’ (LDC) for those units plus a small area of curtilage around each one.RPL later applied for an LDC for the remainder of the site, so effectively it wanted confirmation that the whole site could be used for permanent residential occupation. Its argument was that use of the four caravans for residential purposes had already breached the planning condition and had therefore accrued immunity from enforcement for the site as a whole.The Planning Inspector did not go for this argument, concluding that the ‘planning unit’ was the whole of the site and the fact that part of the site had been used in breach of planning condition didn’t mean the conditions didn’t apply to the rest of the site.RPL applied to the Court of Appeal to quash the Planning Inspector’s decision, but was unsuccessful.

Practical implications:

Whether a breach of a planning condition applies to the whole of the relevant land or whether specific areas can be regarded as being the subject of a ‘partial’ breach is a matter of fact and degree in each case. The courts will seek to strike a balance between the rights of all concerned, taking account of the public interest. For further advice on planning enforcement, please contact a member of our Planning and Environmental Team.

TAX TIPS

Stamp Duty Land Tax – mixed use: Brandbros Ltd v HMRC

Key points:

The Finance Act 2003 defines ‘residential property’ as land/buildings used as a dwelling, suitable for use as a dwelling or in the process of being built or adapted for use as a dwelling
The SDLT regime applicable to residential property transactions is complex, with a number of thresholds and a variety of different rates and surcharges
The relevant date for assessment is known as the ‘effective date’

BL purchased a property for £312,500. It filed an SDLT return on the basis that the property was residential and paid tax of £15,000. BL later sought to amend the return claiming that in fact, the property was mixed residential and non-residential, because, on the day of completion of the purchase, BL had granted a lease of the garage to a company for use as a storage unit. BL was claiming a refund of £9,875 plus interest.HMRC declined to give BL the refund, confirming that the tax had been correctly assessed and paid at the residential rate on the effective date of the transaction. BL appealed, but was unsuccessful.

Practical implications:

The First Tier Tribunal’s view was that the grant of the garage lease did not change the residential classification of the property because:

SDLT is a tax on transactions, and the transaction in this case was the purchase of a house with a garage, i.e. residential property
It was only later, after completion of this transaction albeit on the same day, that a further transaction took place, i.e. the grant of the lease of the garage
The grant of the lease had no effect on the initial property purchase

Given the complexities of the SDLT regime, and the potential savings to be made if property is properly classified as non-residential, contact a member of our Tax Team for detailed advice.

MEANWHILE, OVER ON THE REAL ESTATE BLOG

Our Real Estate bloggers have been busy posting recently. Check out posts you might have missed:

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.