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

Posted in Real Estate News

Landlord liable for business rates following lease disclaimer

It has been understood since the Hindcastle case in 1997 that a guarantor’s payment obligations under a lease survive disclaimer by an insolvent tenant’s liquidator.  What has been less clear is how that works, given that the tenant’s obligation to pay rent dies when the lease is disclaimed.

Does the guarantor’s liability continue because the lease also continues to exist in some way?  The recent case of Schroder Exempt Property Unit Trust v Birmingham CC [2014] has shed some light on this and clarified that, following disclaimer, the landlord is liable for business rates on empty properties.

What is disclaimer?

A liquidator has a statutory power under the Insolvency Act 1986 to disclaim onerous property.  The effect of this is “to determine… the rights, interests and liabilities of the company in or in respect of the property disclaimed“, thereby unburdening the insolvent estate from future liabilities in respect of property that is of no use to the liquidator.

However, disclaimer expressly “does not, except so far as is necessary for the purpose of releasing the company from any liability, affect the rights or liabilities of any other person“.

Hindcastle, which is still the leading authority, confirmed that a guarantor’s liabilities are not affected by disclaimer, notwithstanding that the tenant’s obligation to pay the rent has fallen away.  In order to understand this concept, some have explained the guarantor’s post-disclaimer obligations as arising out of some residual, “shadowy existence” of the lease.  The Schroder case demonstrates that to be an unhelpful analogy.

Who is liable for business rates following disclaimer?

In Schroder, the High Court had to decide whether business rates on empty property were payable by the landlord or the tenant’s guarantor, in circumstances where the lease had been disclaimed by the tenant’s liquidator but the landlord had continued demanding rent from the guarantor without taking the property back.  Rates legislation says that liability for empty properties lies with the “owner” of the premises, meaning “the person entitled to possession of it“.  The question for the Court was therefore, whether the landlord in those circumstances was entitled to possession.

In a decision that relied substantially on Hindcastle, the judge held that where a lease has been disclaimed, it has been determined.  Rights and liabilities survive not because they arise out of the residue or “shadowy existence” of the lease, but because the statutory scheme requires that to be the case.  In effect, the statute deems that those obligations should continue as though the lease still existed. If somebody seeks a vesting order in respect of a disclaimed lease then the lease is somehow recreated for that purpose but – until then – it has been determined.

From that starting point, it was relatively easy for the Court to conclude that, as disclaimer brings the lease to an end, the landlord is immediately entitled to possession and so is liable to pay empty rates.  As many landlords are still managing a number of empty properties at the tail end of the economic downturn, this decision will not be good news, but at least provides some welcome certainty.

Posted in Real Estate News

Utilities companies denied power to take priority over other creditors in administration

The High Court of England and Wales handed down judgment last week in the case of Christine Mary Laverty and others as Joint Liquidators of PGL Realisations PLC and others v British Gas Trading Limited [2014] EWHC 2721.  In an important decision for the insolvency industry, it was held that the statutory deemed contracts regime for gas and electricity supply could not be used by utilities companies to gain priority over other creditors.

The case concerned the Peacocks retail chain, which collapsed into administration in January 2012.  Officeholders from KPMG, advised by Hogan Lovells, were appointed administrators to various companies within the Peacocks group.

At the time of the administration, one of the companies held a series of gas and electricity supply contracts with British Gas on behalf of the group.  It was a term of the contracts that if the company appointed administrators then British Gas could terminate the contracts, which it did shortly after the administration appointment.

Legislation provides that where there is no express supply contract in place, one will be deemed to exist for any supply of utilities made.  Under the Gas Code, the deemed contract is between the supplier and the “consumer”.  Under the Electricity Code it is with the “occupier” or “owner” of the property.  When British Gas terminated the express contracts, one or other of the companies fell within those definitions and so deemed contracts for the supply of gas and electricity were imposed on them.

