Real Estate Legal Update - June 2022

A welcome from the editor....

Welcome to the latest edition of the Real Estate Legal Update.This quarter, we look at cases on adverse possession and what amounts to an unequivocal intention to possess; what issues can arise when a landlord wants to develop the airspace above a building; what happens when an overseas company that owns land in England and Wales is restored to the register; and how the 'thin end of the wedge' argument might prevent a neighbour building an extension but how a 'nuisance or annoyance' covenant may not.In the Landlord and Tenant round-up, we look at a couple of cases on terms that can be included in a renewal lease and another case where a landlord didn't deal with a tenant's application to assign in accordance with its statutory obligations.In Tax Tips, we revisit the case of a very determined (and still disappointed) taxpayer who wanted to reclaim SDLT paid when he bought a house and extensive grounds.

CASE LAW UPDATE

Adverse possession - intention to possess: Amirtharaja v White

Key points:

• To acquire title to land by adverse possession, a claimant needs to prove they had uninterrupted factual possession of the land for the relevant period, and an intention to possess the land during that period
• Factual possession will often demonstrate intention to possess, but this is not always the case and other evidence of intention may be required
• The intention must be unequivocal

A owned an office building and a workshop, in between which ran a narrow passageway. The passageway ran from the back garden of Hollis House, owned by W, to an access road. The passageway was included within the registered title to the workshop, but W claimed title to it by adverse possession.In the initial hearing at the County Court, W was successful and the court ordered that W be registered as the proprietor of the passageway. This was overturned by the High Court. W then appealed to the Court of Appeal, albeit on a procedural ground that did not ultimately make any difference to the outcome, which was the dismissal of W's appeal.Practical implications:The problem for W was that the claim for adverse possession was based on a statutory declaration provided by the person (B) from whom W had bought Hollis House in 2017 (not an issue in itself, it is possible to 'stack up' periods of adverse possession by previous owners). However, rather than setting out clear statements demonstrating an intention to possess the passageway, the declaration talked about B using the land for access to the garden of Hollis House from the road, and for storing ladders and rubbish. B had replaced a gate at one end of the passageway, which was kept locked and to which B had the only key, but it was felt that this was more about protecting against unauthorised access or trespass rather than demonstrating an intention to possess the passageway to the exclusion of the world at large. In a nutshell, the interest W enjoyed was more akin to an easement.

Development - airspace development: Vectis Property Company Ltd v Cambrai Court Management Company Ltd

Key points:

• Residential tenants have certain statutory rights in relation to their flats, such as a right of first refusal if the landlord wants to sell the freehold to another party, and a separate right to acquire the freehold of their building through a nominee purchase (this is known as “collective enfranchisement”)
• Landlords will seek to maximise the amount of premium paid for the freehold, including any potential value for airspace development
• The terms of the leases granted to tenants will be crucial

Cambrai Court is a block of nine flats in north London, each let on long 'internal only' leases, so the external and structural parts of the building, and the roof, are retained by the landlord (VPC). CCMC was a party to the leases and was under an obligation to repair and maintain the building, including the roof.In 2018, a developer obtained planning permission to build two new flats on the roof of Cambrai Court, and offered to buy the freehold from VPC. As the nine tenants had a statutory right of first refusal, VPC served the relevant notice on the tenants. CCMC then served a notice on VPC claiming the right to enfranchise.VPC admitted the right, and the parties agreed a price for the freehold (£24,500) but needed to agree an additional sum for the 'hope' value in relation to the development of the roof space. VPC said this was worth an extra £203,000, but CCMC said it had no value, because the leases did not reserve the right for VPC to actually develop the roof. CCMC also argued that it wouldn't be able to maintain the roof in accordance with the leases if new flats were built on top of the roof.On appeal, the Upper Tribunal found in favour of VPC; whilst VPC had not expressly reserved a right to build on the roof, it did not need to, as it had not demised the roof space to the tenants in the first place. The Upper Tribunal also found that the proposed development would not interfere with CCMC's obligation to maintain the roof - the roof to be repaired would simply be whatever roof was on top of the building from time to time. The Upper Tribunal also agreed with the First Tier Tribunal's finding that the hope value was £166,725, so this is the amount the tenants will need to come up with to enfranchise and acquire the freehold of Cambrai Court.Practical implications:With land in short supply, vertical development is an option more owners and developers are exploring. Whilst this decision confirms that landlords don't need to have reserved an express right to develop, they should check the terms of leases very carefully and should be mindful not to interfere with the rights of the tenants (including the right to quiet enjoyment) and the obligations of any management company.Maybe Yazz (and the Plastic Population) was onto something when she covered “The Only Way is Up” and went to number one in the UK Singles Chart back in 1988... 

