Ask Hill Dickinson
Party wall legislation
The Court of Appeal made its long-awaited decision in the Gamestation case (Pillar Denton Ltd and others -v- Jervis and others) on 24 February 2014. It decided to overrule the High Court decisions in Goldacre (Offices) Limited -v- Nortel Networks UK Limited (in Administration) and Leisure (Norwich) II Limited -v- Luminar Lava Ignite Limited (in Administration). Insolvency practitioners occupying property for the purposes of the administration must pay rent apportioned for the period of occupation, regardless of when the rent falls due for payment under the lease.
There is one note of caution, however: the decision is being appealed to the Supreme Court. Whilst confirmation from the highest court in the land would be welcome, the appeal creates unwelcome uncertainty until the outcome is known.
The effect of the Goldacre decision was to make administrators liable to make full payment of any sums due under a lease as they fell due, regardless of how long the company in administration was occupying the premises. On the face of it, this appeared to be a victory for landlords, as they were entitled to full payment of rent due under leases.
Ultimately, the victory was pyrrhic and the timing of the appointment of administrators became fundamental. Administrators would often be appointed shortly after rent fell due. For example, the administrators of the Game group were appointed on 26 March 2012, the day after the March quarter rent fell due. Game’s quarterly rent liability was approximately
£12 million at that time.
This prejudice on landlords led to a challenge to the Goldacre decision in the Luminar case.
>>> continues on page 2
You can’t have the penny and the bun…
but landlords will
get their daily bread
Prayers are answered in the Gamestation verdict, reports Richard Palmer, as the liability of administrators of insolvent companies to pay rent has been clarified.
T Ltd occupies premises under a lease from L Ltd, with the annual rent payable in advance on the usual quarter days - 25 March, 24 June, 29 September and 25 December.
Before the Gamestation decision, if T Ltd entered administration on 26 March (the day after the March quarter day), the administrators would not have had to pay any part of the March quarter’s rent as an expense of the administration.
The full March quarter’s rent would have remained a debt due to L Ltd from T Ltd, but the landlord’s chances of recovering that rent from the insolvent tenant would inevitably be low. The administrators could have used the premises for nearly three months without having to pay any rent to L Ltd.
But, if the administrators were still using the premises on 24 June, they would have had to pay the full June quarter’s rent as an expense of the administration, even if they only intended to continue using the premises for a short period after 24 June.
>>> continued from page 1
Welcome to the spring edition of Hill Dickinson’s commercial property newsletter, which we hope you will find of interest.
I am particularly delighted that every article in this edition has been written by a first-time contributor! Richard Palmer, from our specialist corporate insolvency team, leads the way with his analysis of a game-changing case which rewrites the rules on how rent is treated when a tenant company goes into administration.
The remaining articles, penned by the younger generation of our property and construction team, cover topical subjects ranging from lease guarantors to party walls and interest on debts.
I would encourage all our readers to get involved with the International Festival for Business, which takes place over 50 days in June and July. Hosted in the north west, the IFB is a UK-wide event and promises to be the largest business event in the world this year. Hill Dickinson has partnered with PlaceEXPO, the property and construction centre for the IFB, and further details of the IFB can be found at www.ifb2014.com. Details of PlaceEXPO can be found at http://www.placenorthwest.co.uk/ifb.html.
If you have any queries relating to the issues raised in this newsletter, please contact the relevant author, or your usual Hill Dickinson contact.
If you have any comments on the newsletter in general, or suggestions for topics to cover in future editions,
please contact our editor, Bill Chandler,
Head of Business Services
Luminar decided that administrators were not liable to make any contribution towards sums of rent falling due before their appointment, even if the company entered administration during that rent period and occupied the premises. The landlord could merely prove in the administration for repayment of that debt as an unsecured creditor.
The rationale for these decisions was that the Apportionment Act 1870 did not allow for sums of rent payable in advance to be apportioned. As a consequence, a landlord seeking to claim rent that fell due before the tenant entered administration could only claim in the administration as an unsecured creditor for that rent.
