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Keeping It Real Estate

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

Posted in Real Estate

Anarchy in the UK – Disruption and Innovation in the Hotel Industry

The annual Hogan Lovells CBRE Hotel Conference

IMG_3842It’s good to share – that was the message from Alex Stephany, former CEO of JustPark, who was the keynote speaker at our conference this morning, interviewed by Jonathan Langston, COO of CBRE Hotels. And it’s not just AirBnB. All hotels hold assets with “idling capacity” which can be “shared” to generate extra revenue.

2015 was the year with the highest ever level of investment and the lowest yields, according to data from David Bailey, Senior Director of CBRE Hotels.  But the operating cost profile is changing: full service hotels are currently spending 8% of their revenue on booking agents’ commission, compared to 1% at the turn of the century. The slice of revenue devoted to sales and marketing also grew over the same period from 1% to 7%.

The net is closing on rate parity in Europe, on a country-by-country basis as observed closely by Angus Coulter, head of our Antitrust Competition and Economic Regulation practice. He warned that even a change of hotel management can require notification to the European Commission for merger control clearance and that there are large penalties for failure to notify or closing a deal before obtaining that clearance.

Ed John, senior associate in our Hotels team, gave a brief explanation of why hotel owners benefit from using a competitive tender process to appoint operators and insisting on Service Level Agreements with key performance indicators – and to be wary of performance termination clauses.

Rob Seabrook, head of agency at CBRE Hotels, reported on portfolio-led investment volume in 2015 of £9.2 billion.  Included in that was the sale in September 2015 of the Bulgari Hotel London from Abu Dhabi Financial Group to Rosalia Mera / Prime Investors Capital for £270 million, an 85-bedroom hotel with a record price tag of £3.2m per key.

Philip Cropper and Ian Corfield of CBRE Hotels’ Corporate Finance practice explained that:

  • €273 billion was invested in European Commercial Real Estate in 2015 (25.4% of which came from outside of the European region)
  • €23 billion was invested in European Hotels in 2015 (42% of which came from outside of the European region)
  • 13.5% of all capital from outside of the European region was invested in hotels.

There has been a blurring of the profile of investors seeking returns from equity, preferred equity, mezzanine & senior debt – with many agnostic as to how they deployed capital and delivered returns out of Real Estate.

Andrew Sangster, editor of Hotel Analyst, moderated a panel with Alastair Campbell of GLH Hotels, Guy Pasley-Tyler of Host Hotels & Resorts and Michael McCartan of Duetto Research. They tackled questions of how to get the most out of the brands and explained how hotels can take advantage of their superior knowledge of their inventory and their guests by tailoring the guest experience.

Jackie Newstead, our Global Head of Real Estate and partner in the hotels practice, surveyed the delegates’ views and found them buoyant about the prospects of the operating and investment market in the coming year.

Posted in Real Estate News

Beware the hidden costs of ground rents

On 21 January, Sir Peter Bottomley MP tabled an early day motion in the House of Commons requesting that Flat 1 Blythe Court, Solihull, be withdrawn from an upcoming auction.  The motion was tabled because the sellers were apparently “withholding essential information of penal ground rent provision that make the premises worthless”.  The property was indeed withdrawn and the legal pack removed from the auctioneer’s website.

What was it about the property that caused such a concern?  We cannot speculate on what the legal pack contained, but we have obtained a copy of the lease for the property from the Land Registry.

The lease, like most flats in England and Wales, contains a yearly ground rent which, for 1 Blythe Court, is £250 “during the first 10 years of the New Term hereby granted and the annual rent during every successive 10 year period of the New Term twice that which was in the previous 10 year period”.

This ground rent was introduced in 2014 by a deed of variation, which also extended the lease term from 99 years starting in 1961 (the “Original Term”), to 160 years starting in 1961 (the “New Term”).  So, on careful reading of the lease, the initial £250 ground rent is backdated to 1961 and doubles every ten years.  Since 1961, the rent has doubled five times and is now £8,000 a year.  Over 12% of the guide price!  This compounding means that in 2021 the rent will increase to £16,000 a year and by the end of the lease it will be over £8m a year.

The case is a vivid reminder of how compound interest can turn very small sums into very large ones (read our previous blog about a 10% annual service charge increase).

Had the ground rent at 1 Blythe Court been described in the lease by using the table below instead of a formula, we very much doubt the leaseholder would have agreed to it.

If tenants and leaseholders are offered fixed rent increases, they should tread carefully and make sure they understand what they are signing up to.

