Header graphic for print

Keeping It Real Estate

News and Trends in UK Real Estate, Disputes and Planning Law

Posted in Real Estate News

Hogan Lovells hosts the Reading Real Estate Foundation Breakfast Forum on the Battersea Power Station Development

Panoramic views and amenities galore are on the menu at Battersea Power Station.  The sold out Breakfast Forum event featured presentations by:

- Alistair Shaw, Chief Development Officer, Battersea Power Station Development Company;
- Natalie Lintott, Partner, Cushman & Wakefield; and
- Matthew Townend, Head of Residential, Battersea Power Station Development Company.

Alistair gave an interesting overview of the mixed use development of Battersea Power Station, which will form part of the regeneration currently underway of the wider Nine Elms area. The development will benefit from the £1 billion extension of the Northern Line to create two new stations at Nine Elms and Battersea. The majority of BPS’s section 106 contribution of around £250M will go towards the Northern Line extension which should open in 2020. From the new Battersea tube station, it is envisaged that a “two tier” high street will be created leading to the iconic building. Continue Reading

Posted in Case Updates

Case Analysis: How Tiger Came to appeal a decision based on its own Expert Evidence

Sunlife Europe Properties Limited v Tiger Aspect Holdings Limited and Another

(CA) [2013] EWCA Civ 1656

The High Court’s decision in the £2.1 million dilapidations dispute between Sunlife (the landlord) and Tiger Aspect (the tenant) received a great deal of commentary in the industry and legal press in early 2013.  As tends to happen, the subsequent Court of Appeal decision in December also attracted press coverage, but the issue before the Court of Appeal was quite different from the one that was so capably dealt with by the High Court. Now that the dust has settled, one can look with fresh eyes at the case before the Court of Appeal and ask how it was that Tiger came to ask the Court of Appeal to overturn a valuation that was carried out in accordance with its own expert’s methods.

First, we have to revisit the High Court decision.  The High Court held that Tiger had taken the wrong approach to the valuation process under section 18(1) of the Landlord and Tenant Act 1927.  Tiger had sought to argue that their liability should be capped under section 18(1) at £240,000, which they said was the diminution in value of Sunlife’s freehold interest in the Soho Square property, arising out of the disrepair. In a detailed, reasoned judgment, Mr Justice Edwards-Stuart explained that if the landlord could have let or sold the property in the condition it ought to have been left in (that is to say, in full compliance with covenants entered into in 1973) then the measure of the landlord’s loss would be the cost of putting the property into that condition or (if lower) the difference between its actual condition and the required 1973 condition (see flow chart below).  The parties agreed that the property could have been re-let in 2008 in full compliance condition.  The cost of the works was the lower measure, and the Judge meticulously reviewed and assessed that cost on an item-by-item basis.

The High Court’s decision thus went against Tiger, but the effect of that judgment was compounded by the fact that Tiger’s expert was not called to give evidence in the High Court.  The parties had submitted expert reports and a joint statement, but once they concluded that the property could have been re-let in its full compliance condition and the parties agreed (perhaps too hastily) that an incoming tenant would not have carried out significant extra work, Tiger decided not to call evidence from its valuer.

It was then common ground that Sunlife’s valuer had not carried out a valuation on the appropriate basis for the circumstances, so the Judge relied instead on the appropriate residual valuation methodology contained in the written report from Tiger’s expert. Item by item, he substituted for the cost of works in that report, his own assessment of the cost of works, so that the same methodology generated a new result.  Tiger’s valuer was not there in person to contradict or challenge the Judge’s application of his methodology. Had he done so, his evidence might have improved his client’s position. It has been suggested that Tiger’s expert could have argued that in a location such as Soho Square, one should more readily accept that any incoming tenant would carry out upgrading works even where there was a market for the property in its full compliance condition.

However, the Court of Appeal’s decision was unequivocal.  The High Court was entitled to rely on the evidence before it. Being unable to rely on Sunlife’s expert evidence, and in the absence of oral evidence from Tiger’s expert, Mr Justice Edwards-Stuart was right to employ the residual valuation methodology available from Tiger’s expert report. The methodology was of such a nature that by importing his own cost of works calculations (which he had arrived at so meticulously), the mechanism would yield a new figure, from which the Judge was able to infer the diminution value of the property.

The lesson from the High Court was one which reinforced and explained existing principles of dilapidations law. That judgment remains an important one because it so meticulously walked through the full process from costing the works to ascertaining the correct measure of loss and applying that measure to the facts.  In contrast, the Court of Appeal decision emphasises a far more practical point; that the court is entitled to, and will, rely on whatever evidence is presented to it, and one should not stand down one’s experts too readily, and certainly not before all matters of valuation have been determined.