Likewise, administrators had to pay the full amount of rent due if they were occupying property for the purposes of the administration on the rent day, even if they were not intending to use the property for the entire period that they were paying rent for. Luminar held that rent payable in advance and accruing before the administration could not be recoverable as an expense of the administration.
This was unpopular with both insolvency practitioners and landlords. Insolvency practitioners were effectively forced to choose between the interests of landlords and creditors generally. Because of this, landlords did not always obtain full value for the use of their property.
In Gamestation, Lord Justice Lewison stated that the Goldacre and Luminar decisions left the law in a very unsatisfactory state.
The Court of Appeal decided that these previous cases were incorrect and that the ‘salvage principle’ applied: this means that the landlord is entitled to receive the full value of the property for the period that the administrators occupy the property for the benefit of the administration. This is in spite of the fact that the lease was entered into, and the rental liability arose, before the company entered administration.
The Court of Appeal therefore ruled that administrators must make payments for the duration of any period during which they retain possession of the property for the benefit of the administration and that this will accrue from day to day.
Lord Justice Lewison held that the application of the salvage principle does not create or transfer any liability: it simply treats part of a single rental liability as an insolvency expense. The landlord has to claim for any other outstanding sums in the normal way. Lord Justice Lewison summed it up rather colloquially, however: ‘you can’t have the penny and the bun.’
Since Gamestation, the timing of the rent payment dates and the administration becomes less important.
If a tenant enters administration on 1 May and the administrators continue to occupy the premises for the purposes of the administration, the administrators must now pay rent on a daily basis from 1 May. The landlord may still struggle to recover rent for the period from 25 March until 1 May, but the landlord will now receive some rent for the March quarter. The administrators no longer enjoy a rent free period until the June quarter day.
As the June quarter day approaches, the administrators will no longer have to choose between either vacating the premises or paying the June quarter’s rent in full. If they require use of the premises for a shorter period beyond 24 June, they will only have to pay for the period they actually use the premises.
commercial property spring 2014
Landlords suffer further, non-financial, prejudice because they cannot rely upon self-help remedies usually available to them against companies in administration. Self-help remedies such as Commercial Rent Arrears Recovery (formerly distress) or forfeiture of the lease are not available, because companies in administration benefit from a moratorium preventing these steps from being taken.
So, the landlord has to wait for the company in administration to vacate or (seek to) assign its interest in the property. Without the Gamestation rule, this would cause unfair prejudice to landlords.
In 2013, 2365 companies entered administration - many of these will have been tenants of properties and until Gamestation their landlords would not have been able to force those companies or their administrators to pay rent.
Going forward, administrators and landlords will agree that a daily rate of rent be paid for the duration of the administrators’ occupation of premises for the benefit of the administration. The Court of Appeal has sensibly restored this position for everybody’s benefit: administrators can simply perform their functions without needing to weigh up the rights of landlords as against creditors generally, and landlords know that they will always receive at least some rent from tenants in administration who continue to occupy the premises.
The Late Payment of Commercial Debts (Interest) Act 1998 is a useful piece of legislation which adds an implied term into qualifying contracts, giving a statutory right to claim interest and compensation arising from the late payment of commercial debts.
On 16 March 2013, the Late Payment of Commercial Debts Regulations 2013 came into force, amending and extending the scope of the Act.
The Act applies to business-to-business contracts made after 7 August 2002 for the supply of goods and/or services for monetary consideration. The following types of contract are expressly excluded for the purposes of the Act:
• a consumer credit agreement; or
• a contract intended to operate by way of mortgage, pledge, charge or other security.
Of course, if the contract is not a business-to-business contract for the supply of goods and/or services, the Act will not apply.
It is possible for the contracting parties to opt out of the Act in the contract and agree a contractual remedy for the late payment of a commercial debt. However, this remedy must be suitably ‘substantial’ in order for the Act to not apply. Where the contract is silent in this regard, the Act will apply.
