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Keeping It Real Estate

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

Posted in Real Estate

Waiving not an option in offer-back case

Offer-back clauses in leases are sometimes used to give the landlord greater control over the identity of the tenant at a property. However, the mechanism of operating an offer-back clause can be problematic as demonstrated by a very recent case: (1) TCG Pubs Limited (in Administration) (“TCG”) and (2) the Administrators of TCG Pubs Limited v The Master and Wardens of the Art or Mystery of the Girdlers of London (“Girdlers”).

The Girdlers were the freehold proprietor of a pub in Hammersmith. TCG held a 40 year lease of the pub, the term of which commenced in June 1987.  TCG, having entered administration, sought to assign its lease to a third party.  Before doing so, TCG were required to “first grant an option” to the Girdlers to buy back the residue of the term at the then current open market value.

The case rested on three points:

• Had TCG granted a valid option by writing to the Girdlers indicating that they were prepared to offer them the ability to purchase the property at a proposed price?

• Had the Girdlers waived the right to rely on the requirement for TCG to grant an option by dealing with the application for consent to assign?

• If the answer to either of the above was “yes”, had the Girdlers unreasonably withheld their consent to the assignment?

Grant of an option
The court decided that words used in the clause such as “grant”, “option” and “exercise” were more consistent with a formal transaction than a simple process of giving a notice. TCG had not done enough, even though the Law of Property (Miscellaneous Provisions) Act 1989 (which provides that an option cannot be granted by a unilateral act of the tenant) was not introduced until after the date of the lease.  Instead, TCG would have had to proffer a formal option with an invitation to the Girdlers to execute it.

Waiver
The Girdlers’ solicitor had responded to the proposed assignee, dealing with the application for consent to assign.  TCG argued that this waived their option rights but the court found that the letter did not contain a sufficiently unequivocal statement to amount to a waiver of the rights under the option clause. Nor was it addressed to the person affected by the waiver (TCG) but, the court said, that “particular hole would have been filled” once it was clear that the proposed assignee was making the application on behalf of TCG.

Application for consent to assign
The application for consent had initially been sent by the proposed assignee, not the tenant. As such, the court found that the application was not a valid request for consent until the tenant had confirmed that the application was made on its behalf.

The court found that the requirement for a surety in the lease operated as a valid gateway to the right to assign, which the landlord was entitled to insist upon and which was not tested by reasonableness.

Hogan Lovells acted for the Girdlers in the case. A full copy of the judgment can be found here.

Posted in Real Estate News

A move to “glasshouses”: Government announces call for evidence on a register of beneficial owners of property controlled by overseas companies and other legal entities

On 5 April 2017, the government launched a call for evidence on a register showing the beneficial ownership of property controlled by overseas companies and other legal entities.

This isn’t the first time that these proposals have hit the news. Last year, in March 2016, the government consulted on their proposals for such a register; the results of which were published last week.

The reasoning behind the government’s efforts is clear: improving transparency in ownership fosters confidence and trust and plays a key role in deterring cross-border and domestic crime and in particular money laundering for the funding of terrorism. Since 2004 enforcement efforts have stepped up. It is reported that £180m of UK property has been subject to criminal investigation as suspected proceeds of corruption, with 75% of this funded through offshore corporates. HMRC, in turn, have recovered over £2.7 billion from tackling tax avoidance schemes through the courts. The benefits of a register operate at an individual level too. Tenants would be able to look through an overseas landlord to obtain information on those with ultimate control and neighbours could trace the owners of buildings in their community.

Where are we now?

In June 2016, the government introduced a central, publically accessible register of beneficial ownership – the people with significant control (PSC) register, under which all companies incorporated in the UK must give information about people with significant control (those with a 25% share or voting rights or other form of control) of the entity. Before that, at the International Anti-Corruption summit in London in May 2016, the government committed to go further and introduce this new register.

What do the proposals involve?