The measure of loss (following the High Court decision in Sunlife v Tiger Aspect)

 

Posted in Real Estate News

Fair Game: Law overturned on rent payable during administrations

The UK Court of Appeal has swept aside existing rules governing when administrators have to pay advance rents falling due before their appointment.

In what will be seen as a significant victory for landlords, the Court held on 24 February 2014 that it was not open for administrators to enjoy a rent free period simply because they were appointed just after a quarter day.  The decision will have major implications for the planning and implementation of corporate insolvencies and looks set to transform the relationship between insolvency practitioners and the property industry.

The Court had to consider whether the administrators of the Game group had to pay rent as an “expense of the administration” in priority to other debts.  The retailer had over 600 stores and quarterly rents of about £10 million when it went into administration.  It failed to pay rent due on the March 2012 quarter day and appointed administrators shortly afterwards.

Game’s administrators quickly sold the business and assets of the group, including a number of the stores which continued to trade.  The question was whether they had to pay about £3 million of unpaid rent that had fallen due for those stores.  The Court of Appeal decided unanimously that they did.  In reality, the buyer of the business will have to pay the rent as it reportedly indemnified the administrators against this liability.

In reaching its decision, the Court overturned earlier case law that has dictated the relationship between landlords and insolvency practitioners throughout most of the latest economic downturn.  In 2009, Goldacre was viewed as a landlord friendly decision as it confirmed that administrators were required to pay in full quarterly rents falling due after their appointment where they were using the property on the quarter day.

The case has since become something of a poisoned chalice for landlords.  As was subsequently confirmed in the 2012 Luminar decision, Goldacre meant that advance rent falling due prior to the appointment of administrators was not treated as payable as an expense, even where property was used for the remainder of the quarter.  Landlords have complained about the seemingly deliberate timing of appointments around rent days to avoid payments and have called for a return to the “pay as you go” regime previously adopted.

Lord Justice Lewison, giving the leading judgment, said that the earlier cases had “left the law in a very unsatisfactory state“.  Instead, His Lordship said that administrators and liquidators “must make payments at the rate of the rent for the duration of any period during which [they] retain possession of the demised property for the benefit of the winding up or administration.  The rent will be treated as accruing from day to day.  Those payments are payable as expenses of the winding up or administration.  The duration of the period is a question of fact and is not determined merely by reference to which rent days occur before, during or after that period“.

Pithily summing up the position, he said that administrators “can’t have the penny and the bun“.

The result is that administrators will no longer be able to plan for a rent free period during which landlords are kept at bay whilst a business is sold.  Yet the decision cuts both ways: administrators will not have to pay an entire quarter’s rent in advance where they happen to retain premises on the rent day but vacate part way through the quarter.

The decision represents a major shift and return to the position that was thought to apply before Goldacre.  We are unlikely to have heard the last of this issue.  Even allowing for the time it will take for all the practical consequences to be worked through, an appeal to the Supreme Court may seem inevitable given the amounts and the principles at stake.

Posted in Real Estate News

Frack to the drawing board?

Landowners in the South Downs National Park have hit the headlines recently with their opposition to controversial shale gas exploration in the area. In this blog we ask – have the objectors managed to find a way to plug the shale gas well before drilling starts?

The actions of this local community are as a result of a planning application submitted by an energy company to construct a temporary well site to search for commercially viable oil and gas reserves. The company is likely to drill both vertically and horizontally (into neighbouring land) in its search for the reserves.

In response to the application, the landowners have submitted a letter to the energy company and the Energy Secretary, Ed Davey, to expressly deny permission for horizontal drilling into their land.

It has often been said that the owner of the surface of the earth is entitled to everything below it, down to the centre of the earth. Few realise that Section 2 of the Petroleum Act 1998 establishes a statutory exception that any petroleum deposits (including shale gas) in the UK are the property of the Crown. Consequently a licence is required from the Department for Energy and Climate Change (amongst other consents) to extract the gas and, on the face of it, consent from the owner of the surface is needed in order to drill horizontally to access gas deposits.

The case of Bocardo SA v Star Energy UK Onshore Limited [2011] 1 AC added fuel to the debate as it brought into question whether horizontal drilling at hundreds of metres below the surface could result in a trespass. The Supreme Court concluded that it could. Objectors heralded this as a success for future actions, a means for local landowners to prevent horizontal drilling and hydraulic fracturing (“fracking”) on their land – by obtaining injunctive relief.