Before 16 March 2013
Provided the Act applied, a business would have had a statutory right to claim interest at the rate of 8% over the Bank of England base rate for the late payment of commercial debts.
Such statutory interest was to be calculated from the day after the agreed date for payment of the debt. If there was no agreed date, statutory interest would start to run after 30 days from the later of either:
• the date that the supplier performed its obligation; or
• the date the customer received the invoice.
On top of this claim for statutory interest, a supplier could also claim compensation for the cost of recovering a debt in the form of a fixed sum as follows:
• £40 for a debt less than £1000;
• £70 for a debt between £1000 and £10,000; and
• £100 for a debt of £10,000 or more.
Since 16 March 2013
The reasoning behind the introduction of the Regulations was to encourage prompt payment of invoices, with the particular intention of assisting the cash flow of smaller suppliers.
The Regulations seek to achieve this by making a number of changes to the Act:
First, the Regulations have amended the period and dates from which statutory interest will start to run. The Regulations have created a differentiation in the time periods for calculation of statutory interest between a public authority as customer and other businesses as customer.
Where a public authority is the customer, statutory interest will start to run on outstanding payments after 30 days from the later of:
• receipt of the supplier’s invoice;
• receipt of the goods or services; or
• verification and acceptance of the goods or services.
For other businesses, where a payment period has not been agreed in the contract, statutory interest will start to run on outstanding payments after 30 days from the later of:
• receipt of the supplier’s invoice;
• receipt of the goods or services; or
• verification and acceptance of the goods or services.
Pay late? Pay interest!
Ruth Carins examines the legislative framework which facilitates the recovery of interest and compensation when money due under construction contracts (and other contracts) is paid late.
commercial property spring 2014
As was the position before the Regulations, where the payment period is specified in the contract, statutory interest will start to run from that date.
However, the Regulations have introduced an amendment whereby if that agreed payment period is longer than 60 days after any of the events listed previously, statutory interest will begin to run from the date 60 days after the latest of the events above, in spite of the express contractual term. The only way to circumvent this would be to prove that the longer payment period as agreed between the parties is not grossly unfair to the supplier.
The definition of the term ‘grossly unfair’ in the Regulations is very broad:
‘In determining… whether something is grossly unfair, all circumstances of the case shall be considered; and for that purpose, the circumstances of the case include, in particular:
• anything that is a gross deviation from good commercial practice and contrary to good faith and fair dealing;
• the nature of the goods or services in question; and
• whether the purchaser has any objective reason to deviate…’.
Compensation for costs of recovering a debt
The fixed sum compensation amounts stated above have been retained by the Regulations.
However, the Regulations have introduced a further ‘level’ of compensation. A supplier may now claim as compensation any further reasonable costs which are incurred in recovering the debt which are not met by the fixed sum. Any attempt to exclude or limit the level of the top-up compensation will be subject to the reasonableness test set out in the Unfair Contract Terms Act 1977.
This remains at 8% over the base rate as per the Act.
Points to note
• If the contract expressly provides a substantial contractual remedy for late payment, the Act and Regulations will not apply.
• The Regulations only apply to contracts made on or after 16 March 2013. The Regulations do not apply retrospectively.
• It would be advisable for businesses to review their payment terms to check that they do not exceed the maximum 60 day period (30 days for public authorities).
• If a party does claim for the debt through litigation, it is worth noting that in order to claim interest, rule 16.4(2) of the CPR requires that a claimant must state in the particulars of claim whether he is doing so:
(i) under the terms of a contract;
(ii) under an enactment (and, if so, which); or
(iii) on some other basis (and, if so, what that basis is).
Therefore, the claimant will need to expressly plead in their particulars of claim their claim for interest under the Act and the Regulations, if they believe they are so entitled.
