winter 2016/17 commercial property >>> continues on page 2 hilldickinson.com/property Speeding up property sales: top tips for a smooth transaction Page 3 SDLT - the ‘taxing’ changes Page 5 Balfour Beatty payment schedule appeal refused Page 6 ‘Get out, and take your stuff with you!’ It may sound like the parting words of a jilted lover, but it could equally be the sound advice of a commercial property lawyer to a tenant who has exercised the break clause in a lease. Break clauses have become commonplace in commercial leases in recent years. Over half of commercial leases more than five years in length now contain a break clause, while even a quarter of leases for less than five years are capable of being broken early by the tenant. If the break is only exercisable on a specific fixed date, rather than being a rolling break, the tenant may only have one opportunity to get it right. If they fail to properly exercise the break, they could remain on the hook for the rent and all the other tenant obligations under the lease (insurance premiums, service charges, repairs, etc.) for several more years. Tenants must remember that there are two distinct aspects to breaking the lease. Firstly, a valid break notice has to be served. This usually needs to be done several months before the lease will actually come to an end and any specific requirements in the lease as to the content or service of that notice must be strictly complied with. Once the break notice has been validly served, the tenant must not relax too much. Most break clauses impose conditions that the tenant must have complied with by the break date if the lease is actually to terminate. We may have moved away from the dark days when break clauses were frequently conditional upon the tenant having complied with all its obligations under the lease (meaning that even a modest breach of, say, the repairing or decorating covenants could frustrate the break), but even the Commercial Lease Code recognises that a landlord should legitimately be able to require that the tenant has at least paid the rent up-to-date and given up occupation of the premises. With landlords reluctant to take premises back that may have been difficult to re-let during and following the recession, we have witnessed a plethora of cases involving tenants finding ever more ingenious ways to get things wrong - serving the break notice on the wrong party (such as a former landlord or a superior landlord), or at the wrong address, getting the dates wrong, or even in some cases getting its own name wrong on the break notice! commercial property winter 2016/17 Welcome 2 >>> continued from page 1 Welcome to the winter edition of Hill Dickinson’s commercial property newsletter, which we hope you will find of interest. The common thread in this edition seems to be the importance of time. Emma Townley offers tips on speeding up property transactions and Bill Chandler emphasises the need for tenants to vacate on time after exercising a break clause, while Jon Pearson-Basudev and Holly Richardson consider the proposal to drastically reduce the timescales for paying SDLT. Jim Purves asks whether 2017 is the year of the shed and the back page invites you to spend five minutes protecting your properties from fraudsters. We also include a construction focus reviewing the latest JCT contracts as well as a significant case on the timing of interim payments to contractors. 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, at firstname.lastname@example.org. David Chinn Head of Business Services email@example.com David Swaffield Head of Property & Construction firstname.lastname@example.org Ensuring that a property is ready for sale is crucial to the successful completion of a transaction. This guide sets out top tips for streamlining real estate transactions, thereby minimising delays and scope for renegotiation of the agreed purchase price, as well as avoiding potentially abortive transactions and wasted costs. 1. Title review Instruct your solicitor to review the title and prepare a title pack before marketing the property for sale. This will ensure that all necessary title documents are readily available to provide to the buyer and its solicitor when heads of terms are agreed. A review of the title pre-sale will allow your solicitor to identify any title defects or missing title deeds and assist in formulating a strategy for dealing with such issues from the outset. This tactic will avoid the delay of the buyer raising enquiries on such issues and price chipping. Title registers often contain historic entries which are no longer relevant, for example, entries relating to expired or forfeited leases. Removing such entries may require the seller to submit supporting evidence or statutory declarations with its Land Registry applications, which will take time to collate and prepare. Applications to the Land Registry should be made pre-sale to ensure that the title is updated, avoiding unnecessary enquiries by the buyer and delays in waiting for the Land Registry to process and complete applications. 2. Unregistered land Sellers should ensure that all deeds and documents of title are sent to their solicitor in advance of any sale, to allow sufficient time for review and preparation of an epitome of title. As with registered land, such a review allows any title issues to be identified and managed at the outset. In both cases of registered and unregistered land, sellers should consider instructing their solicitor to prepare an overview title report, summarising any matters which require further investigation and recommending steps to take to prepare the title for sale. This will allow the seller to formulate its negotiating strategy with any potential buyer from a position of knowledge. 3. Plans Review the title plan and check that it matches the boundaries on the ground. If selling part of a property, instruct a surveyor to prepare a Land Registry-compliant plan. If dealing with unregistered land, plans to old title deeds can often be difficult to interpret. To avoid any delay in the buyer dealing with the unregistered plans and any surprises in the plans not matching the position on the ground, instruct a surveyor to produce an overlay plan. Any gaps in ownership can be identified and a solution formulated. 