However, that is not the end of the matter. A process set out in the Mines (Working Facilities and Support) Act 1966 allows a court to grant rights to energy companies to enter onto private land to search and bore for gas. Importantly, these ancillary rights will only be granted in limited circumstances.  The court will need to be satisfied that it is not reasonably practicable to obtain the necessary rights, for example where landowners unreasonably refuse to grant the rights or demand terms which are unreasonable.

As a consequence, the tension between objectors and energy companies is not going to go away. As the fracking debate continues to heat up, both sides would be wise to tread carefully.

Posted in Case Updates

Guarantor pays nothing in DIY store case

The recent Court of Appeal case involving Topland Limited and Smiths News Trading Limited was a salutary lesson about the strict rules that protect guarantors and the perils of forgetting them.  The facts of the case were relatively simple:  Topland owned a commercial property, leased to the rather aptly named Payless DIY Ltd, which became insolvent.  Topland brought a claim against the tenant’s guarantor, Smiths, for arrears of over £280,000 and required them to take a new lease for the remainder of the term. Smiths argued that it had been released from liability as it had not consented to an earlier licence for alterations, granted to the tenant by Topland’s predecessor.

The case revolved around a principle of law (known as the rule in Holme v Brunskill) established in 1878 when a tenant farmer was obliged under the terms of his lease to re-deliver a flock of some 700 sheep in good condition.  Unfortunately, when the time came, there weren’t 700 sheep and they were not in good condition. The landlord looked to the farmer’s surety to make good his losses but during the course of the lease, and unbeknown to the surety, the farmer had agreed with the landlord that he would surrender a field in exchange for a decrease in rent.  Because the surety had not consented to this alteration to the lease, the court held that the surety was released from his obligations.  The principle that emerged has since become embedded in law: unless it is self-evident that a variation is insubstantial or incapable of prejudicing a guarantor then the guarantor will be released from its liabilities unless it consents to the variation.

Over 130 years later, the rule still holds firm. The licence granted by Topland’s predecessor amounted to a variation as it permitted structural works (the construction of a new garden centre to be accessed by making an opening in the wall of the building) which were prohibited by the lease. The increased obligations were not of the type contemplated by the lease (such as an increase in rent through rent review) and, as the alterations could only be carried out with the landlord’s agreement, the guarantor was entitled to expect that its consent would be sought as well as that of the landlord. The Court was of the opinion that the variation had clear potential to increase the obligations of the guarantor in the event of the tenant’s default. The rule in Holme v Brunskill applied and, as the surety had not consented to the variation, it was discharged.

Although patently not new law, this is a timely reminder that guarantors should be joined into documents that might be viewed as variations to leases. Not to do so is to run the risk of having to argue that the changes are self-evidently insubstantial or do not prejudice the guarantor. The ultimate result might be losing the benefit of a guarantee just when you need it the most.

Case reference: Topland Portfolio No. 1 Limited v Smiths News Trading Limited [2014] EWCA Civ18

Posted in Planning

Deregistration of town and village greens – good news for landowners

The Supreme Court has recently made an important ruling on when the register of town and village greens (TVGs) can be rectified to remove land erroneously registered (Adamson and others v Paddico (267) Limited and Mrs Gill Taylor v Betterment Properties (Weymouth) Limited [2014] UK SC7).  Given that the registration of land as a TVG effectively prevents all development taking place, this case is important in removing a potential hurdle for landowners wishing to have their land deregistered, although those commentators throwing their arms in the air and declaring that this decision gives a “green light” to developers to build on TVGs are overstating its importance somewhat.

There has always existed a right to apply to rectify the register of TVGs, including seeking deregistration of land.  However, this rectification can only take place where the court is satisfied that the registration of the land as a TVG was flawed in the first place and it remains the case that in order for land to be deregistered the landowner must be able to demonstrate that the statutory test for registration was never met.

What the case does do, though, is ensure flexibility as to when an application for rectification can be made.  The law does not prescribe a deadline for making an application and in one of the two conjoined cases before the Court 13 years passed between registration of the land and the application for rectification.  Local residents argued that the land should not be deregistered as deregistration would be unfair to members of the public who had, in effect, grown used to the areas being TVGs.  They argued that many people had brought properties overlooking the TVGs in reliance on the fact that they were registered, and that it would be unfair for everyone who had been using the land since registration to now lose the right to do so.

The Court, though, held that the starting point should be the landowners’ rights and given that those rights had been “severely curtailed”  for some time by a registration which should never have taken place, the Court found that members of the public needed to show significant prejudice in order to prevent rectification of the register.  Delay is not immaterial, and there will be cases where delay does make it unjust to rectify the register, given the prejudice it would cause, but that was not the case here.

