What lurks below
Did you know that landowners frequently do not own the mines and minerals beneath their land? Kevin Lee, who leads our property litigation team, examines this historical quirk that is increasingly causing problems for the new wave of post-recession development.
Coal, gas and other valuable minerals have long been nationalised, but in many cases the ownership of other minerals beneath land has historically been severed from the surface land. Some Land Registry titles expressly confirm that the title excludes mines and minerals, but even where the Land Registry title is silent there is no state guarantee that the minerals are included, nor is there any obligation on the owner of minerals to register their ownership
Particularly with the scare stories circulating about fracking (although legally that is another kettle of fish entirely), it is inevitable that some landowners will worry that third party ownership of minerals beneath their land could lead to undesirable mining operations taking place. Even where mining is unlikely, that does not mean that third party mineral ownership can be ignored.
We are dealing with an increasing number of cases where the purported owners of the mines and minerals beneath development sites are alleging that the development will interfere with their rights. Some developers are paying off these claims to make them go away, but my advice to developers is to think twice before opening the chequebook. If you receive such a claim, there are several questions that need to be asked: • Can the claimant prove that they are the rightful owner of any mines and minerals beneath the land? • Is there anything actually there? • If there is, will the proposed development actually interfere with the mines and minerals? In most cases, the proposed development simply won’t involve digging deep enough to penetrate the mineral strata. Where there is any risk of mines and minerals issues affecting a development, the developer should also consider taking out indemnity insurance at an early stage, to protect against the risks and inevitable costs of a challenge by the minerals owner. Waiting until their claim arrives will be too late!
Stamp collecting The new rates Up to £125,000 0% £125,001 - £250,000 2% £250,001 - £925,000 5% £925,001 - £1,500,000 10% Over £1,500,000 12% Stamp duty on property purchases was a remarkably simple tax 20 years ago. Either the property fell within the nil-rate band so that nothing was payable, or the price exceeded the nil-rate band, and tax of 1% was payable on the whole price. Over time, higher rates of tax were introduced for higher value properties and those higher rates were inevitably increased. The fact that the relevant rate of tax was applied to the entire price meant that modest increases in purchase price could result in a disproportionate increase in the amount of tax payable if it pushed the transaction over one of the thresholds. For example, tax of £2500 would be payable on a purchase for £250,000, but a purchase for £260,000 would be taxed at 3% rather than 1%, costing £7800. Recent years have witnessed an increasing divergence between residential and non-residential property. Residential property has a lower nil-rate band than non-residential (£125,000 rather than £150,000) and higher rates have been introduced for valuable residential property, including a 5% rate for properties over £1 million, 7% for properties over £2 million and the punitive 15% rate for ‘higher threshold interests’, which now applies to residential properties over £500,000 purchased in corporate ‘envelopes’. While all these changes represented the development of the existing system, the changes introduced by the autumn statement late last year represent a fundamental change of direction for the taxation of residential property transactions. By moving to a ‘slice’ system where only the relevant proportion of the purchase price falling within each band is taxed at the applicable rate (similar to income tax), the massive hikes that previously applied when moving from one band to another are avoided. The tax bands and rates have been set so that most buyers will pay less tax, especially at the lower end of the market. In fact, more tax will only be paid on purchases between £937,500 and £1 million and those over £1,125,000. The Government estimates that 98% of byers will benefit from the changes, with SDLT on the average family home plummeting from £8250 to £3750. It is interesting that a ‘slice’ approach to taxing property transactions also underpins the new Land and Buildings Transaction Tax which replaces SDLT in Scotland on 1 April 2015, and had been mooted as a possible change to be introduced when SDLT is devolved to Wales. It remains to be seen, however, whether this new philosophy will be extended in due course to non-residential property in England and Wales. Bill Chandler email@example.com Business as usual - Non-residential property is unaffected by the changes and continues to be taxed in the traditional way. - Higher Threshold Interests (i.e. residential properties over £500,000 purchased in corporate envelopes) continue to be taxed at 15% of the entire price.4 Traditional structures A hotel operated by the freehold owner, possibly with traditional mortgage finance, is straightforward and uncomplicated from a property law perspective. Provided there are no restrictive covenants on the freehold title limiting the development or use of the property as a hotel and the landowner has the necessary planning permission and licences, the landowner has complete freedom over the hotel operation. Where the hotel operator is taking a lease of the hotel premises, the lease negotiation will resemble commercial lease negotiations in any other sector. Careful consideration should however be given to the lease clauses concerning user, alterations and especially alienation, to ensure that the lease allows sufficient flexibility in the event that at some future date the operator wishes to embrace one of the alternative structures discussed below. While such simple ownership structures have not disappeared altogether from the hotel sector, they are largely confined to small independent operators, such as traditional family-run seaside hotels. Changes to business models, combined with difficulties raising traditional funding, have As hotel operators explore increasingly diverse and innovative methods of funding new schemes, commercial property partners Andrew Williams and Alex McCann examine the property law implications of this specialist sector. Room service required innovative solutions. Most large hotel chains, and the majority of significant new hotel developments, now adopt far more complicated structures which differentiate the hotel sector from other property classes. Management agreements Popular for a number of