The terms of deemed contracts are for the relevant utilities companies to determine.  British Gas’ terms included that the deemed contract would continue, even after the customer had vacated the premises supplied with gas or electricity, until someone else that British Gas accepted as a customer took over the supply. After the administrators had sold the business, they ceased trading and closed the remaining 224 stores, 177 of which were supplied by British Gas.  Although those stores were by that stage empty, the deemed contracts continued.

The administrators accepted that the cost of utilities supplied to the stores during the administration while the companies continued to trade from them was an expense of the administration, but considered that any charges accruing once the stores had been vacated ranked as unsecured claims provable in the administration.  British Gas claimed that ongoing charges totalling about £1.2 million (comprising fixed standing charges and ongoing usage at some stores) were automatically an administration expense, irrespective of whether the charges had been incurred as a result of something done by the administrators or for their benefit.  The dispute was taken to Court.

The decision  

The Chancellor of the High Court, who heard the case, applied the test set out by Lord Neuberger in the landmark Supreme Court decision of Nortel GmbH from July 2013, on which Hogan Lovells also advised, in relation to pension liabilities.

The Court concluded that if pre-administration utilities contracts are terminated after the company enters insolvency and new contracts deemed to arise under statute, the liabilities under those deemed contracts are not treated as administration expenses simply because they arose during the administration.  Although technically new contracts, the deemed contracts had arisen out of a pre-administration “obligation” within the meaning of the Insolvency Act 1986 as the companies had fallen within the scope of the deemed contract regime as soon as the group took supplies from British Gas.  Equally, there was nothing in the Gas or Electricity Codes, or in the nature of the liability, to indicate that Parliament intended that the liabilities under the deemed contracts should rank as anything other than provable debts.  On that basis, the charges were held to be provable debts.


If British Gas had succeeded it would have meant that utilities companies would be able unilaterally to achieve priority over other creditors in respect of supplies that were never requested and made to premises after administrators had closed them.  For a property-heavy business like a retailer, that could be a significant liability.  In certain circumstances it could put the administration process into jeopardy.

The decision is a timely one as it coincides with the Government’s current consultation on introducing legislation which, amongst other things, would invalidate termination clauses in utilities contracts triggered by insolvency.  It does not obviate the need for the consultation as utilities companies may still, for example, terminate contracts to get the benefit of non-discounted rates under their standard deemed contract terms, even if they do not gain automatic priority.


Posted in Real Estate News

UK: Flood Re – consultation on proposed regulations implementing the scheme

There has been much discussion about the Government’s plans to implement a new scheme for providing flood insurance to certain properties at greater risk of flooding (see post on Flood Re and our client briefing). The Water Act 2014 (which received Royal Assent on 14 May 2014) sets the legal framework and parameters within which Flood Re will operate and the broad scope of the regulations. The Government is intending to introduce regulations to enable the insurance industry to implement Flood Re next year. The proposed regulations will cover the legal framework around the Flood Re Scheme, its funding and its administration. DEFRA (the Department for Environment Food and Rural Affairs) has issued a consultation (22 July 2014) seeking views on these regulations.

Posted in Real Estate News

Dolphin sees literal meaning of statute triumph over porpoise

In Westbrook Dolphin Square Limited -v- Friends Life Limited [2014] EWHC 2433 (Ch) the High Court has paved the way for one commercial owner to compel the transfer of another’s freehold property to it, by the process of collective enfranchisement.

Under the collective enfranchisement regime created in the Leasehold Reform, Housing and Urban Development Act 1993, and subject to certain conditions, tenants of long leases of flats can together – through a nominee company – acquire the freehold of the property in which their flats are located.  The price of acquisition is determined by a statutory formula.

There seems to be little doubt that the right to enfranchise was intended to give flat owner-occupiers greater control over their leasehold asset and the management of their buildings.  Nevertheless, in a 215 page judgment, Mr. Justice Mann rejected no fewer than six arguments advanced by Friends Life as to why the head tenant of Dolphin Square (a Westbrook company) should not, as nominee for 612 SPVs, be allowed to exercise the same right.