4. Occupiers Is the sale with vacant possession or subject to leases and licences? Your solicitor can advise on the legal steps required to enable vacant possession to be given. If the sale is to be subject to leases and licences, collate all documentation including management information. Prepare a schedule listing all leases and licences and extract key information for the schedule such as rent payable, rent review dates, term commencement and end dates, any break dates and service charge caps as well as details of any disputes with tenants. Such a schedule will provide a useful tool for managing enquiries. 5. Commercial property standard enquiries (CPSE) Replies to CPSE should be prepared in advance of a sale. CPSE should be answered fully and correctly, otherwise buyers will push back and raise further enquiries. Hannah Gavigan’s article in the autumn edition of commercial property demonstrates the importance of giving accurate replies to CPSE. Preparing replies to CPSE in advance will also identify any issues which can be dealt with before they cause delay. 6. Planning history/building regulations It is essential that the seller discloses all relevant planning permissions and provides evidence of satisfaction of planning conditions and any section 106 obligations. Ensure that all relevant documentation and building regulations completion certificates are obtained from the local authority, ready to make available to the buyer at the outset. 7. Third party consents Are there any restrictions on the title requiring the consent of a third party before the sale can complete? An early approach will avoid delays in progressing the sale to exchange and completion. Correspond with any lender to ensure they will consent to the sale and release their security on completion. Good planning in advance of a sale can minimise delays and mitigate hurdles to getting deals done. If you would be interested in attending a workshop session on preparing for sale, please contact Emma Townley to register your interest. The workshop will provide an overview of the documentation, information and processes required to ensure an efficient sale. Emma Townley email@example.com Speeding up property sales: top tips for a smooth transaction In other cases, unfortunate tenants have fallen at the final hurdle by failing to satisfy the requirement in the lease to give up vacant possession on the break date. Failure to give up vacant possession can take different forms. At one end of the spectrum lies the tenant who is still physically in situ when the break notice expires. In one such case, the tenant remained in the premises over the weekend following the break date in order to complete its repair of outstanding dilapidations. This turned out to be a well-intentioned but ultimately costly miscalculation on the tenant’s part, since the break clause was conditional on vacant possession but not on compliance with the repairing covenant. The tenant would therefore have been far better served by getting out on time and then arguing the toss over dilapidations in the usual way. At the other end of the spectrum lies the tenant who has clearly vacated the premises but who has failed to remove all its belongings from the premises. The courts have ruled that vacant possession is not given where what is left behind constitutes ‘a substantial interference with the landlord’s right to possession of a substantial part of the premises’, so it will be a question of fact and degree to be assessed on a case-by-case basis and tenants should not expect any favours from the courts. The lesson for tenants is to remember that break clauses must be complied with strictly and fully. Even if you’ve managed to successfully serve a valid break notice, any conditions to be satisfied on the break date must be complied with. If vacant possession is a condition (which it usually is), make sure you get your people out of the premises on time. You also need to take your stuff with you, and that can even include tenant’s fixtures and items such as demountable partitioning. Since the test is whether what is left substantially interferes with the landlord’s right to possession of a substantial part of the premises, it is not the case that the break will automatically fail if the tenant leaves absolutely anything at all behind, but why take the risk? Bill Chandler firstname.lastname@example.org 3 The last few years have proven a challenging time for SDLT practitioners, due to the considerable number of changes to the SDLT rules. To quote former chancellor Lord Lawson, ‘SDLT as it is now is crazy.’ In March there was the implementation of the ‘slice’ system for non-residential properties, whereby SDLT is only charged on the portion within each tax band. Then in April we saw the addition of the 3% surcharge for those buying a second residential property. Whilst these changes have focused on the calculation of SDLT, HMRC is now proposing further changes aimed at streamlining the process of filing SDLT returns and collection of payment. HMRC hopes that these changes shall bring greater efficiency to the system and enable HMRC to obtain funds and process applications more quickly. The key aspect of the new proposals, set to be implemented between 2017 and 2018, will reduce the window for filing a return and paying the tax from the effective date (which may not be the actual date of completion) to 14 days compared to the current 30-day timescale. HMRC claims that many customers already file and make payments well in advance of the 14th day and that on this basis these changes will be unlikely to have a significant impact. Whilst we accept that this is likely to be the case with many residential transactions and simple commercial transactions where the completion date and SDLT liability