years, management agreements allow a hotel chain to operate a hotel without actually owning any interest in the underlying hotel premises. The agreement regulates the rights and obligations of the parties, covering everything from repairs and improvements to the hiring and firing of staff and the all-important calculation and division of profit. Although not intended to create any interest in the property, it is important that the management agreement is considered by the property lawyers. Not only will it deal with the use and management of the property, but it is easy to inadvertently create a landlord and tenant relationship between landowner and occupier, since the law looks at the substance of the arrangement rather than the label placed on it by the parties. The creation of a lease can be dangerous for both parties. The landowner does not wish the hotel operator to acquire statutory security of tenure and renewal rights as a business tenant. Furthermore, if the landowner is itself a leaseholder rather than freeholder, their own lease may prohibit the grant of further leases, or at least require the superior landlord’s consent. For the hotel operator, the creation of a legal estate in the property may give rise to unwanted liabilities, starting with the obligations to pay Stamp Duty Land Tax on the lease and to register it at the Land Registry. Even where all parties are confident that the management agreement does not constitute a lease, consideration still needs to be given as to whether it offends any restrictions in the landowner’s headlease on sharing occupation or possession of the property. commercial property winter 2014/15 5 Business premises renovation allowance Another valuable piece of the funding jigsaw is Business Premises Renovation Allowance (BPRA), which provides 100% tax relief on the costs of converting or renovating qualifying buildings, although not on the cost of land acquisition or constructing new buildings or extensions. We have been involved in several recent schemes where BPRA was key to the financial viability of the project. Particularly attractive for hotel conversions because of the high level of costs involved in such projects, BPRA is available for business premises in a designated disadvantaged area that have been empty for at least a year. You may wonder who would be developing hotels in disadvantaged areas, but several of these designated areas include lucrative city centre locations. BPRA won’t last forever. Originally scheduled to finish in April 2012, the scheme has been extended by a further five years. Any hotel development relying on BPRA also needs to be considered as a medium-term investment, since a ‘balancing adjustment’ will be made if the relevant interest is sold within seven years of the building being brought back into use. Hotel room investment Another solution to the development funding conundrum is the phenomenon of hotel room investment. A concept which arrived from the Unites States in the early years of the new century, hotel room investment involves investors purchasing long leases of individual hotel rooms, which are then leased back to the operator so that they can be used as part of the hotel. In addition to an expectation of capital growth, investors can usually expect to receive a percentage of revenue from ‘their’ room, and maybe free use of the room for a certain number of nights each year. While generally only minimal negotiation of the leases of the individual rooms will be permitted, these leases will need to deal with complicated issues such as rights over common parts and what happens if the hotel closes. The leases will also be subject to Stamp Duty Land Tax and will need to be registered at the Land Registry. If the developer only holds a leasehold interest in the property, the subletting provisions of the developer’s headlease will need to be examined carefully to ensure that the proposed scheme is permitted. Unlike a traditional new-build property purchase, where the buyer pays a modest deposit on exchange of contracts and only pays the bulk of the purchase price when completion takes place following completion of the building, a typical hotel room investment scheme requires the buyer to pay at least half of the purchase price up front. Widely touted in the years leading up to the recession as a viable alternative to investment in traditional buy-to-let property, interest among UK investors has waned due to the risk of paying substantial sums before receiving a lease, together with problems financing such a purchase and an uncertain resale market. However, the appetite for this sort of property investment continues unabated among wealthy overseas investors and we have been involved in several new hotels funded entirely in this way. Conclusion It is apparent from the above that hotel development has broken away from traditional property ownership structures, perhaps moreso than any other sector. It is therefore imperative that anyone thinking of becoming involved in the hotel sector - whether as developer, operator or investor – retains an open mind as to how a scheme should be structured and funded, and that they take advice from professionals with experience of this increasingly specialist sector. Andrew Williams firstname.lastname@example.org Alex McCann email@example.com Competition law is finally starting to bite on retail leases, but not necessarily in the ways we expected, warns Michael Stephens. Tales of the unexpected It is over three years since retail leases were exposed to the full force of competition law. The repeal of the Land Agreements Exclusion Order on 6 April 2011 stripped the security blanket from all property contracts, leases and other land agreements. What’s caught? Any agreement which restricts the use of land is potentially vulnerable. This isn’t just about competitors carving up territory between them. This also affects retailers protecting themselves from unwanted competition by imposing restrictive covenants on the disposal of surplus property, or by insisting on lease covenants whereby the landlord guarantees an anchor tenant exclusivity within a particular scheme. The consequences of getting it wrong can be severe. Not only is the offending restriction void, but the parties involved can each be fined up to 10% of their annual global turnover. The official guidance promises that only a small minority of property agreements will have the appreciable effect on competition required to infringe competition law. The emphasis is on the effect that a particular restriction has on the relevant market, rather than the wording of the restriction itself. Matters are further complicated by the principle of ‘transient voidness’, which dictates that valid restrictions can still breach competition law months or even years later following changes in the relevant market. The