Posted in Real Estate News

Right to rent: government shifts responsibility onto landlords

From 1 February 2016 landlords across the country will become responsible for policing the immigration status of their tenants

New legislation will impose fines of up to £3,000 on landlords in England who rent out their property to illegal immigrants. To avoid this fine, landlords will have to carry out more stringent immigration and identity checks on their tenants. There is a new code of practice for landlords to follow which will outline the checks they need to do.

Within 28 days of the start of a tenancy, landlords will have to carry out checks on all people aged 18 or over who will live at the property as their main home. All private landlords of residential properties in England will be subject to these rules, although certain types of tenancy, such as social housing, student accommodation and leases of seven years or more, are exempt.

Landlords will need to check the original documents that allow the tenant to live in the UK. A valid passport and (if necessary) visa endorsement should be sufficient in the majority of cases, but the government also provides a list of acceptable documents. Landlords should keep copies of all documents inspected and evidence of correspondence with the tenant. A government checking service will also be available.

If the tenant’s stay in the UK is time-limited, the landlord will have to make a further check just before the later of (a) the expiry date of the tenant’s right to stay in the UK or (b) 12 months after the previous check. If the tenant fails the follow-up check once the tenancy has already been granted, landlords do not need to evict the tenant but they must make an official report to the Home Office.

In most cases landlords are expected to pass responsibility for rent checks onto letting agents as part of the due diligence process on prospective tenants. This should be clearly agreed as part of the landlord’s contract with the letting agent.

The extra paperwork and threat of fines could lead to increased costs. Such costs may ultimately be passed down to tenants in the form of rental increases.

For now, landlords who fail to comply will escape with just a fine. However, parliament is considering introducing further sanctions, including prison sentences of up to five years.

Posted in Case Updates

A brace of cases on the right to enfranchise

The last two months have seen two key appeals in which the court was required to decide whether the tenant of a particular type of building should enjoy the statutory right to acquire the freehold of a house. This right is enshrined in the Leasehold Reform Act 1967.

The properties, and the questions for the court in each case, were quite different. What the judgments had in common was a purposive approach to interpretation of the Act.

In Jewelcraft, the court was required to revisit the question of whether a property was a “house” within the meaning of the Act. Though the same question had come before the Supreme Court quite recently – in Hosebay and Lexgorge – the property here (a shop with accommodation above, in a purpose-built terrace) was quite different.

The need to derive from the Act a rule which captures houses of all descriptions is clear. This is why the courts have promoted a purposive interpretation, especially since the case of Tandon, 9 years ago.  It also explains how the court was able to conclude that the property in Jewelcraft was a “house” for the purpose of the Act, when the contrary decision had been reached for a similar property in last year’s case of Henley v Cohen.

Birchlea’s end of terrace house was a “house” within the meaning of the Act, but the landlord argued that it should be excluded on the basis that its flank wall rose higher than its two storeys, to form the flank wall of a taller building next door. That meant, they said, that it fell under an exclusion in the Act where a “material part” lay below  another building.  Again, this has already been the subject of judicial scrutiny at the highest level (in the House of Lords case of Malekshad) but, again, the facts were different in the Birchlea case, so no direct comparison could be drawn.

Taking the purposive approach, the judge in Birchlea decided that questions of materiality should be read in light of Parliament’s original intention: to empower tenants of houses to acquire their freeholds, and only exclude properties for which the right was plainly not intended. As Lord Nicholls said in Malekshad, the purpose of the exclusion is simply to avoid certain absurdities. The caveats and conditions in the Act are not meant to cause the right to be lost entirely by reason of a triviality.

The drive towards a purposive construction of enfranchisement legislation is both fair and sensible. Some landlords have caused mischief by challenging their tenants’ right to enfranchise, using a literal interpretation of the Act and knowing that the facts of their case will never match precisely those that have already come before the courts. The message is clear: the policy of the statutes should be carried into effect, without enfranchisement being thwarted by an unimportant feature or statutory technicality.

Hogan Lovells acted for Birchlea Limited in its successful first instance and appeal cases.

West End Investments (Cowell Group) Limited v Birchlea Limited

Jewelcraft Limited v (1) Palu Pressland and (2) Justin Pressland

 

Posted in Case Updates

More leisure time for timeshare owners

Timeshare owners of Elham House in Canterbury will celebrate a recent High Court decision confirming that you can grant a binding property right (easement) to use facilities such as a golf course, swimming pool or tennis court. Until this decision, it was unclear whether use of leisure facilities could exist as an easement as stringent conditions limit the kinds of rights which can constitute an easement and the circumstances in which a valid easement can be created.

