Welcome to the autumn edition of the Real Estate Bulletin. This quarter, we have a couple of cases on conditional contracts with parties trying to pull out, a look at some interesting landlord and tenant issues and a quick review of nuisance. There are planning points on interpretation of planning conditions and for the tax enthusiasts amongst you, we have a case on options to tax.
The Bulletin brings together highlights from our popular quarterly update training sessions, so if you are local to the East Midlands or happen to be passing through every now and again and would like details of our next event in December, please get in touch.
- 13 July 2016 sections 203 to 206 Housing & Planning Act 2016 HPA 2016) came into force in England and Wales replacing section 237 Town and Country Planning Act 1990 (TCPA 1990)
- Section 237 TCPA 1990 was used by local authorities (LPAs) and agencies with regeneration powers to override adverse rights (for example easements and covenants) on the acquisition or appropriation of land by an LPA for planning purposes
- This power was used to facilitate development where planning permission had been granted and it was in the public interest to do so
- Those whose rights were affected would be entitled to compensation
- Section 203 HPA 2016 applies similar rules but with new statutory language
- Land already acquired or appropriated for planning purposes before 13 July 2016 can take the benefit of section 203
- The power is now afforded to a “specified authority” (for example LPAs and statutory undertakers)
- Section 203 should be used for developments which relate to the purpose for which the land has been acquired
- The right to override does not apply to rights vested in the National Trust or to “protected rights” (for example rights vested in statutory undertakers)
CASE LAW UPDATE
- Most conditional contracts will contain an obligation to use ‘reasonable endeavours’, ‘all reasonable endeavours’ or ‘best endeavours’ to satisfy the conditions
- The interpretation of endeavours provisions varies significantly and would be a question of fact for each case
- Conditional contracts can also contain a requirement for the parties to act in ‘good faith’ to discharge their contractual obligations
- ‘Good faith’ obligations are also difficult to define, but would involve acting in accordance with commercial standards of fair practice, being faithful to the purpose of the agreement in question (rather than sticking to the letter of a particular clause) and acting consistently with the expectations of the other party
In 2011 S entered into a conditional contract with BR to purchase their stadium for development as a mixed use scheme, including a new Sainsbury’s superstore.
The contract was subject to numerous conditions, including a planning condition. There was also a fixed period in which the conditions had to be satisfied by i.e. a ‘long stop’ date.
The planning condition specified that S had to use ‘all reasonable endeavours’ to obtain ‘acceptable store planning permission’ as ‘soon as practicable’. ‘Acceptable’ was defined as a permission which did not restrict deliveries to certain times of the day.
The steps S needed to take were very clearly set out in the contract, but S was not obliged to appeal unless it was advised by Counsel that it had a higher than 60% chance of success. The contract defined s73 applications to vary planning conditions as ‘appeals’ (when technically they are separate applications).
The planning permission granted did restrict delivery times, so was deemed ‘unacceptable’ by S. S therefore lodged a s73 application. The initial s73 application was refused, so S lodged a second application. This application was then withdrawn after Counsel advised it would only have a 55% chance of success.
S then served notice to terminate the contract. BR argued S had not used ‘all reasonable endeavours’ nor acted in good faith.
The Court of Appeal took the view that the general endeavours and good faith obligations were ‘curtailed’ by the specific contractual provisions and that as the specific provisions had been adhered to, then S was entitled to terminate the contract.
If a specific result is desired clear drafting is required. The intention of the parties needs to be clear in the contract. If, for example, endeavours obligations are to extend to assisting another party with making an appeal, then this should be specified. If the extent of the parties’ obligations is clearly set out, there should be less scope for dispute.
Development – Conditional contract: Dooba Developments Ltd v McLagan Investments Ltd
- As well as clearly defining the steps a party needs to take to satisfy conditions in the contract, the conditions themselves have to be carefully drafted
- The meaning of one word can make all the difference as to whether a party can serve notice to rescind a contract or not
In 2010, D exchanged a conditional contract to purchase a property worth £12M from M. Completion would have taken place 28 days after either the ‘Unconditional Date’ which was defined as “the date upon which the last of the [four] conditions is discharged by satisfaction or waiver”. There was also a longstop date in 2014 that the conditions had to be satisfied by.