Dolphin Square was built, and the headlease granted, in the 1930s, almost 60 years before the 1993 Act came into being.  Until relatively recently, it was the largest block of flats under one roof in Europe (containing 1229 flats, shops, a fitness centre and gardens) and its proximity to Westminster has made it a scene for political scandal over the years.

Having acquired the headlease in 2007, Westbrook altered the lease structure.  Each of the SPVs was granted qualifying sub-underleases of not more than 2 flats each (so as not to fall foul of the statutory exclusion from the process of tenants of 3 or more flats (and exclusion of those flats)).  Occupational tenants were bought out or offered non-qualifying leases, so that the right to participate in the collective enfranchisement rested with the SPVs above them.

Each of the six arguments advanced by Friends Life in the High Court merits an article in its own right, but the principal question was whether on a proper construction of the 1993 Act each of the SPVs was really “a tenant of [a] flat under a long lease“.  In broader terms: should corporate sub-undertenants, created and granted leases exclusively for the purpose of allowing Westbrook to acquire the freehold, be permitted to exercise a statutory right which was not intended to be exercised in that way.

The judge held that Westbrook had succeeded on a proper construction of the law in “getting round” what might be perceived to be the proper object of the statute.  The literal wording of the relevant provisions is neither ambiguous nor obscure.  Friends Life sought not so much to construe the words of the statute to establish that it did not apply to the SPVs, but to “divine a purpose behind the provisions, extract it and apply a principle that a person should not be able to evade that purpose because it was Parliament’s purpose“.  The correct approach, according to the judge, was to have regard to what Parliament had actually enacted.  If there are “holes” in the legislation which might be exploited for a purpose not originally contemplated by Parliament, the courts cannot always fill them.

It is quite possible that other head tenants of residential blocks might now follow Westbrook’s lead and – with the legislative loophole now established and the courts unable easily to close it – complex arrangements such as those undertaken at Dolphin Square over the last seven years will also succeed until Parliament changes the law.

Posted in Real Estate News

Discussing Development Disputes

Anyone looking out of their office window in central London will see that the development market is back. From our offices in Holborn, we have been able to see (and feel!) the works going on at the new Goldman Sachs headquarters on Farringdon Road, AXA Real Estate’s 12 storey scheme at Holborn Viaduct now occupied by Amazon,  and the impressive Crossrail project at Farringdon, to name a few. But the upturn in the development market bring with it an increased likelihood of disputes

Yesterday, we hosted a seminar covering some key issues facing today’s developers. The panel, made up of speakers from our Real Estate Disputes team, and their hot topics up for discussion were:

Obtaining vacant possession  – Paul Tonkin (Senior Associate) Collective enfranchisement of residential or mixed use properties – Tim Reid (Senior Associate) Residential tenant’s rights of first refusal – Edward John (Senior Associate) Rights to light and the  impact of Coventry v Lawrence – Dellah Gilbert (Of Counsel)

Mathew Ditchburn, partner, assumed the role of MC for the event which was attended by over 120 people, including developers, fund managers, agents and investors from across the industry.

As always, the important message for developers is to start your planning early and to plan for the worst, as there are many pitfalls that can turn a successful development project into a series of delays and costly court actions.

For more information on development disputes, and how to avoid them, check out our article in Estates Gazette.

Posted in Case Updates

The Return of Superstrike – Tenancy Deposit Schemes – residential landlords must protect deposits afresh if the tenant remains beyond the fixed term

Tenancy Deposit Schemes continue to trip up landlords in the residential sector with yet another court decision on how the scheme should work.

The legal framework requires landlords to do two things within 30 days of receiving the deposit: pay the deposit into a registered scheme; and give the tenant certain prescribed information about how their deposit is held.

The position is straightforward on a new letting. It is also clear that on an express renewal of the tenancy, the landlord has to make sure that the deposit is or remains protected and provide the tenant with the prescribed information afresh within 30 days of the renewal date. But what happens when the tenant is allowed to stay in the property, paying the rent as per the terms of the expired tenancy?