are already known, this may not be the case when transactions are not as straightforward. On such complicated transactions, lawyers may not be able to calculate the actual SDLT liability until the effective date and then face a race against time to complete the SDLT return, have the declaration signed by the client and obtain funds for the appropriate tax liability. Based upon the information provided so far, HMRC does not propose to distinguish between complex or more basic SDLT returns and in both cases returns will need to be completed within 14 days. Consider a client who may wish to take early occupation for fitting-out purposes following the conclusion of an agreement for lease. This triggers the requirement to file a return and pay SDLT on the lease. The actual occupation date is unlikely to be known in advance by the lawyer responsible for making the SDLT return, but the tax due cannot be finalised until the date is known. This leaves practitioners with insufficient information to be able to complete a return and a constant uphill battle to ensure their client knows the cost of early occupation. Similarly, when dealing with the grant of a lease set to commence from the completion date but with a specified end date, the precise length of the lease will be unknown and in turn the precise SDLT liability cannot be confirmed until completion. It is worth noting that there will be some exceptions to the changes. When a further return is required, for example following a rent review within the first five years of a lease, the payment window is set to remain at 30 days. Considering HMRC is intending on keeping the payment window at 30 days for rent review applications, it is surprising to find that the same logic has not been applied to transactions where an application is required to defer SDLT on uncertain or contingent consideration, nor for transactions involving overlap relief. Overlap relief (which applies where one lease replaces another, for example on lease renewal or surrender and regrant) is another situation where the SDLT liability cannot be finalised before the effective date and if the timescale is changed to 14 days it will increase the chance of incurring a penalty. Hill Dickinson LLP has responded to the HMRC consultation to raise our observations on these proposed changes. We have suggested that any reduced timescale should be expressed in working days rather than calendar days; 14 days can elapse very quickly over holiday periods such as Christmas and Easter. We have also urged HMRC to consider whether more complex transactions should remain within the 30-day timescale, particularly where SDLT is triggered by ‘substantial performance’ such as early occupation rather than by legal completion. These changes are set to come into effect during the tax year 2017-2018, therefore giving practitioners and their clients some time (but not much) to evaluate their procedures in order to minimise the impact of these changes. Jon Pearson-Basudev email@example.com Holly Richardson firstname.lastname@example.org 4 5 commercial property winter 2016/17 Christmas is approaching and the bright lights of Liverpool2 illuminate the sky like the star of Bethlehem. There is no room at the inn (the north west’s burgeoning tourism industry has seen to that), but ships and lorries are shepherding vast flocks of containers towards the north west’s numerous sheds, where wise men deposit gold, frankincense, myrrh and other containerised commodities. 2016 has been a positive year for the logistics sector in the north west and that trend looks certain to continue through 2017. Peel’s ambitious Liverpool2 deepwater container terminal is inevitably being proclaimed as a post-Brexit saviour, and 2017 will witness the arrival of the largest container ships in the world within easy reach of the majority of the population. Diverting this traffic away from the south east ports will further stimulate an already booming logistics sector in the region. However, success will bring its own challenges. Despite the Omega expansion and Peel’s investment all along the Manchester Ship Canal, a lack of sufficient speculative development in recent years means that supply is unlikely to be able to keep pace with Before Christmas, Jim Purves was asked by regional property news service Place North West for his thoughts on the prospects for the region’s logistics sector in 2017. 2017, the year of the shed? Property purchasers and tenants (and their professional advisers) will have to adapt their working practices to avoid incurring penalties and interest under proposed changes to the collection of stamp duty land tax (SDLT). SDLT - The ‘taxing’ changes North west focus escalating demand in 2017. Speculative development will continue to grow, but developers will increasingly have to fight for appropriate sites against other competing uses, including residential development. Delays in the timely availability of a new supply of quality sheds in the right locations mean that occupiers too will have to compete for the best sites. Modern buildings already fitted out by (and at the cost of) previous tenants will be in short supply. Rents will rise and logistics providers taking a developer’s shell will also have to factor in expensive fit-out costs. We will increasingly see landlords maximising their advantage by demanding longer lease terms, with 10 years becoming the norm and some landlords seeking 15 years. With logistics contracts rarely exceeding three to five years, this creates a significant risk for the logistics provider if their supply contract is not renewed. With logistics providers operating on increasingly tight margins, a lease that extends beyond the supply contract on which the provider depends can more than wipe out any profit made on the supply contract. If the shed is in a sufficiently desirable location, the logistics provider may be prepared to take a commercial view that it can find another use for it if the worst happens. Those landlords who will still consider shorter leases