Accordingly landowners now have the comfort of knowing that they have some leeway in deciding whether to apply to have their land deregistered as a TVG, where the original registration was flawed.  However, given the greater risk that local inhabitants will be able to show prejudice as time passes, it is still advisable in all cases to act as promptly as possible.

Posted in Real Estate News

CRAR creeps closer – more new regulations introduced

The implementation of Commercial Rent Arrears Recovery (CRAR), which will replace the law of distress, has taken a step forward.  On 9 January 2014, new regulations (Taking Control of Goods (Fees) Regulations 2014) were made for enforcement agents to recover fees and disbursements for CRAR from debtors.  There are three stages to the new process (set out in Schedule 12 to the Tribunals, Courts and Enforcement Act 2007) and the fees payable are:

1. compliance stage (instructing the enforcement agent and serving notices)

  • fixed fee of £75

2. enforcement stage (all activities relating to enforcement up to but not including any sale or disposal of goods)

  • for non-High Court matters: a fixed fee of £235 plus 7.5% of any sum to be recovered exceeding £1500, or
  • for High Court matters: a fixed fee of £190 plus 7.5% of any sum to be recovered exceeding £1,000

3. sale or disposal stage

  • a fixed fee of £525 plus a further 7.5% of any sum to be recovered in excess of: £1,500 for non-High Court matters; and £1,000 for High Court matters

As with bailiff’s fees for distress, the enforcement agent’s fees will generally be recoverable out of the sale proceeds of the seized goods along with expenses (such as court fees, storage costs and paying for locksmiths).

This is the second set of regulations brought out to make way for the introduction of CRAR.  The first set of regulations (Taking Control of Goods Regulations 2013) established procedures for taking control of goods. A third and final set (on certification to work as an enforcement agent) will follow shortly.  All three are due to come into force on 6 April 2014.

The original recommendation to abolish distress was published by the Payne Committee in 1969.  It has taken 45 years to implement the proposal to change the law, which may be a record!

Posted in Real Estate News

A common approach for discharging mortgages?

Earlier this week, the City of London Law Society issued a new Protocol for discharging mortgages of commercial property but will this mean a common approach for all commercial property transactions?

Historically, commercial property transactions do not benefit from the Law Society endorsed code of practice that relates to residential properties.  Instead, where a transaction involves mortgaged property, there is a chicken and egg scenario that needs to be resolved each time: the buyer does not want to release the sale proceeds before the mortgage has been discharged and the seller’s bank does not want to discharge the mortgage (or release the title deeds) until it has the redemption monies.  The scenario is complicated further if the buyer also intends to mortgage the property.

The solution is often a series of tortuous completion mechanics and undertakings which need to be negotiated by the lawyers from scratch for every transaction.  The new Protocol includes draft contract provisions as well as draft undertakings, which the seller’s solicitors give to their client’s bank, the buyer’s solicitor and (if appropriate) to the buyer’s bank’s solicitors.

The Land Law Committee of the City of London Law Society has designed the Protocol as a “best practice” guide.  It is not compulsory but it sets out the steps which the Committee consider to be “appropriate and fair to all parties”. It is for the parties themselves to decide on a case by case basis whether to adopt the Protocol or whether to adopt it with variations.

The Financial Law Committee of the City of London Law Society and the Association of Property Lenders have both been consulted in devising the Protocol, so it is to be hoped that banks and their solicitors will agree to adopt it.  However, the “preferred” scenario presented in the Protocol involves the mortgage release being signed by the seller’s bank and sent to the seller’s solicitor before completion.  It also assumes that the seller’s bank will unconditionally release the mortgage release when the seller’s solicitor is holding the redemption money, but before it has been received by the bank itself.  Anecdotal evidence suggests that these two key steps may not be agreed by the seller’s bank in practice.

In recognition of this, the new Protocol includes an “alternative” scenario in which the completion monies are split between the redemption monies which are to be sent to the bank’s solicitors and the rest of the money which is to be sent to the seller’s solicitors.  The buyer relies on an undertaking from the bank’s solicitor to send the mortgage release following completion.  It remains to be seen whether the alternative scenario will in fact be the banks’ preferred scenario.  It also fails to overcome the problem of banks who rely on in-house non-legal staff (who cannot provide legally binding undertakings) to process discharges rather than the appointment of external or even in-house solicitors.

The new Protocol is welcome news for owners of commercial property as well as their lawyers.  If it becomes widely adopted, protracted negotiations of completion mechanics can be short-circuited, which should speed up the transaction process and re-direct focus appropriately.  Unfortunately the uptake depends rather more on a change in attitude from the banks which, to date, have shown little sign of changing their practices.