Disclaimer of lease - restoration of overseas company: Trident Nominees (IOM) Ltd v Shaftesbury Properties Ltd

Key points:

• When a company incorporated in England and Wales is restored to the register of companies after having been struck off, it's relatively straightforward for its assets to be revested in the company, even where a lease has been disclaimed - the Companies Act 2006 contains 'as you were' provisions
• The position is more complicated when the company is registered overseas - restoration does not have the extra-territorial effect of re-vesting land situated in England and Wales in the company, and common law applies

SPL owned a long leasehold interest in a property in Camden, worth over £2M. It was incorporated in the Isle of Man, but was struck off the register in 2017, due to an administrative oversight. The lease therefore vested in the Crown as ownerless property. In 2019, following contact from the freehold owner of the property, the Treasury Solicitor, on behalf of the Crown, issued a notice of common law disclaimer of the lease.In 2020, SPL was restored to the register of companies in the Isle of Man and the question of what happened to the lease needed to be resolved. SPL argued it revested in the company, the freeholder (who wanted the property back) disagreed, arguing the Crown did not have the power to disclaim the lease by common law and, therefore, SPL had lost its lease.Although there is equivalent 'as you were' legislation in the Isle of Man, it doesn't apply where the assets in question are situated in England and Wales, so the court would have had to consider the common law position. However, the parties (including the Crown, which was joined as a party to the litigation) settled the dispute just before the trial and agreed a declaration that on the restoration of SPL to the register, the lease revested in the company and continued as if SPL had never been dissolved.Practical implications:Although the compromise of the dispute means we still don't have an official court decision on this issue, the position taken by the Crown - that it does have a common law power to disclaim and that it has exercised that power consistently in the past - should give some guidance on the process to be followed when a foreign company, owning assets in England and Wales, is subsequently restored to the register in its jurisdiction.

Restrictive covenants - 'the thin end of the wedge': Cross v Coach House Mews (Highbury) Ltd

Key points:

• The Lands Chamber of the Upper Tribunal has jurisdiction to discharge or modify a restrictive covenant affecting the use of land or buildings on it, if certain grounds, set out in section 84 of the Law of Property Act 1925 are made out
• One of the most common grounds is that the covenant impedes the reasonable use or development of the burdened land
• Whilst the grant of planning permission is persuasive when considering whether a proposed use is reasonable, this doesn't mean the covenant will necessarily be modified or discharged

C owned a three-storey mews house in Coach House Lane, not far from the Emirates Stadium in Highbury. The property was part of the Couch House Mews Estate and was subject to a restrictive covenant preventing the erection of, or material alterations or additions to the external appearance of, any buildings or other structures. The covenant benefited the owners of other properties on the Estate and CHMH, the management company owned by the residents.C obtained planning permission for a ground floor extension. The extension was small, just 7.4m², but would have enabled C to reconfigure the interior space and make better use of the floorspace for C's growing family. C applied to the Upper Tribunal for modification of the restrictive covenant, so that C could implement the planning permission, on the basis that it impeded C's reasonable use of the land.CHMH and three other residents objected to the application for modification of the covenant on aesthetic grounds, arguing that the proposed design was not in keeping with the overall look of Coach House Lane and would impact the visual amenity of the objectors' houses. One resident also argued that allowing the modification would encourage others to apply to extend their properties in a similar way.The Upper Tribunal refused C's application.Practical implications:Although there had been agreement that C's proposed use of the land was reasonable, and although objections made on aesthetic grounds are highly subjective, the Upper Tribunal was satisfied that the practical benefit conferred by the covenant on CHMC and the other residents was of substantial advantage. It preserved the unique character and appearance of the Estate and provided certainty, in that all residents had been aware that the external appearance of their properties could not be changed. Modifying the covenant would effectively be opening the door to other development and eventually, the current character of the Estate would be lost - known as the 'thin end of the wedge' argument. 