are increasingly demanding premium rents and no security of tenure. This reflects current market conditions, but for the logistics provider it merely substitutes one problem for another, since it allows the landlord to hold the provider to ransom on lease renewal should the customer renew the supply contract. We also expect the trend for substantial customers to take the lease themselves to swell during 2017. While this protects the logistics provider from property costs (and the risk of being left with a lease once the supply contract ends), it weakens the provider’s bargaining position with its customer and means that the loss of a supply contract can also result in the loss of a key strategic location. So, a positive prognosis generally, although supply and demand issues mean that the market is unlikely to fully return to a more recognisable equilibrium until after 2017. Jim Purves email@example.com commercial property winter 2016/17 6 7 Key changes to the Design and Build Contract form include the incorporation of the Construction (Design and Management) Regulations 2015, previously dealt with in the March 2015 Amendment 1 to the 2011 form. Current industry practice is also reflected in the new edition with reference to the BIM protocol and the removal of the JCT fluctuations options B and C (though these options are still accessible on the JCT website). A notable change that reflects current market practice is cross-referencing to forms of performance bond and parent company guarantee as well as the use of collateral warranties. Industry practice has also seemingly dictated the amendments to the insurance provisions which have been consolidated. Notably, the latest form includes provision for a ‘C.1 replacement schedule’, to allow flexibility for the insurance of existing structures, particularly where the employer is not necessarily the owner of the existing structure or building. The Design and Build 2016 form of contract also amends the payment provisions under section 4, with the objective of making the Construction Act notice requirements clearer. One such change is the introduction of defined ‘interim valuation dates’. There will be a transitional period before all projects use the new 2016 forms. Many projects currently being tendered and that will be tendered in the course of this year will still proceed on the basis of the 2011 forms (with the March 2015 Amendment 1). However, during this period consideration should be given to these key changes and thought be given to: • Where you are the employer, updating your current schedules of amendments to reflect these key changes; and • Where you are the contractor or subcontractor, reviewing your terms and conditions - particularly to reflect payment changes in the Design and Build 2016 form. The construction and engineering team at Hill Dickinson recommends steps be taken to put these changes in place in anticipation of the new 2016 form being used. We can also offer training in relation to the key changes outlined above, including the new payment mechanism changes. The Joint Contracts Tribunal (JCT) has now launched the 2016 Design and Build Contract form. It follows on the tails of the release in June of the 2016 editions of the Minor Works Building Contract and the Short Form Subcontracts in July 2016. To coincide with the launch of the 2016 Design and Build Contract, back-to-back changes have also been made in relation to the Design and Build Subcontract Agreement and Conditions Forms. Balfour Beatty payment schedule appeal refused Please contact Alan Pugh or Tricia Morrison to discuss how we can assist you. In February 2016, the now widely-discussed decision of the Technology and Construction Court in the matter of Grove Developments Ltd -v- Balfour Beatty Regional Construction Ltd was issued. In October 2016, Balfour Beatty’s appeal failed. 1 The case Balfour Beatty had entered into a building contract with Grove with the terms broadly based on the JCT Design & Build 2011 payment mechanism but with various amendments. Whilst the parties had originally envisaged using stage payments (alternative A), they actually agreed to use the valuation and payment dates set out in a payment schedule. That schedule included dates for submission of interim valuations by Balfour Beatty as well as the issue of payment certificates and payless notices by Grove. Notably, the payment schedule ran out of payment dates in July 2015, immediately after the anticipated contractual completion date for the works. As is so often the case, the works were not in fact finished by the completion date. Rather, Balfour Beatty continued on site and sought a number of extensions of time. Balfour Beatty continued to submit interim applications for payment after July 2015 but Grove, having taken legal advice, advised Balfour Beatty that it was not entitled to any further interim payments after July 2015, despite the extended period on site. 2 The original decision The original decision of Mr Justice Stuart-Smith was that whilst the Construction Act required the parties to agree an adequate payment mechanism, which is what has been done, it was accepted by the Court that Balfour Beatty may not be happy that it had agreed a payment mechanism which ran out before it had completed the works. However the Court would not intervene in these circumstances. The decision came as a surprise to many in the industry. Payment schedules which did not have a mechanism to allow an extension of the stated interim payment dates have not been that unusual. In those circumstances, parties have often simply extrapolated the scheduled dates forward or have proceeded to apply the payment timetable from the Scheme to the Construction Act. After the February decision in Grove -v- Balfour Beatty, that practice came to an end and it has become common for contractors’ claims for payment of interim applications to be refused where the payment schedules have run out of payment dates. 