The conditions to be satisfied related to planning, planning agreements, highways and ‘pre-start’. Either party could serve notice on the other to rescind the agreement if “all of the conditions have not been discharged” by the longstop date.
D served notice to terminate as one of the conditions remained outstanding at the longstop date. D also made an application for the court to determine the validity of the notice.
D argued that the meaning of the clause was that unless all of the conditions had been discharged by the longstop date, D was entitled to rescind. M argued that it meant the opposite: D could only rescind if all the conditions remained outstanding.
The court held that in this case ‘all’ really meant ‘any’ and that if any conditions were outstanding at the longstop date, either party could rescind. It considered that would be what a reasonable person would have understood, based on the factual and commercial context of the transaction.
You need to consider not only what wording means in the context of a particular agreement, but also the ordinary general meaning of the words and what an unconnected third party would presume them to mean.
Development – Overage/Section 106 Agreement: Redrow Homes Ltd v Martin Dawn (Leckhampton) Ltd
- Local planning authorities sometimes impose planning obligations in the form of s106 agreements to procure infrastructure
- Because a s106 agreement binds future owners of the land, anyone with an ‘interest’ in the land could be asked to enter into the agreement (for example a mortgagee)
- Specific performance is an equitable remedy that may be awarded to compel a party to perform its contractual obligations
- As an equitable remedy, specific performance is only available to those who come with ‘clean hands’ ie it would be inequitable to order specific performance to a party who is itself in breach of their obligations
R purchased land from M for £3.6M plus VAT. In addition to the basic purchase price, R agreed to make deferred payments, including an uplift calculated on the net developable area defined by any planning permission R might obtain for the site.
To secure the deferred payment, M took a legal charge over R’s land. The legal charge contained an obligation on M to execute any s106 documentation deemed necessary by R to secure the grant of planning permission.
R had to use ‘all reasonable endeavours’ to obtain planning permission to achieve a minimum net developable area of 28.88 acres to maximise the development value (and, therefore the payment to M). R managed to agree planning permission with the LPA to develop 26.69 acres, subject to a s106 agreement being entered into by all the relevant parties, including M.
M refused to execute the s106 agreement, asserting that R was in breach of its contractual obligation by failing to use all reasonable endeavours to obtain planning permission to develop 28.88 acres and instead agreeing to develop a lesser area which would reduce the amount due to M.
R applied for specific performance of M’s obligations in the legal charge to sign the s106 agreement. M argued this should not be granted because of R’s alleged breach of contract.
The court found that there was nothing in the contract or the legal charge which gave M the power to veto the s106. It also found that the alleged breach by R related to the contract, not performance of an obligation under the legal charge, and was therefore not sufficiently connected to make it inequitable for specific performance to be granted. The alleged breach of the ‘all reasonable endeavours’ obligation by R was a contractual matter that could be dealt with by compensation if established.
When considering an overage again clear drafting is key, not only for the contract, but also for the transfer or overage deed (if separate) and any documentation securing payment of the overage. The same definitions and wording should be used throughout to ensure consistency and avoid confusion.
Easements – Right to commit a nuisance: Peires v Bickerton’s Aerodromes Ltd
- An easement is a right which benefits land or property over land or property owned by someone else. Examples include a right to connect into services which cross under neighbouring or adjoining land or a right of way over a private footpath or road owned by someone else
- Easements can arise by ‘prescription’ ie 20 years uninterrupted use, if the exercise of the right is lawful, is ‘as of right’ (without force, secrecy or permission), and without payment or objection
P lived next to an aerodrome owned by B. P argued that helicopter training on a section of land close to her property was causing a nuisance and interfered with her use and enjoyment of the property.
B argued that that particular area of land was essential for the training (it was sloping) and that the training was much less frequent than claimed by P. B argued it had acquired the right to commit a nuisance by prescription as helicopter activity on the site had commenced in the 1960s.