Last year, we blogged about the Court of Appeal decision in Superstrike Ltd v Rodrigues. The Court decided that where a tenancy was granted before the tenancy deposit scheme came into force in April 2007, and the tenant stayed in the property after the expiry date, the landlord was required to protect the deposit and give the tenant the prescribed information. This makes sense, as the deposit was not previously protected.

However, the recent court decision of Gardner v McCusker in the Birmingham County Court goes one step further. Now, landlords must renew the deposit protection within 30 days of the fixed term expiring, regardless of whether it was previously protected. In reality, the deposit will continue to be protected with whichever scheme it is registered, but there will be an additional burden on the landlord to provide the prescribed information within 30 days. Of course, the prescribed information will not tell the tenant anything new other than the start date of the new periodic tenancy which is created automatically on the expiry of the fixed term.  Crucially, if the prescribed information is not provided in time, the landlord will be liable to pay the tenant a penalty of between one and three times the amount of the deposit. Additionally, the landlord will not be able to serve notice to bring the tenancy to an end until that information has been provided.

The result? No added benefit to the tenant but another administrative burden for landlords.

The lesson? Landlords should actively manage their portfolios and ensure that within 30 days of a fixed term tenancy expiring, the prescribed information is given to a tenant who stays in the property with the landlord’s agreement even if an express renewal has not been granted.

Case: Gardner –v- McCusker 3BM70525, Birmingham County Court

Posted in Real Estate

Reasonable doubt when applying for landlord’s consent

Do landlords have to act reasonably when dealing with a tenant’s application for consent?  This is a surprisingly tricky question.  The starting point is always what the lease says about the landlord’s obligations if the tenant seeks permission e.g. to –assign, underlet or carry out alterations.  However, the lease is not the complete picture as the impact of various statutes must also be considered.

In relation to assignment, if the lease contains an absolute prohibition then the tenant is not permitted to assign.  There is no need for the landlord even to consider consenting to a request from the tenant for consent.

If the lease permits assignment with the landlord’s consent then the landlord will generally have to be reasonable in granting or refusing consent, even if the lease says nothing about the landlord being reasonable.  This is because the landlord is obliged, by statute, to act reasonably in such circumstances.  In addition, the landlord must deal with the tenant’s application within a reasonable period of time.  The position in relation to underletting is essentially the same as that in relation to assignment.

For “new” leases granted on or after 1 January 1996, the parties can agree in advance the “reasonable” circumstances in which the landlord can withhold consent to assign, and the “reasonable” conditions which the landlord can impose.  Such leases usually include a requirement for the tenant to give an Authorised Guarantee Agreement (or AGA) if it assigns the lease.  An AGA is a guarantee of the assignee’s performance of the tenant’s covenants in the lease.  Where the parties agree in the lease that it will be reasonable for the landlord to require the tenant to give an AGA on any assignment, the landlord will be entitled to insist on one.  When the assignee in turn assigns, the original tenant will be released, and the assignee may give a further AGA to the landlord.

With respect to alterations, an absolute prohibition in the lease will be subject to the potential statutory right for tenants of commercial property to carry out  improvements upon serving the requisite notice and, if the landlord objects, making a court application.  If the lease permits alterations with landlord’s consent then, if the proposed alterations amount to improvements, statute provides that the landlord cannot unreasonably withhold consent.  In determining whether or not an alteration is an “improvement” the court will look at the question from the tenant’s point of view (Lambert v F.W. Woolworth and Co. Ltd [1938] Ch. 833).

If the lease is entirely silent as to whether the tenant can assign, underlet or alter then it may do so without restriction.

Posted in Real Estate News

Avoiding trespass: Queen’s Speech supports oil and gas exploration

Yesterday, in the Queen’s Speech, the Government confirmed plans to support the unconventional gas and oil industry by facilitating horizontal drilling without landowner consent. Implementing these plans could enable this industry to bring forward their activities (and the implementation of the controversial “fracking” technique) more quickly but industry supporters may say there is more to be done in order to speed up the development of this fledgling sector.