Posted in Case Updates

Insolvency and Deposits: Get your priorities right

Landlords often ask for a rent deposit when they grant a new lease, or consent to an assignment, especially if the incoming tenant is of shaky covenant strength.  This provides security against possible future default.

If a tenant becomes insolvent then this is exactly the sort of situation where a landlord would want to make use of a deposit.  Where it is in the “commingling” form (i.e. paid to the landlord so that it becomes a debt in favour of the tenant) then that is unproblematic: no restrictions are imposed by the moratorium which arises on the tenant’s insolvency.

However, if it is in the “charging” form (i.e. kept in a separate account charged to the landlord) then the moratorium prevents the landlord from enforcing the charge without the consent of the administrator or permission of the court.  The landlord may argue that the deposit is a “financial collateral arrangement”, in which case the moratorium would be disapplied under EU regulations.  But that requires the deposit to be in the “possession or control” of the landlord.  What if it isn’t?

A welcome answer could be inferred from Re A/Wear UK Ltd (in administration), a Court of Appeal case from December last year.

In the case, two landlords entered into agreements with the company on terms that (a) the landlord could require the lease to be surrendered on six weeks’ notice, (b) the tenant would pay a “reverse premium” for the surrender (£340,000 for one lease, £210,000 for the other), (c) the premium would be held in an escrow account by the landlord’s solicitors, and (d) the solicitors would release the monies to the landlord on completion. The tenant had a contingent right to a return of the premium if the surrenders never happened.

The landlords served notice to complete the surrenders but before completion the tenant went into administration.  The administrators refused to complete the surrenders as that would trigger the release of the premiums to the landlords.  As a result of the moratorium, the court’s permission was needed by the landlords to seek an order for specific performance requiring the tenant to comply with the agreements.

The High Court refused permission: the landlords could forfeit the leases if they really wanted the properties back.  Their true agenda was to trigger the payment of the monies held in escrow. Generally, a court will not permit enforcement of an obligation to pay where the company is insolvent as that would mean one creditor gets paid in priority to others.

The Court of Appeal overturned the decision.  Once the money was placed in escrow, it was no longer part of the tenant’s assets available to be distributed to its creditors.  Therefore, granting the landlord permission to seek an order would not disadvantage other creditors.  Whilst it was true that if the landlords did not get permission then it was possible that the tenant’s contingent interest in the deposits might be realised, this did not justify a refusal.  That would be to promote the interests of the other creditors over those of the landlords.  The same rationale could be applied where a landlord needs the court’s permission to enforce a rent deposit.

The decision also confirms that landlords are right to give short shrift to administrators who demand an immediate return of a rent deposit.  The tenant’s interest remains contingent and always subject to the landlord’s contractual rights.

Re A/Wear UK Ltd (in administration) [2013] EWCA Civ1626

Posted in Case Updates

A slip-up by the pool? Collateral warranties held to fall within the Construction Act for the first time

Have you noticed how often swimming pools feature in important cases? Consider, for example, the 2012 case of Walter Lilly & Co Ltd v Mackay which clarified several issues commonly encountered in construction disputes and involved a luxury home with a basement pool. The recent High Court decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] is likely to join this (water) canon.

The case concerned a swimming pool and leisure facility on a site owned by Cardiff City Council. The Council let the site to a property developer who engaged Laing O’Rourke Wales and West Ltd to construct the facility. Practical completion was achieved in 2008. In December 2007, before completing the works, LOR provided a collateral warranty in respect of the works to the facility operator, Parkwood Leisure Ltd, a subsidiary of the developer.

In 2011, a dispute between Parkwood and LOR arose over defective work. The parties settled and LOR agreed to carry out further works as part of the settlement. Parkwood found further defects and, relying on the warranty, initiated proceedings.  LOR denied there was a dispute. Parkwood sought a declaration that the warranty was effectively a “construction contract” pursuant to the Housing Grants, Construction and Regeneration Act 1996 (commonly referred to  as the Construction Act) and that its claim could therefore be adjudicated. Mr Justice Akenhead granted the declaration.

Many industry players have criticised the decision, arguing that collateral warranties are not the types of contract the Act was introduced to cover, because, for example, they do not include direct payment obligations for having carried out work or rights to deduct liquidated damages for late or defective performance. However, the decision still stands.

Perhaps an unexpected outcome will be increased support for third party rights in place of warranties. While the matter has not been the subject of a reported decision, it is generally accepted that third party rights do not of themselves create a contract. As such there is less chance of statutory adjudication rights being invoked for their enforcement.