The proposals call for a register of the beneficial owners of overseas companies owning UK property or engaging in UK government procurement. This will:

• Not be limited to companies limited by shares but will instead be applicable to all legal entities;
• Only apply to leases of over 21 years;
• Require registration of beneficial ownership at Companies House (adopting the existing definition of beneficial ownership that underpins the PSC) where UK property is bought or sold (including the grant of long leases);
• For property already owned by an overseas entity, require that entity to supply the beneficial ownership information over a transitional period, after which they will be prevented from selling, granting a long lease or granting a charge over the property unless the new register requirements have been complied with (as backed up by a note on the registered title).
• Require overseas entities that wish to take part in new central government procurement contracts valued over £10 million to supply beneficial ownership information before the contract is finalised.

The proposals represent a bold step for the government as the new register will be the first of its kind in the world. Margot James, Parliamentary Under Secretary of State for Business, Energy and Industrial Strategy, acknowledges that the government needs to proceed with care so as to ensure that the UK remains an attractive place for foreign investment.

The call for evidence on the new register closes on 15 May 2017; rest assured, as the detail is pored over, it won’t be the last we hear on it.

Posted in Real Estate News

Hogan Lovells wins Real Estate Team of the Year at Legal Business Awards 2017

lba17_real_estate_team_winHogan Lovells is delighted to have won Real Estate Team of the Year, jointly with Gowling WLG, for its work on the £3bn redevelopment of Brent Cross South. The scheme has been described as one of the most ambitious regeneration projects in London in living memory.

Hogan Lovells advised Argent Related on the scheme to deliver nearly 7,000 new homes, 4.2m sq ft of commercial space, a new Thameslink station, three re-built schools and integration with the parallel scheme to redevelop the neighbouring Brent Cross Shopping Centre.

The 40 lawyer team was led by real estate partner Nicholas Roberts, while also bringing leading practitioners from planning, corporate, tax, construction, and real estate finance practices to name a few.

Commenting, Nicholas Roberts said: “This is a major achievement for all of those who have worked on the deal. It’s been a pleasure to work with Argent Related on this high profile, complex and significant project. The wider benefits that this redevelopment will bring to the community are enormous, and we look forward to continuing our work on the scheme for Argent Related.”

Posted in Real Estate News

Squatting in mansions: The risk to residential as well as commercial premises

Since the beginning of this year, the so called Autonomous Nation of Anarchist Libertarians has occupied a number of multimillion pound residential properties in and around Belgravia.  Autonomous Nation’s cause is to highlight the number of properties sitting vacant, whilst the number of homeless people continues to rise. Their occupation of a £14 million mansion at 19 Buckingham Gate was widely publicised  as it posed a potential security risk to Her Majesty the Queen with a direct view into Buckingham Palace gardens and Wellington Barracks.

Squatting in residential properties has been illegal since 2012 but that has not made the issue go away.  Owners often find that the police remain reluctant to act.  The only alternative is to apply to court for an order for possession but this can be costly and time consuming.  It can also give squatters an opportunity to air grievances in a public forum, attracting media attention.  Squatters will look for any procedural irregularities, or try to rely on their inability to obtain legal advice and the importance of their human rights in order to delay eviction.  Frustratingly for owners, this may result in the court giving the squatters more time before their inevitable eviction.

Even a short delay can be problematic, for example where the owner is about to start works at the property, or there is a high risk of costly damage being caused by the squatters whilst they remain in occupation.  The end result is that squatters remain a very real threat to both commercial and residential premises.

The following tips will assist owners faced with the prospect of evicting squatters:

1. Don’t forget section 6 of the Criminal Law Act 1977.  This section makes it a criminal offence to force entry to a property when there is someone present who opposes entry –  even if it’s your own property!  Although this protects squatters once they have taken occupation it will also work to protect a property if a security guard is present when squatters try to enter.   As always, prevention is better than cure so review the security measures at vacant premises on a regular basis.

2. Know who to call and make sure you instruct good enforcement officers to deal with the situation from the outset.  Professional squatters know their rights and even minor technical errors in following procedure can lead to delays down the line. Plus, enforcement officers can provide vital “on the ground” information to the lawyers.

3. Put forward an individual in your organisation who can help the lawyers gather the necessary information in relation to the property and the events that led to it being occupied. This is especially important in time critical cases where an eviction is required urgently.

4. Make your lawyer aware of any sensitive information that you would not want to appear in court papers (such as particularly valuable items remaining in the property, or circumstances making it particularly vulnerable to damage or the threat of further unlawful occupation) and bear in mind that this information will be seen by the squatters and could even find its way into the media.