Back in February this year, Rosie Kent and I blogged on the (then) current position regarding sub-surface ownership. This was a position confirmed in the Supreme Court case of Bocardo SA v Star Energy UK Onshore Limited [2011] 1 AC. In short, an English man’s land does indeed run to the centre of the earth but those drilling for hydrocarbons can apply to the courts to circumvent landowners “unreasonably” objecting to horizontal drilling through their land.

The relevant legislation has been little used in practice and on 24 May this year, the Government published a consultation asking, amongst other things, whether measures should be introduced to allow drilling below private land at a depth of 300 metres or more without first securing permission for access.  Such a right would be supported by a voluntary scheme for advance public notification and community compensation payments.   That consultation runs until 15 August 2014.

This has since been followed by the Queen’s Speech in which the Government confirmed plans to implement the measures suggested in the consultation, after reviewing the responses.  The new Infrastructure Bill will “support the development of gas and oil from shale and geothermal energy by clarifying and streamlining the underground access regime.”

Clearly shale gas operators should herald any assistance, in this infant market, a success. It certainly looks likely that legislation will follow the consultation. However, with the myriad of consents required and the numerous statutory bodies with whom potential drillers must liaise, should more be done to streamline the process to extraction? This is certainly not the end of the story.

Posted in Real Estate News, Uncategorised

Frozen in time: Tenant given a cool 10 year term on lease renewal

In Iceland Foods Ltd v Castlebrook the court considered the often thorny issue of the length of term which a tenant should be granted in a lease renewal under the Landlord and Tenant Act 1954.

Under the Act, the court can grant a maximum term of 15 years. However tenants nowadays often want much shorter terms and BPF research suggests that the average commercial lease term is now around 5.8 years.

The case concerned a supermarket in Cheshire. The tenant, Iceland, sought a renewal lease for a term of five years. Its rationale was that the store was currently underperforming and it wanted to maintain flexibility in volatile market conditions. The landlord argued for a lease length of 15 years. It relied upon evidence suggesting that a 15 year lease term was standard in the supermarket industry and argued that a shorter term would adversely affect the value of its reversion.

The court decided that an appropriate lease term would be 10 years. In exercising its discretion, the court had to weigh up the interests of both parties and arrive at an outcome which protected the tenant’s business (which is what the Act is geared toward) as well as being fair to the landlord. The court felt that market evidence of average lease terms was of limited value and that each case would turn upon its own facts. The tenant’s understandable desire for flexibility was a relevant factor, as was the landlord’s desire to protect its reversion given the limited market for property of this type in the area. The length of the previous lease (42 years) was also relevant.

The clear message is that whilst market comparables may be all important in determining rent, they are of limited value in assessing the length of term. Instead, the parties will need to present specific evidence as to why they require a particular length of term which will be determined at the discretion of the court.

Iceland Foods Ltd v Castlebrook Holdings Limited [2014] PLSCS 95

Posted in Real Estate News

No refund in M&S break case

The Court of Appeal refused to imply a term into a lease that would enable a tenant to a refund of rent paid in advance and which related to a period after the break date.  This was despite the fact that the tenant had paid a break premium equivalent to approximately one year’s rent.

Marks & Spencer was the tenant under four leases of separate floors of an office block in Paddington. All the leases were on the same material terms so the Court considered just one of them. The lease required rent to be paid on the usual quarter days in advance. The lease contained a tenant’s break option which was conditional upon M&S paying a break premium and also having paid the rent in full.  M&S successfully exercised the break clause and terminated the lease. It then sought to reclaim the rent and other sums paid in advance for the period after the break date. The landlord refused, arguing that there was no express term entitling the tenant to a refund.

In the High Court, the Judge found in favour of M&S and implied a term into the lease allowing for the excess rent to be returned to M&S. The Judge considered that, as M&S had already paid the break premium, the parties could not have intended that the landlord should keep the overpayment of rent as well.

The Court of Appeal disagreed. If the parties had intended for the rent to be refunded, they would have included an express term in the lease to this effect. In the absence of an express clause, the rent paid would lay where it fell: namely, in the pocket of the landlord.

Case: Marks and Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anr [2014]EWCA Civ 603