Regency Villas owned land which housed a number of timeshare properties. Diamond Resorts owned the neighbouring land.  Both pieces of land had been in common ownership until November 1981 when part was sold to Regency’s predecessor with “the right for the Transferee its successors in title… and the occupiers from time to time of the property to use the swimming pool, golf course…tennis courts…and any other sporting or recreational facilities” on the remaining land (owned by Diamond).

Regency argued that the right to use the leisure facilities on Diamond’s land constituted an easement. Diamond argued that the right was a personal right for the parties to the 1981 transfer only. As a personal right, it would not benefit or bind future owners.

The focus of the Court’s attention was on whether the right was capable of being the subject-matter of an easement. The Court considered that rights of recreation can take effect as easements as long as they benefit the land, are not too wide and vague, do not amount to rights of joint occupation and do not deprive the neighbour of legal ownership or possession.

This case serves as a useful reminder that what constitutes an easement is open to expansion, provided it complies with the characteristics set out in the 1956 case of re Ellenborough Park.

Case: Regency Villas Title Limited & others v Diamond Resorts (Europe) Limited & another

Posted in Real Estate News

Breaking news: M&S loses break clause appeal

Tenants cannot recover any rent paid in advance when they exercise a break clause. This was the conclusion of the Supreme Court today in the final chapter of the long running Marks and Spencer break clause case.

You may recall from our blog in May 2014 (No refund in M&S break case) that the Court of Appeal overturned a High Court decision that M&S was entitled to be reimbursed rent it had paid in advance relating to the period after it had broken its lease. M&S had been required to pay the full quarter’s rent in order to exercise the break, even though the break date was part way through the quarter.  There was no express provision in the lease entitling M&S to a reimbursement.

The High Court took into account that the break conditions included the payment of a penalty by the tenant, which had been satisfied. It concluded that the parties could not have intended that the landlord should keep the excess rent as well. Therefore, there was an implied term that the excess rent should be repaid.

The Court of Appeal disagreed, saying that any such intention would have manifested itself as an express term and should not be implied.

Today, the Supreme Court agreed, unanimously dismissing M&S’s appeal.

The judgment sets out the correct approach to implying contractual terms: a term will only be implied if it satisfies the test of business necessity or it is so obvious that it goes without saying.

It is well-established that rent payable in advance is not apportionable under case law or statute. So, for example where a lease is forfeited in the middle of a quarter, the tenant is not entitled to a return of any of the rent paid in advance.

That being so, the Supreme Court found that it would be wrong, save in a very clear case, to infer that a landlord and tenant intended something different, and that the tenant should receive back an apportioned part of the rent paid in advance. This did not give rise to any anomaly that made the lease unworkable or commercially or otherwise absurd.

The decision sends out a clear message: if a tenant wants to get back rent it pays in advance relating to periods after a break date, it must write that requirement clearly and unambiguously into the lease. The courts will not fill in the blanks.

Case: Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72

Posted in Case Updates

Lost and found: Bona Vacantia property restored

In Re Fivestar Properties Ltd, the High Court has decided that a dissolved company which is subsequently restored to the register could have its freehold property re-vested in it, even though the property had passed to the Crown bona vacantia and the Crown had subsequently disclaimed it.

Fivestar, a property development company, entered into a loan arrangement with a bank.  As security for the loan, Fivestar granted security over its freehold interest in commercial property in Croydon, let to a tenant.  Following default by Fivestar, the bank called in receivers and subsequently put the company into administration.  The administrators inexplicably gave notice to dissolve Fivestar on the basis that “there are no further assets that remain to be realised“.

Following dissolution, the receivers continued to deal with the tenant’s negotiations for a new lease as the current lease was due to expire.  Pursuant to the Landlord and Tenant Act 1954, the tenant issued a claim for a new lease.  As Fivestar was dissolved by this date, so any remaining assets vested in the Crown bona vacantia, the tenant served notice of its claim on the Treasury Solicitor.  In response, the Treasury Solicitor disclaimed the Crown’s interest in the freehold.

Realising that the property was probably of some value, the bank applied for Fivestar to be restored to the register and placed in liquidation, together with an order that the disclaimed property be re-vested in the Fivestar.

All land in England and Wales ultimately belongs to the Crown.  The Court confirmed that when freehold property was disclaimed by the Crown, it still owned the land but without the freehold interest and all the rights and obligations that went with it. The Court held that the effect of Fivestar’s restoration was that the freehold interest was retrospectively re-created and re-vested in Fivestar in all respects as if it had never been dissolved and the freehold had never been disclaimed.  The Court referred to the 1994 case of Allied Dunbar Assurance plc v Fowle as authority for this position.  In Allied Dunbar, a lease disclaimed by the Crown was revived when the tenant was restored to the register.