5. If there is a particular threat posed by the squatters’ occupation, such as health and safety risks,  some feature of the property worthy of greater protection or a risk to the wider community, draw it to your lawyers’ attention as it may warrant an application for expedition.

6. Arrange a proper handover of the security arrangements from the enforcement agents post eviction as re-occupation by the squatters could mean another trip to court.

Professional squatters are always on the look-out for vulnerable properties. The risk should never be under-estimated when any property becomes vacant, whether it is commercial or residential.

Posted in Real Estate News

Tenant insolvency – Is there merit in a further moratorium?

The recent spate of high-profile company voluntary arrangements (CVAs), including those of BHS, Store 21 and more recently Love Coffee, The Food Retailer Group and Blue Inc, has placed this corporate rescue tool back in the spotlight.

CVAs can be a useful mechanism for turning around a failing business, but it is clear that they are no panacea.  First, they don’t always work, and BHS is a striking example of a CVA failing to save a business despite compromising a large number of leasehold liabilities.

Secondly, a CVA needs approval from the requisite majority of creditors in order to take effect.  For landlords, supporting a CVA proposal can prove challenging: they highlight the tension between the protection of businesses and the legal rights of property owners who see their claims compromised in the interests of creditors as a whole.  When landlords voted against The Food Retailer Group’s CVA in February this year, and the company subsequently went into administration, it was seen by some as an indication that landlords’ patience with the process was finally running out.

So is it time for a new process?

Last year the Insolvency Service consulted on proposals for the ‘Review of the Corporate Insolvency Framework‘. The proposals included a new moratorium for struggling businesses. Subject to fulfilling certain criteria, it was proposed that businesses would benefit from a three month moratorium, to “consider the best approach for rescuing the business” during which no enforcement action may be brought by creditors, including forfeiture of leases by landlords.

The justification for changing the rules was to make corporate rescue more business friendly, with more opportunities to restructure companies without a formal insolvency process whilst being protected from creditor claims.  There is, however, concern that this could be open to abuse and unnecessarily delay inevitable insolvencies.

Although the responses received to the consultation broadly favoured a new moratorium, some clarification and amendment was called for to ensure a fair balance between the rescue of insolvent businesses and the rights of creditors, including:

  • Rent: the business will “be obliged to meet on-going trade costs and debt obligations during the moratorium“.  However, the consultation did not clarify how landlords will be safeguarded if a tenant enters into a moratorium having failed to pay a quarter’s rent the previous day.  With an administration, landlords know that their rent will be paid as an expense of the administration, at least for the period that the premises are in use.  Landlords will want to see similar protections clearly codified in the revised proposals.
  • Length: Three months was viewed by many of the respondents to the consultation as excessive, given that the purpose of the moratorium is for the tenant to seek some agreement with creditors.  The most common length of time considered appropriate by respondents for the moratorium was 21 days.
  • Role of the supervisor: During the moratorium, the business’s activities will be overseen by a supervisor who will help safeguard creditors’ interests.  The proposals envisage this being an accountant, solicitor or insolvency practitioner.   Landlords will want to see the supervisor having sufficient control over the business to protect their interests, particularly the payment of rent during the moratorium.

Clearly, rescuing a struggling business can be beneficial for all stakeholders.  However, it is not clear whether this proposal for an additional moratorium strikes the right balance between saving a business and protecting the rights of creditors.  CVAs at least allow creditors some say in whether and how the company is restructured, and require the company to come up with a turnaround plan.  Where the plan does not address the fundamentals of the business, the CVA is ultimately more likely to fail.  A standalone moratorium would, it seems, be even more exposed to this risk.  Whilst there is no automatic moratorium for most CVAs, the company can apply to court for one.  If creditors vote down a CVA because they do not think it is fair or credible then perhaps placing the business into the hands of an administrator through a formal process is the right logical step.

It is hard to see how the purpose of this proposed moratorium cannot be just as well, if not better, served by making full use of the processes that already exist.

Posted in Real Estate News

Terrorist Attacks: The importance of adequate security measures at hotels

Hotels are targets for terrorists due to the likely presence of foreign tourists and the consequent possibility of impacting multiple nations with one attack.