The court found in favour of P and granted an injunction to restrict the training to limited times during the week. It also limited the training to different parts of the site to minimise the impact of the nuisance on P.
B’s argument that it had acquired prescriptive rights failed on two counts. First, the activity had been carried on in the face of numerous protests by P and therefore had not been without objection; second the 20 years continuous use had to start from when the noise had become a nuisance (which was only, according to P, in 2014 when the training activity near her house increased).
In the 2014 case of Coventry v Lawrence, the Supreme Court established that Landowners can acquire prescriptive rights to commit a noise nuisance. In practice, this is very much dependent on the facts of each case and may be difficult to prove, not least because someone is likely to have made complaints before the 20 years had clocked up!
Claimants affected by noise nuisance may be entitled to substantial damages if the value of their property is reduced as a result if activities on neighbouring land.
LANDLORD AND TENANT ROUND UP
Landlord & Tenant – dilapidations and alterations: South Essex Partnership University NHS Foundation Trust v Laindon Holdings Ltd
- At the end of the term of the lease, the tenant is required to ‘yield up’ the property to the landlord in the condition required in the lease
- The property should also be ‘vacant’ as defined in the lease (which could mean removing all contents including tenant’s fittings or temporary structures like partitions)
- A yielding up provision should be read in conjunction with clauses concerning repairs, decoration, alterations and signage
- If a tenant has not yielded up the property in accordance with the lease, the landlord can bring a claim for breach of covenant
- If the breach relates to a ‘condition’ clause the landlord can lodge a schedule of dilapidations based on diminution of value (for example on a damaged item), or actual expenditure or a combination of both
As part of its initial fitting out works SEP re-installed a tiled carpet floor throughout the whole property. As the lease was coming to an end, it replaced the carpet with one of similar colour and specification but installed in a different way, in strips as opposed to tiles, at a cost of £38,234.
L brought a claim against SEP alleging that it had failed to comply with its covenant for repair, as it had not replaced the landlords fixtures on a ‘like for like’ basis.
SEP argued that the carpets were tenants fixtures, not landlord’s, and did not need to be replaced, or that if they were landlord’s fixtures, that SEP was permitted under the lease to make any internal non-structural alterations, which would include replacing the carpet.
This was part of a much larger claim by L, which was successful at first instance. Part of the overall award included the cost of replacing the carpet strips with carpet tiles at a cost of £41,445. SEP therefore appealed.
The Court of Appeal found that the carpets were a landlord’s fixture or a fitting, or a chattel but that it did not matter which, as the tenant had an unfettered right in the lease to make non-structural alterations. As the tenant had replaced the carpet with one that was in a good state of repair as required under the lease, it was not in breach of covenant.
Terms like ‘fixture’, ‘fitting’ and ‘chattel’ should be clearly defined in a lease, particularly where a tenant is permitted to make non-structural alterations without the landlord’s consent. If the landlord does not want its fixtures or fittings to be altered, it need to provide clear instructions so that the lease can be drafted accordingly. Repairing and decorating obligations should also clearly be defined.
Landlord & Tenant – Surrender by operation of law: Padwick Properties Ltd v Punj Lloyd Ltd
- A lease can either be surrendered by deed, made between the landlord and tenant, or by operation of law, which is inferred from the conduct of the parties
- To surrender by operation of law, the landlord needs to show by its conduct that it accept that the acts of the tenant bring the lease to an end. A tenant cannot just hand over the keys: without action on the part of the landlord to show it feels the lease is at an end, the tenant will remain liable for its covenants under the lease
- The principle behind surrender by operation of law is one of ‘estoppel’: one party by their actions is estopped from denying its validity later
P was the intermediate landlord of a property called Sim-Chem House in Stockport. Their tenant was SCL a subsidiary of PLL, the guarantor.
Under the terms of the guarantee, PLL not only had to guarantee all payments of SCL but also had to take a new lease in the same terms if the lease was disclaimed or if SCL otherwise was no longer liable to perform the covenants of the lease.