Restrictive covenants - nuisance or annoyance: Di Silvio v Sharp

Key points:

• Common law nuisance provides an element of protection, and remedies, for aggrieved landowners
• Express covenants, given in deeds, not to cause 'nuisance or annoyance' are much wider and bring into scope a range of activities that wouldn't be prevented or remedied by common law nuisance
• The long-established test for deciding what amounts to an annoyance is what would a reasonable, sensible person find annoying

D and S owned neighbouring properties on a residential estate in Wimbledon that was subject to a building scheme. One of the covenants imposed under the scheme was a fairly standard covenant not to do anything on the property that was an annoyance, nuisance or disturbance to the other residents.S wanted to build a two-storey extension and obtained planning permission, despite objections from D and other neighbours. Knowing that the same neighbours would object to the extension on the basis that it breached the nuisance covenant, S applied for a negative declaration from the High Court that the extension would not breach the covenant.The judge in the County Court granted the declaration, but D and the other neighbours appealed on the basis that the judge had applied the wrong test - i.e. would a reasonable person living in D's house be annoyed or aggrieved by the extension? Instead, D argued there may be situations where the reasonable hypothetical person would not be annoyed, but someone else might be and, therefore, the activity at issue should still be prohibited. The judge was not persuaded!Practical implications:The decision in this case re-states the 'reasonable hypothetical person' test for judging annoyance, as set out back in 1888, and followed by the Court of Appeal in a 2009 case. We see a lot of cases on restrictive covenants, mainly in the context of applications to modify or discharge them, so it's interesting to consider a commonplace covenant that doesn't usually come into the mix, but which could - in the right circumstances - be another line of attack for those seeking to prevent development.

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LANDLORD AND TENANT ROUND-UP

Consent to assignment - statutory duties: Gabb v Farrokhzad

Key points:

• Where a lease permits the tenant to assign with the landlord's consent, statute dictates that consent cannot be unreasonably withheld
• Landlords are also under other statutory duties, including to give consent within a reasonable time and to give written notice of the decision
• If a court finds the landlord has behaved unreasonably, the tenant can go ahead and assign without obtaining the landlord's consent

G had a long lease of a flat on Kensington Park Road. The lease required the tenant to obtain the landlord's consent to assign. On various occasions, starting in October 2020, G had asked his landlord, F, for consent to assign the lease. In February 2021, G had received an offer of £3.25M for his flat, but that fell through because F didn't respond to the request for consent to the assignment. In October 2021, G received another offer for the flat, this time for £3.2M.In addition to the delay, F employed other stalling tactics such as commencing forfeiture proceedings (which were not successful but which did lead to the proposed sale for £3.25M falling through) and requesting financial references for the other prospective purchaser, even though they were a multi-billionaire member of the Oppenheimer family (founders of the De Beers diamond mining company)!In January 2022, G applied for a declaration that F had unreasonably withheld consent, and the High Court granted the declaration, along with an award of damages for the losses arising from F's unreasonable behaviour.Practical implications:There is a history of bad blood between these two parties - see this Daily Mail article with an excitable headline about curtains - and F has appealed to the Court of Appeal, but the test for unreasonable refusal of consent is well-established. It is unusual to see a requirement to obtain consent to assign a long residential lease, but the High Court recognised that a residential lease is a valuable capital asset in the hands of a tenant, with the landlord's reversionary interest having limited value. Landlords need to take account of the potential detriment to a tenant in withholding consent, and consider whether withholding consent is disproportionate (and, therefore, unreasonable). 

Lease renewals - green provisions: Clipper Logistics Plc v Scottish Equitable Plc

Key points:

• If a lease falls within the protection of the Landlord & Tenant Act 1954, a tenant has a statutory right to renew the lease at the end of the contractual term
• Either the landlord or the tenant can start the renewal process, and the parties will seek to agree the terms of the renewal lease
• If the parties cannot agree, one or other of the parties must apply to the court for determination of any disputed terms
• The starting point for the court is to look at the terms of the existing lease