In Fivestar’s case, the Court considered that it would be “highly undesirable” for freehold and leasehold interests to be treated differently. The Court recognised that a landlord is left in “limbo” if a lease is disclaimed because it may be revived if the company is, at some stage, restored to the register.  However, it was less concerned about  the risk to the Crown of dealing with land that might be subject to an unexpected restoration, as the Crown had the more straightforward option of disposing of the bona vacantia property for value rather than disclaiming it.

Case: Re Fivestar Properties Ltd [2015] EWHC 2782 (Ch)

Posted in Real Estate News

Not so fine for motorists: parking penalty upheld

An £85 fine for exceeding a two hour parking limit is neither unfair nor unenforceable, the UK Supreme Court ruled today.  This won’t be a welcome decision for car owners but it will be for car park managers and landowners who may have had to re-negotiate car park contracts if the court had found otherwise.

In reaching their decision, the court redefined the test for deciding whether payment under a contract is a penalty and therefore unenforceable.    No longer will parties need to consider whether the charge is a genuine pre-estimate of damages but whether “the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”.  In other words, the court is looking for a commercial justification and the charge must not be extortionate.

In the present case, chip shop owner, Barry Beavis had a contractual licence to park in a retail park in Chelmsford.  The terms were set out in notices posted at the entrance, including a two hour limit and an £85 charge if this was exceeded.  Mr Beavis overstayed by nearly an hour.  The car park was managed by ParkingEye, who demanded payment of the £85 charge.  Mr Beavis disputed that it was payable on the basis that it was excessive and therefore a penalty.

The Supreme Court found that the charge had two main objectives: (i) the management of the efficient use of parking space in the interests of the retail outlets and their users by deterring long stay or commuter parking and (ii) the generation of income in order to run the scheme.  On that basis, the court held that both ParkingEye and the landowners had a legitimate interest in charging overstaying motorists even if that extended beyond the recovery of any loss.

The court went further and said the charge was neither extravagant nor unconscionable having regard to practice around the UK and taking into account the clear wording of the notices.

This doesn’t mean carte blanche for car management companies demanding overstay charges. Supreme Court President, Lord Neuberger made it clear that:  “None of this means that ParkingEye could charge overstayers whatever it liked.  It could not charge a sum which would be out of all proportion to its interest or that of the landowner for whom it is providing the service.  But there is no reason to suppose that £85 is out of all proportion to its interests.”

Penalties have long been a bone of contention in commercial contracts.  This is the first time in a century that we have a definitive ruling on the scope and continued application of the doctrine in both commercial and consumer dealings.   The test has been redefined so that parties need to consider both whether the charge protects a legitimate interest and whether it is extortionate.  Yet, without government intervention, the thresholds remain open to interpretation.  What will be classed as extortionate and where will the limits lie? Whilst commentators pick over the bones of the case to gain further enlightenment, it’s business as usual in Chelmsford.

Posted in Planning

Some thoughts from the European Shale Gas and Oil Summit 2015

Early engagement with the community and the planning authority is key. It helps to bring order and information to the process.  It can prevent issues mushrooming, with some careful explanation of the proposal.

Engagement helps to break down barriers; communities need a voice and it’s right that they should have one. But engagement also presents an opportunity to show them what an onshore drilling operation looks like and to explain things in a way that the layman can understand. For example: what will it look like; what is the noise level; just how much water is needed? The community will have to have the benefits clearly spelled out to them if there is any hope of the developers obtaining the elusive social licence to operate.

Posted in Planning

Shale Gas: Plan for a bumpy road ahead

Time is money.

The shale gas sector wants quicker planning decisions. Local Planning Authorities are chronically under resourced. How can the industry navigate a planning process which has integrity without offending the “fifth official” – the public?

The European Shale Gas and Oil Summit has seen many questions debated, but not many answers. Panel member, Claire Dutch (Hogan Lovells Planning Specialist), summarised the feeling of the room neatly: “Planners and promoters can expect a bumpy road ahead but the sector will get there. There may be call ins and judicial reviews along the way, but it will get there”‎.

Should shale gas operators be able to opt for an NSIP (Nationally Significant Infrastructure Project) decision‎ process with the certainty of time line (even if a long one)? Should Planning Performance Agreements (for promoters to fund Planning Authority’s consultant’s costs)  be embraced or do they jeopardise the integrity of a decision? Views were split on these and other topics.

What is universal? The public needs to buy into the decision making and perhaps the industry more generally. It will be interesting to see how the sentiment lies when Hogan Lovells’ industry consultation results come in.