We blogged http://www.ukrealestatelawblog.com/2017/02/24/revolution-or-evolution-protect-survive/ a few weeks ago about Richard Walton’s keynote speech to the Hogan Lovells CBRE 2017 Hotel Conference.  Richard, a former Head of the Met’s Counter Terrorism Command at New Scotland Yard, warned of the need to be vigilant and ensure the adequacy of security measures at hotels to prevent terrorist attacks.

On 28 February 2017, Judge Loraine-Smith delivered his ruling in the Tunisia Inquests on the tragic incident in June 2015 that led to the death of 38 tourists in Sousse.  The adequacy of the Riu Imperial Marhaba Hotel’s security measures was considered, along with the response from local police and the actions of the tour operator.

Deficient hotel security measures

In light of the increasing threat to tourists in the region (evidenced by a botched suicide bomber attack in October 2013 close to the Riu Imperial and the death of 22 people, mostly tourists, in the Bardo Museum terrorist attack in Tunis on 18 March 2015), a generic security protocol was provided to a number of hotels on 6 April 2015, including the Riu Imperial.  Despite this, a number of deficiencies were found in the hotel’s security measures:

• Only three guards were on duty at the hotel that day, none of whom carried walkie-talkies.
• The hotel had six CCTV cameras, far less than the other hotels in the area and two of which (on the front and terrace doors) were not working
• Unlike other hotels, there was no control room.
• The staff had received no training on dealing with a terrorist incident.
• There was no procedure for evacuation.

“lack of care”

The Inquest considered whether a “lack of care verdict” was appropriate under principles established in cases where the victims were found to be in a dependant relationship.  The Inquest accepted that, in a non-legal sense, guests of a hotel in a foreign country could be considered to be in a dependant position. However, in law, the dependant relationship must arise because of youth, age, illness or incarceration. According to the judge, that does not cover tourists who have voluntarily agreed to go on holiday abroad.

“neglect”

A finding of “neglect” would, it was said, require a “gross failure to provide shelter“.  Whilst there were deficiencies in the security measures at the hotel, some of them appreciable, neglect required a clear and direct causal connection between the conduct and the cause of the death, which was not found here. The judge found that the presence of an armed guard at the hotel was one security measure that could have had a dramatic effect but gun law in Tunisia meant that an armed guard was not a realistic option.

Accordingly, the judge rejected findings of neglect against the hotel. The tour operator was also cleared, although the families of the victims now intend to bring civil proceedings against them. Instead, the judge found the “response by the police was at best shambolic, at worst cowardly“.

The Inquest provides a tragic reminder of the importance of proper security measures and the accountability of hotels in the wake of an attack.

Posted in Real Estate News

Business rates revaluation 2017: an explanation

On 1 April 2017 the business rates payable in respect of properties in England and Wales will be changing.

Business rates are the tax that businesses pay on the retail, office and industrial premises that they occupy.  The total tax payable by an occupier is based on the rateable value for the premises combined with a multiplier, which is a figure set by government each year.

Although rateable values are usually revaluated every five years, the changes on 1 April 2017 are set to be much more dramatic than previous revaluations and see the rates payable by some businesses soar.

Rateable values are broadly based on the market rent payable for premises.  The steep increases in rent for commercial properties in London and the South East in the past years mean that rateable values are changing significantly.  This is exacerbated by the fact that the revaluation is overdue.  The rateable values currently in force were set in 2010 and based on rents in 2008.  The government delayed the valuation scheduled for 2015, which would have been based on 2013’s rents, and instead the rateable values coming into force on 1 April 2017 will be based on 2015’s rents.  The longer gap between revaluations and the sharp rises in market rents between 2013 and 2015 will result in big changes as to the rates payable by occupiers.

It is estimated that some high street shops in central London are facing rises of up to 400%.  Rates on Bond Street are expected to rise by over 100% whereas occupiers in Westfield White City will see increases of around 62%.  With business rates already being the third biggest outgoing for small businesses, after rent and staff costs, this could have a major impact on the high street.  The increases are to be introduced in stages but in a few years businesses will be feeling the full force of the changes.  Time will tell whether this will fuel the tendency of some retailers to downsize their bricks and mortar operations in favour of an increased online presence.