CL occupied commercial premises at an industrial estate in Rotherham under a 10-year lease. The landlord, SE, started the renewal process before the expiry of the contractual term and the parties managed to agree many of the terms of the renewal lease.One of the things the parties couldn't agree on was the alterations clause, and, in particular, the interplay of that clause with the energy performance of buildings regime. SE wanted to restrict the ability of CL, or any other occupier under the lease, to carry out alterations that would lead to the property having an energy performance rating below band 'E' and wanted the tenant to indemnify the cost of having to obtain a new EPC if such alterations were made. SE also wanted a clause requiring the tenant to maintain the current energy rating, to hand the property back with the same energy rating and carry out works to restore the rating, if it fell below the then current level.The court did not agree to the additional restriction on alterations, nor to the requirement to indemnify the cost of obtaining a new EPC, but it was prepared to include a clause requiring the tenant to return the property with the same energy rating.Practical implications:When determining certain 'other terms' of a renewal lease (i.e. not extent of property, duration of term or level of rent), the court is directed to consider the terms of the existing lease. The burden of persuading the court to depart from those existing terms falls on the party proposing the changes. Any changes need to be fair and reasonable. In this particular case, the court decided that the clauses proposed by the landlord would unfairly and unreasonably impose a number of statutory duties relating to energy performance on the tenant that legally fell on the landlord.

Lease renewals - turnover provisions: W (No.3) GP (Nominee A) Ltd v JD Sports Fashion Plc

Key points:

• The way the courts approach determining the rent payable under a renewal lease is governed by section 34 of the Landlord & Tenant Act 1954
• The court will decide the rent as a matter of valuation, based on expert evidence from both parties
• The court has no discretion when it comes to rent and must follow the formula set out in section 34, which effectively results in an open market rent
• The facts of each particular case will dictate whether it's appropriate to include an element of turnover rent

JDSF had a 10-year lease of a unit in a Derby shopping centre, under which it paid a base rent plus a turnover rent. In 2016, prior to the expiry of the lease, WGP initiated the lease renewal process and proposed a new 10-year terms at a rent of £282,000 per year.Some time later, JDSF proposed a five-year lease at a rent of £160,000 per year with a three-month rent-free period and a turnover rent equivalent to 5% of its turnover.By the time the matter got to court, the parties' positions had effectively reversed, with WGP seeking a turnover rent (but of 8%, which would have produced an annual rent in the region of £496,000 per year) and JDSF was looking for a fixed rent of £17,700 per year or a turnover rent equivalent to just 0.29% of turnover.The judge in the County Court ordered a fixed annual rent of £104,300 and refused to include any element of turnover.Practical implications:The judge noted that a turnover rent is tenant-specific and is, by definition, dependent on the turnover of the particular tenant, so does not sit easily with the objective exercise required by section 34. This decision doesn't mean a court will never order a turnover rent to be included in a renewal lease, but the court needs to make an assessment, based on the facts of each case, whether a turnover rent 'accords with the purpose and provisions of the [Landlord & Tenant Act 1954]'.For advice on all aspects of lease renewals, please contact a member of our Property Litigation Team.

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TAX TIPS

Stamp Duty Land Tax - gardens and grounds: Hyman v Revenue & Customs

Key points:

• Lower rates of Stamp Duty Land Tax (SDLT) apply to non-residential and mixed-use property
• Residential property includes land that forms part of the gardens and grounds of a dwelling, even if that land is not actively used as such

Readers may recall from previous updates that H bought a farmhouse with 3.5 acres of land, some of which was physically separate from the farmhouse, for a price of £1.515M. On completion of the purchase, H paid SDLT at residential rates on the whole of the property but later claimed a tax refund of just under £35,000, having been advised the transaction should've been treated as 'mixed use', therefore benefiting from the lower commercial rate of SDLT.HMRC refused to pay the refund, arguing the whole of the land was residential. The First Tier Tribunal agreed with HMRC's position, and on appeal, the Upper Tribunal upheld the decision. Not happy with this outcome, H has appealed to the Court of Appeal...and has been unsuccessful again.Practical implications:There can be significant advantages in land being classed as non-residential from an SDLT perspective, but there is no wording in the relevant legislation that imposes a requirement that land can only be part of the 'garden or grounds' of a dwelling if it is needed for the reasonable enjoyment of that dwelling. H's argument was that certain parts of the land were not integral parts of the house and garden, but courts and tribunals will look to give words their ordinary meaning.If you want to avoid finding yourself in the same predicament as the Hymans, contact a member of our Tax Team.