SCL got into financial difficulties and was placed into administration. Its assets were transferred to another subsidiary of PLL, SCEL. The lease however was not assigned to SCEL, SCEL simply occupied the property under licence until 28 September 2011.
On 30 September 2011, SCL’s administrators wrote to P’s solicitors asserting that the safety and security of the property should revert back to P. The keys were returned several weeks later.
P accepted the return of the keys. To secure the property in accordance with its insurer’s requirements for vacant properties, it had to change some of the locks, board up some of the windows, install alarms and some steel security screens. It also put the property on the market in 2012, but was not able to secure a new tenant.
In 2013, SCL went into liquidation. The liquidators wrote to P’s solicitors disclaiming the lease. P gave notice to PLL that it was still bound by the deed of guarantee and had to enter into a new lease on the same terms and pay all sums due from SCL under the existing lease.
PLL argued that the conduct of the parties was clear. By accepting the keys and remarketing the property, P's conduct was inconsistent with the continuation of the lease and therefore the lease must have been surrendered by operation of law.
The court found in favour of P. P had accepted the keys but had made it clear that it was only doing so to ensure that the property was secure while it was vacant. Attempting to re-let the property was also not inconsistent with the continuation of the lease, as no tenant had taken occupation.
A tenant cannot simply walk away from a property and hand back the keys to bring a lease to an end. There needs to be clear conduct on both sides to show a mutual intention for the lease to end. Landlords do however need to be mindful of their conduct as unless they make it clear they are only accepting the keys to protect their interests to ensure that the property is secure, they could be deemed as accepting the surrender. Guarantors need to be cautious and ensure the lease is brought to an end, otherwise they will remain bound by their guarantee until it is.
Landlord and Tenant – Termination of business tenancies: Gulf Agencies Ltd v Ahmed
- Tenants have a statutory right to renew a lease of premises occupied for the purposes of carrying out a business (unless it is an excluded tenancy)
- The parties can agree to exclude this right
- A landlord can oppose a tenant’s request for a new lease on certain grounds, including that the landlord intends to occupy the premises for its own business (ground (g))
- The court will assess the landlord’s intention on both a subjective basis (ie is the landlord telling the truth?) and an objective basis (is there a reasonable prospect of the landlord being able to act on its intention?)
A owned property on Edgware Road in London. The basement and ground floor were let to GAL and the upper floors were residential.
A ran two businesses in the vicinity: a solicitors’ practice and a minicab business. A intended to move both businesses into the property therefore objected to GAL’s request for a new tenancy using ground (g).
The judge at first instance found that the ground was not justified as A did not have a realistic prospect of running his businesses from the property as he had not applied for planning permission for change of use. A appealed arguing that although there was a certificate of lawful use issued to GAL for Class A1 (retail), A had lodged an objection to this and could in any event use the property for Class A2 (financial and professional) for two years without change of use.
The judge also made some comment about whether A was in fact a solicitor, as he had been unable to locate A on the Law Society’s website (it later transpired that he had been searching the wrong name!). A alleged bias on the part of the judge claiming that he failed to actually consider A’s subjective intentions and whether they were genuine.
The Court of Appeal agreed with A and ordered a new trial. The court at first instance should have subjectively considered whether A had a genuine intention to occupy the property and objectively considered whether this was realistic based on the facts, such as planning restrictions.
If you are landlord intending to object to the renewal of a lease on ground (g), you need to have taken steps to be able to practically achieve this. For example, if planning permission is required, you should at least have submitted a planning application. You should also provide subjective reasons for wishing to occupy: for example, in this case A intended to save rent by moving two businesses into one property and to make it easier to manage two businesses by having them situated together, both sound reasons which would give credibility to his intentions.
Nuisance – Licensor’s Liability: Cocking & Ano’r v Eacott & Ano’r
- A bare licence is simple permission for one person to enter the licensor’s land
- It can be terminated by the licensor giving notice to the licensee (the length of time given will depend on the circumstances, for example if the licensee is occupying they will need to have sufficient time to pack and vacate the property)
- A bare licence will not involve payment from the licensee to the licensor and therefore cannot be an assured tenancy
In this case W had granted a bare licence to her daughter E to live in the property. W paid the bills and maintained the property without any contribution from E.