big seven supermarket chains are subject to even greater restrictions under the Controlled Land Order (CLO). Among other things, the CLO prohibits them from imposing new restrictive covenants preventing grocery retailing and imposes strict conditions on new exclusivity agreements with landlords. Retailers are undoubtedly far more familiar with competition law concepts than many others affected by the change. However, despite the reassurances made in the official guidance, considerable uncertainty remained as to how the courts would apply competition law in the context of commercial leases. User clauses The recent first reported case on the application of competition law to retail leases suggests that the courts will perhaps be more sympathetic than expected to arguments based upon competition law. With restrictive covenants and exclusivity agreements considered most vulnerable, it was somewhat surprising that the first reported case concerned a user clause in a lease and arose in the context of lease renewal proceedings. The case concerned a newsagent’s shop in a suburban shopping parade on a post-war housing estate. The local authority landlord had a longstanding policy of deliberately using narrow user clauses to ensure that the parade contained a selection of complementary retailers, including a baker, pharmacy, hairdresser, takeaway, mini-supermarket and newsagent. In doing so, the council was not seeking to protect itself from competition, but to maintain a diverse and vibrant parade for the benefit of the local community. ‘The repeal of the Land Agreements Exclusion Order stripped the security blanket from property contracts, leases and other land agreements.’On lease renewal, the newsagent wished to extend its user clause to become a convenience store. To avoid potential competition with the mini-supermarket, the council proposed a user clause for the renewal lease making it clear that the newsagent could not sell groceries or other convenience goods. The judge held that the user clause proposed by the council infringed competition law and did not benefit from the exemption which can save anti-competitive agreements that ultimately afford a benefit to consumers. Significance At first glance, this case is great news for retailers and disastrous for landlords. Retail tenants will undoubtedly attempt to use this case as a precedent to upset similar letting schemes elsewhere and generally to argue against overlyrestrictive user clauses and to leverage wider user clauses on lease renewal. However, while the first case to consider a new area of law is always exciting, it is important not to get carried away. The official guidance confirms that landlords have a legitimate interest in manipulating user clauses to manage their estates and ensure a good tenant mix. In this case, the council conceded that the proposed user clause did breach competition law, presumably having concluded that the housing estate was likely to constitute the ‘relevant market’ and that this parade comprised the only shops within that market. With the council having conceded the key issue, the case was argued on the basis of whether the consumer benefit exemption applied. Since a strong case will always be needed to invoke this narrow exemption, it is not altogether surprising that the judge decided that the exemption did not apply. The case is therefore less significant than it first appears. Virtually every shop lease in the country contains some limitations on the tenant’s use of the property and in the vast majority of cases this will not result in a breach of competition law. Exclusivity agreements While the next battleground might be more predictable, its outcome could have wider ramifications for retailers. The Supreme Court of Latvia has asked the European Court of Justice to consider whether exclusivity agreements given to anchor tenants by shopping centre landlords automatically offend competition law, regardless of their effect on the market. The Latvian competition authorities have apparently been taking a hard line on exclusivity agreements, focusing on their anti-competitive intent. In contrast, the UK’s approach focuses on effect and even the CLO stops short of imposing an absolute prohibition on retailers extracting exclusivity covenants from landlords. Such an outcome in the European courts would therefore necessitate a complete rethink of the current position in the UK, although judicial guidance on assessing such agreements would be welcomed. Watch this space! Landlords and tenants beware Recent developments serve as a timely wake-up call for landlords and tenants of retail property that they are not immune from challenges based upon competition law. Every proposed new restriction must be individually risk-assessed before the agreement is entered into. And don’t forget that existing agreements are affected too, even those entered into before 2011. Michael Stephens firstname.lastname@example.org 7 commercial property winter 2014/15 ‘The first case suggests that the courts may be more sympathetic than expected to competition law arguments, but don’t get carried away.’If you have any queries about matters raised, please contact: Bill Chandler Editorial contact email@example.com David Chinn Head of Business Services firstname.lastname@example.org David Swaffield Head of Property & Construction email@example.com Martyn Smith Business Development Manager firstname.lastname@example.org hilldickinson.com/property ® 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. 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 Break clauses In Marks & Spencer plc -v- BNP Paribas Securities Services Trust Company (Jersey) Limited, discussed in the summer 2014 edition of this newsletter, the Court of Appeal overturned the High Court’s decision and ruled that Marks & Spencer were not entitled to a refund of rent paid in advance where the lease had been terminated mid-quarter pursuant to a tenant’s break clause. The Supreme Court has given Marks & Spencer leave to appeal, meaning that we should receive welcome clarity from the highest court in the land as to how rent paid in advance should be treated in such circumstances. In the meantime, however, landlords and tenants are back in limbo. Insolvent tenants In the Game Station case, discussed in the spring 2014 edition of this newsletter, the Court of Appeal departed from the approach previously taken by the courts and ruled that rent is payable as an expense of the administration for any period that the administrator makes use of the property, regardless of whether the rent fell due before or after the commencement of the administration. The Supreme Court has refused leave to appeal in this case, leaving the Court of Appeal’s decision as the approach to follow when a tenant enters administration. Bill Chandler email@example.com