It’s not all bad news.  The rates revaluation is carried out so as to raise no extra money.  With such large increases faced by some businesses, in areas where market rents have not increased as much or have stagnated business rates are set to fall.  Areas such as Yorkshire are estimated to see a 41% reduction in rates bills.

In light of the potentially drastic consequences for some occupiers and following lobbying from MPs and businesses, the Chancellor has announced in the Spring Budget some measures to help those affected by the changes.  These include a £300m fund for local councils to offer discretionary relief for businesses hardest hit by the increases and a £1,000 discount to the rates bill for local pubs with a rateable value of less than £100,000, which is estimated to be 90% of pubs.  A consultation before the next rates revaluation is also promised.

Posted in Real Estate News

HELP AT LAST! GOVERNMENT PUBLISHES GUIDANCE ON MINIMUM ENERGY EFFICIENCY STANDARDS

The Government has published its long-awaited guidance on the minimum energy efficiency standards regulations that will start to apply to non-domestic properties in April 2018.  We previously blogged on the topic of MEES here back in 2015; a copy of the guidance can be downloaded from here.

The guidance is intended for use by both landlords and enforcement agencies alike, and contains a useful explanation of the way in which the Government intends the regulations to be applied.  It provides a number of helpful, practical examples of the process for deciding whether or not a landlord is required to comply with the regulations for a particular property and what might be covered by exemptions.

It also sheds some light on some of the points that were not clear from reading the regulations on their own.  For instance, it is clear from the guidance that the Government does not intend a landlord to have to comply with the regulations where an EPC has been obtained voluntarily and has not been used for a sale or letting (a scenario that was previously unclear under the regulations).  This means that landlords who have obtained EPCs for their own purposes and have not let the property since doing so will not have to comply with the regulations for that property until they come to grant a new lease, which from 2023 onwards (when the prohibition on “continuing to let” substandard premises comes into force) will be a significant relief to asset managers who were worried that obtaining a voluntary EPC might bring them within the scope of the regulations.

The guidance doesn’t help to clarify the scope of the “consent exemption”, though.  We were hoping for examples scoping out the sorts of unreasonable conditions third parties could impose that would qualify for an exemption, but instead the guidance simply repeats what the regulations say: the condition must be one with which the landlord cannot reasonably comply.  We therefore still don’t know how reasonableness is to be measured in this context.

The guidance also attempts to elaborate upon the confusing position of listed buildings and buildings in conservation areas.  Under the regulations relating to EPCs, an EPC is not needed for a building that is “officially protected as part of a designated environment or because of [its] special architectural or historical merit, in so far as compliance with certain minimum energy performance requirements would unacceptably alter [its] character or appearance”.  The Government has explained that this means that you do not need an EPC for listed buildings or buildings in a conservation area if compliance with certain minimum energy performance requirements would unacceptably alter their character or appearance.  But if compliance would not unacceptably alter their character or appearance, you do.  The Government seems to think that this clarifies matters, but as it still leaves open the question of what an “unacceptable” alteration might be we are in practice really no wiser!

Finally, it is important to note that the guidance on MEES is clearly stated not to be legally binding or a definitive interpretation of the law; instead, the guidance states throughout that appropriate legal advice should be taken by anyone seeking to apply or to comply with the regulations.  As the regulations are complex and the penalties for non-compliance can be severe (up to £150,000 per breach, plus a “publication penalty” intended to deter through the risk of reputational harm – and there’s a section in the guidance on this, too!), we would definitely echo that recommendation.

Posted in Real Estate News

Quit (Illicit) Smoking – new proposals will affect landlords

Landlords could potentially find themselves hit with new lease requirements, periodic checking obligations and even financial penalties following the publication of the ‘Sanctions to tackle tobacco duty evasion and other excise duty evasion’ consultation document by HM Revenue & Customs.

The context

The government is committed to tackle evasion of tobacco duty and the illicit tobacco trade. In 2015-16, the UK consumed around 5 billion illicit cigarettes and 3,200 tonnes of illicit hand-rolling tobacco. Evasion of tobacco duty robs public finances of revenue and undermines the government’s wider public health objective of reducing smoking, which contributes to over 100,000 deaths each year.