Mr and Mrs C lived next door to E and made complaints that E was causing a noise nuisance. W became aware of these complaints in 2009.
The alleged nuisance continued and Mr and Mrs C sent a letter before action to W in September 2010 complaining about shouting noises and a dog barking loudly. They then made a claim in 2011. W rejected the claim, alleging that she was not personally involved and therefore not liable.
Mr and Mrs C were successful at first instance and W and E were found jointly liable. W appealed but the Court of Appeal dismissed her appeal and found that she remained in control of the property as licensor and should have taken steps to abate the nuisance as soon as she became aware of it.
Whether you are a landlord or a licensor, if you become aware your property is being used in a way which would constitute a nuisance you need to take steps to abate that nuisance as soon as possible (including taking possession of the property if that is likely to be proportionate to the level of the nuisance). If you do not and you permit the nuisance to continue you could be deemed liable for the nuisance even if you are not personally involved.
Planning permission – Interpretation of planning condition: Dunnett Investments Ltd v DCLG
- Planning conditions can either be time limited or apply indefinitely
- If they apply indefinitely but there has been a breach for a continuous period of more than 10 years, then if the local planning authority (LPA) does not take enforcement action within the 10 years they generally lose their right to do so and the unauthorised development or use then becomes lawful. The party who is in breach also acquires immunity from enforcement action
- Under the Town and Country Planning (General Permitted Development) Order 1995 (GPDO 1995) and more recently the GPDO 2015 certain changes of use do not require full planning permission, for example a change from B1 (a) office use to C3 dwelling houses
- They do however usually require prior approval from the local authority
In March 1982 planning permission was granted for new industrial and office premises (1982 PP). This was varied in 1994 to make the site subject to a planning condition (1994 Condition) that the property could only be used for a purpose within class B1 and for no other purpose without first obtaining express planning consent from the LPA. The LPA added this condition so that it could be satisfied as to the details of any proposals in light of the character and location of the property.
In 2014 D applied for prior approval under GPDO 1995 for change of use from office to residential. The LPA failed to reply, so seven months later D applied for a certificate of lawful use.
The certificate of lawful use was refused as the planning condition required separate consent and the 1982 PP showed a clear intention on the part of the local authority to limit the site to class B1 use. D appealed as the 1994 Condition did not specifically take the permitted development rules into account.
The Court of Appeal found that the wording was sufficiently clear to exclude the GPDO 1995.
The courts will usually interpret planning conditions so as to give a meaning which a reasonable person, without any specialist knowledge, would interpret them to mean. If you are unsure as to the interpretation of any conditions affecting your property, you should speak to a member of our Planning Team. Be particularly cautious if any of the conditions restrict use of the property as the restrictions are likely to impact on your plans to develop.
VAT – Option to tax/late notification: Hills v The Commissioners for HMRC
- An option to tax only has effect if notification is given before the end of a period of 30 days beginning with the day the option is exercised or such longer period that HMRC may allow in a particular case
- HMRC has discretion to accept late notifications
H’s seller bought a unit on a business park and granted a lease to a tenant the next day, charging VAT on the rent due. H’s seller did not submit it’s option to tax until 2010, but HMRC accepted it and backdated it to the 30 March 2004.
In 2011, H purchased the unit for for £650,000 “plus VAT (if applicable)”. H operated a dental practice from the unit. Dental practices are exempt suppliers and are therefore unable to recover VAT.
HMRC sought to claim VAT on the £650,000. H argued that the option to tax was invalid as HMRC had not given their permission prior to exercising the option.
H’s appeal from the FTT was dismissed. HMRC’s permission was not required as no exempt supplies were made prior to the option to tax.
Although in some cases prior permission may be required, the option to tax is usually available automatically. There are some complicated conditions which need to be satisfied, so we recommend that you speak to a member of our Tax Team if you have any queries. Ultimately however HMRC has the power to overlook these conditions so the likelihood of being able to challenge the validity of an option to tax seems ‘slim to none’.