The Party Wall etc. Act 1996 introduced legislation to help people who had been badly affected by building works to party boundary walls and who did not live in London - so were not afforded protection by London Buildings Acts. Put simply, it enabled the whole country to enjoy the same party wall regime that London has had since 1844.
The Act dates back to 1666, when the great fire of London swept through the city and put an end to the plague. It was also the cause of this important piece of property legislation, a special instruction from the Privy Council on 8 May 1667, which laid down procedures to be followed when rebuilding the numerous party walls – walls which are technically half one side of the boundary and half the other.
The London Buildings Act 1939 is its successor today. But it was the Earl of Lytton who was the force behind extending the party wall legislation and it was his Private Member’s Bill that became the Party Wall etc. Act 1996, which came into force on 31 March 1997.
The Act provides a framework for preventing and resolving disputes in relation to party walls, boundary walls and excavations near neighbouring buildings. The provisions deal with three aspects of party walls and structures:
1. building new party walls;
2. repair and other work to party walls; and
3. excavations close to party boundaries.
The Act applies to both existing and new walls, but what is a ‘wall’ is not defined by the Act. This means that whether or not a boundary is a ‘wall’ is a matter of fact. What you would think of as traditional walls built of brick, concrete or stone are probably going to be accepted as ‘walls’.
More flimsy structures - such as wooden fencing, post and wire fencing and the like - will probably not be considered to be walls by the Act. Certainly hedges and other living structures will not. This does not mean that these cannot be covered by some other means, such as deeds.
Section 1 - new party walls
A building owner must give adjoining owners one month’s notice of an intention to build a new wall or party fence wall on the line of the boundary. The notice should indicate the desire to build and describe the intended wall. Unless the adjoining owners dissent (or are deemed to have dissented), the wall can then be built to straddle the boundary. The neighbouring parties bear the cost in proportions related to their respective use or expected use of the wall.
Section 2 - repair and other work to party walls
A building owner is allowed to:
• underpin, thicken and raise a party wall;
• demolish and rebuild or repair party walls; and
• demolish and rebuild to greater strengthen a party wall.
The moral must be to scan the list when practically any operation is contemplated.
The Act also allows for a party wall or fence to be reduced in height subject to conditions and specifically allows for cutting into a party wall to install a damp proof course and/or flashings. However, if a party wall is to remain exposed where it had not been before, then adequate weathering must be provided and any damage must be made good.
Excavations close to party boundaries
Notice is required where:
• the new wall or structure lies within three metres of a neighbour’s building and will extend below the bottom of the foundations of the adjoining owner’s building or structure; or
• the new wall or structure lies within six metres of a neighbour’s building and the excavation passes through a 45 degree line drawn from the base of the adjoining’s owner’s foundations in line with the plane of the external face of the external wall of the adjoining owner’s building or structure.
At least two months’ notice must be given in the case of works to a party wall, while only one month’s notice is required for excavations for foundations.
Detailed drawings must be attached to a notice if excavation works are proposed or if the foundations to a party wall have reinforcement in them and are known as ‘special foundations’. If no drawings are attached, the notice is automatically invalid.
The party wall legislation has been with us for some years now. However, with development firmly back on the agenda, Katie Hogan gives us a timely reminder of its main provisions.
commercial property spring 2014
If the adjoining owner fails to respond
within 14 days, they are deemed
to have dissented. However, the
adjoining owners can respond with a
Rights of the parties
The Act contains general provisions
in relation to this, but some of the
most important are:
• The building owner shall not cause
unnecessary inconvenience to any
adjoining owner or occupier and
shall compensate for any loss or
damage resulting from their work.