What does this have to do with landlords?

Whilst the underground world of illicit tobacco trading may seem remote to landlords, they need to be aware of some key – and potentially onerous – proposals of the consultation.  These proposals  reflects a perception that some landlords are turning a blind eye to their tenant’s behaviour to protect their rental income.

Whilst many leases prohibit a tenant from using the property for any illegal, immoral or improper purpose, HMRC are proposing to write to landlord associations to request that they voluntarily add a clause to their standard lease agreements prohibiting illicit tobacco or excise trading.

More serious is a potential sanction proposed in the consultation which would impose a statutory duty of care on the landlords of properties or land which are used in tobacco (or other excise duty) fraud. The proposals are:

1. The duty of care would only arise once the landlord has been notified that the tenant has evaded an excise duty

2. Landlords who have taken reasonable steps to prevent future wrongdoings on their property would have a defence available (in an effort to minimise the burden on them). Such reasonable steps could include:

  • Including provisions in all new leases making it clear that any illicit tobacco trading or any other illicit excise activity will terminate an existing lease and providing HMRC with copies of tenancy agreements.  It is not clear whether the usual forfeiture clause for breach of covenant would suffice.
  • Requiring the landlord to undertake periodic checks of the premises and request relevant information from tenants.
  • Contacting HMRC or Trading Standards immediately should landlords have any concerns.

3. If the tenant continues to deal in illicit excise trading and the landlord cannot demonstrate that they have taken steps to address the issue, HMRC will consider action against the landlord. A new civil penalty would be introduced for non-compliance.

HMRC hopes this will raise landlords’ awareness of the issue and root out illicit sales of tobacco in their properties.

What happens next?

The consultation document seeks views on whether the proposed steps landlords could take to prevent illicit activity on their properties are reasonable and proportionate. HMRC is also querying what sanctions they should apply to landlords who fall short of their obligations, including whether they should suffer a financial penalty.

Responses to the consultation are due by 12 May 2017.

A copy of the consultation document published by HMRC can be found here to:https://www.gov.uk/government/consultations/sanctions-to-tackle-tobacco-duty-evasion-and-other-excise-duty-evasion

Posted in Real Estate News

Supreme Court decision slashes empty rates bills for developers

The rateable value of commercial premises is generally equal to the rent payable under a hypothetical letting on the relevant assessment date. There are some express statutory assumptions for this – it is to be an annual periodic tenancy and the premises are assumed to be in a reasonable state of repair unless the works required would be uneconomical for the landlord to carry out.  Paradoxically, there is a separate, long standing principle of reality which requires the premises to be valued as they actually exist on the assessment date. How do these two opposing principles fit together?

In early 2010, the owner of a vacant office block embarked on an extensive renovation project, stripping it back to shell and taking out all existing services and systems. The building was listed in the 2010 list as “offices and premises” with a rateable value of £102,000. When this fell to be re-assessed in 2012, it was still vacant. Works were underway, but the re-installation of services was incomplete.

The Court of Appeal found in favour of the valuation officer and held that the statutory assumptions took precedence.

That decision has been overturned this week by the Supreme Court, which decided that the reality principle was overarching. The valuation officer, they said, should have taken a three step approach.  First, he should consider whether the premises were actually capable of occupation in the state they existed on the assessment date. This is an objective test. If they were, the second step is to ascertain the mode or category of occupation. These two steps are based on the reality principle. The third step is to apply the statutory assumptions. If any part of a building undergoing redevelopment is capable of occupation on the assessment day, it can be separately assessed for rates and the statutory assumption of repair would apply to that part. In this case, the works had rendered the whole premises incapable of occupation so the statutory assumptions were not engaged. The building should have been rated as a “building undergoing reconstruction” with a nominal rateable value of £1.

The court dismissed concerns of deliberate avoidance tactics by owners of empty buildings as the Secretary of State has the power to enact regulations to prevent owners benefiting from the removal of services before a rating assessment.

There may now be a rise in factual disputes over the extent of redevelopment works and whether all or part of the premises is capable of occupation, but the decision will be welcomed by developers and property owners alike.

Newbigin (Valuation Officer) v S J & J Monk [2017] UKSC 14