3 The appeal Balfour Beatty was unhappy with the decision and proceeded with an appeal. The decision of the Appeal Court was issued on 13 October. The Appeal Court was split in its decision with Lord Justice Jackson and Lord Justice Longmore refusing the appeal; however, Lord Justice Vos allowed the appeal. The key part of Jackson LJ’s decision was that the contract and its payment schedule provided for interim payments to stop at the contractual date for completion of the works. Jackson LJ found that there was neither an express nor an implied term which enabled Balfour Beatty to receive interim payments after the contractual completion date. He noted that Balfour Beatty would receive a full final payment for its work in due course, but until that final payment date arose no further payments were due to be made. It seems from the decision that the problem for Balfour Beatty was that the parties simply did not consider at the relevant time (that is when agreeing the schedule) what would happen after the payment timetable came to an end. Jackson LJ found that there was no ambiguity as to the terms agreed which would allow the Court to extend those dates expressly provided. Jackson LJ makes an interesting observation in his judgment. He notes that the Construction Act gives the parties considerable latitude as to the system of interim payments which they may agree, including deciding the frequency of interim payments and the amounts to be paid. During the course of arguments before the Court, consideration was given as to whether it would be possible for parties to, in effect, frustrate the intention of Parliament by agreeing a pitifully inadequate scheme of interim payments. The leading construction law text of Keating has suggested that it may be possible for parties to simply agree one interim periodic payment and of inadequate value. Jackson LJ observed that he doubted that a cynical device to exclude the operation of the scheme by prescribing one interim payment ‘of an insignificant amount’ would suffice. However, he also noted that he was not required to determine this issue as part of his judgment. Contracting parties should note the Court’s comment, however. If an employer does seek to frustrate the intention of Parliament in the building contract payment mechanism, it is possible that the Court will not find this to be an adequate payment mechanism in a future decision. In this case, the parties had agreed twenty-three interim payment dates and that was an adequate mechanism for quantifying those interim payments. Accordingly, the Court found that the terms of the parties’ contract were clear and were not contrary to the terms of the Construction Act. That line of reasoning was not accepted by Vos LJ. He found that the contract was ambiguous and that the parties had clearly intended to reintroduce certain parts of the JCT payment provisions and dates beyond those set out in the schedule. On the basis that the contract was ambiguous, Vos LJ decided that interim payments after the original contractual completion date were to be on the basis of the payment schedule as if the word etcetera had been included at the end of the payment schedule. He took the view that the parties must have intended interim payments to continue on the same basis up to actual practical completion and accordingly he allowed the appeal. As Longmore LJ followed the reasoning of Jackson LJ, Balfour Beatty’s appeal failed. 4 What it means… Contractors should continue to take care to make sure that payment schedules are drafted so as to allow interim payments to continue if the contractual completion date is delayed. Employers should take note of the warning in Jackson LJ’s comments on attempts to avoid the Construction Act’s intention for there to be an adequate payment mechanism. Alan Pugh firstname.lastname@example.org Tricia Morrison email@example.com Construction focus commercial property winter 2016/17 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. Liverpool Manchester London Sheffield Piraeus Singapore Monaco Hong Kong hilldickinson.com/property 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 1150 people including 190 partners and legal directors. If you have any queries about matters raised, please contact: Bill Chandler Editorial contact firstname.lastname@example.org David Chinn Head of Business Services email@example.com David Swaffield Head of Property & Construction firstname.lastname@example.org Martyn Smith Head of Business Development email@example.com The Land Registry announced in December that 50,000 people have now signed up to its award-winning Property Alert service. Property Alert is a free service that allows individuals to protect up to 10 properties from fraud. It’s easy to use and you don’t even need to know the title numbers of the properties you wish to protect. You can even monitor properties owned by other people, perhaps elderly or vulnerable relatives. The service works by sending you an email whenever a search or an application is lodged against one of your protected properties. If it relates to a purported sale or mortgage that you’re not aware of (perhaps being conducted by a fraudster who has stolen your identity), you should contact the Land Registry immediately to halt the registration and protect your interest. While it is of course fantastic that more people are signing up to Property Alert, even if all those 50,000 people have protected the maximum 10 properties each, that still represents a measly 2% of the 24 million individual registered titles. If you are not currently signed up for Property Alert, and even if your only property interest is the home you live in, then I would urge you to take five minutes out of your schedule today and protect your property. Bill Chandler firstname.lastname@example.org You can sign up to the Land Registry Property Alert service at: https://propertyalert.landregistry.gov.uk/ If there was a free way to protect your home, your buy-to-lets and your aged relatives’ homes from property fraud, you’d use it, right? Will you take five minutes to protect yourself from property fraud?