• All works must comply with
• A building owner and his agent
have the rights to enter the land or
premises of the adjoining owner
to execute work under the Act,
remove furniture or fittings or take
other action necessary to achieve
this, provided 14 days’ notice has
Dissenting to the work
If the adjoining owners and occupiers
do nothing, they are deemed to have
dissented. Alternatively, they may
In either case, the building owner and
the adjoining owners would need to
appoint a surveyor who would settle
the dispute by making an ‘award’
which is fair and impartial to both
parties. Both parties can appoint the
same surveyor to act or they can
each appoint their own, in which case
these two surveyors must agree
The award is conclusive and cannot
be questioned in any court unless
the building owner or the adjoining
owner appeals to the county court
against it. The county court may
rescind or modify the award or make
an order for costs.
The Act sets out who pays what,
although generally the building
owner pays all the expenses, unless
the adjoining owner has benefitted
from the works carried out, in which
case the expenses are shared.
Overall, the Act brings the benefits
of inner London legislation to the
rest of England of Wales, ensuring
that building works to adjoining
properties can go ahead speedily
whilst also making sure that the
adjoining owners are properly
If you have any queries about matters raised, please contact:
Head of Business Services
Business Development Manager
The information and any commentary contained in this newsletter are for general purposes only and do not constitute legal or any other type of professional advice. We do not accept and, to the extent permitted by law, exclude liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this newsletter. Whilst every effort has been made when producing this newsletter, no liability is accepted for any error or omission. If you have a particular query or issue, we would strongly advise you to contact a member of the commercial property team, who will be happy to provide specific advice, rather than relying on the information or comments in this newsletter.
commercial property spring 2014
Ask Hill Dickinson Please can you explain how a licence for alterations operated to release the tenant’s guarantor from liability in the Topland case. Topland owned a commercial property, which was let to WH Smith Do-It-All (which later became Payless DIY Limited) under a 35 year lease, commencing in May 1981. Smiths News Trading, the tenant’s parent company, acted as guarantor under the lease. Significantly, the lease did not permit alterations.
Payless went into administration in May 2011, leaving substantial arrears outstanding under the lease. After Payless was dissolved, Topland gave notice requiring Smiths to take a new lease for the remainder of the term.
Smiths resisted on the basis that a licence for alterations had been granted to Payless in 1987, which granted permission for Payless to construct a new garden centre. Smiths argued that, as they had not consented to this licence which increased their obligations as guarantor, they were released from all liability according to the long established rule in Holme -v- Brunskill (1878).
Holme -v- Brunskill provides that a guarantor is released if any amendments are made to the primary underlying contract, unless the guarantor consents to the variation or the variation is obviously insubstantial or cannot be prejudicial to the guarantor.
In January 2014, the Court of Appeal confirmed that the Holme -v- Brunskill rule did apply, on the basis that the licence had the clear potential to increase the obligations on Payless and therefore also on Smiths. Given the absolute prohibition against alterations in the lease, Smiths was entitled to expect that its consent would be sought for any alterations.
The court also provided useful guidance as to the interpretation of the very common proviso contained in the lease that the guarantor would not be released from liability in the event of any ‘neglect or forbearance’ by the landlord in enforcing the tenant’s covenants. This proviso only captures situations where there has actually been a breach of the tenant’s covenants, not where landlord and tenant agree to vary the lease at a time when no actual or apprehended breach of the covenants has occurred.
Although Topland does not create any new law, it provides a useful warning to landlords to ensure that they do not inadvertently release a guarantor from liability when varying a lease – or granting a licence which takes effect as a variation.
Many modern leases provide that the guarantor will not be released by a variation to the lease, whether or not the guarantor has consented. However, it is always worth checking, especially older documents.
Best practice is to ensure that the guarantor consents to the deed of variation or is a party to it. If not, you may find that the useful guarantor on whom you were relying sneaks out of the back door when you are not looking.
About Hill Dickinson
The Hill Dickinson Group offers a comprehensive range of legal services from offices in Liverpool, Manchester, London, Sheffield, Piraeus, Singapore, Monaco and Hong Kong. Collectively the firms have more than 1300 people including 180 partners.
Liverpool Manchester London Sheffield Piraeus Singapore Monaco Hong Kong ®