Assurances made by a purchaser to a homeowner that they could remain in occupation after completion of a sale and rent-back scheme did not amount to the grant of ownership rights taking priority over the purchaser’s mortgagee.
This was the judgment of the Supreme Court in the test case of Scott v Southern Pacific Mortgages Ltd and others  UKSC 5, which formed part of what has become known as the North East Property Buyers Litigation, involving a number of sale and rent-back transactions. The case has received wide-spread publicity given its implications for the users of this type of equity release scheme, which became highly popular in the residential sector before it became a regulated activity in 2009.
The defendant home-owner, Mrs Scott, sold her property to Ms Wilkinson, a purchaser nominated by an entity called North East Property Buyers. NEPB promised Mrs Scott that after the sale, she would be able to stay in her home indefinitely as a tenant paying a discounted rent. To finance the purchase, Ms Wilkinson took out a “buy to let” mortgage which proceeded on the basis that the purchase was at full value with vacant possession. The purchase and the mortgage completed on the same day and the tenancy agreement was completed shortly afterwards. Ms Wilkinson subsequently defaulted on her mortgage payments and the lenders sought possession of the home.
In May this year, the Court of Appeal overturned a High Court decision that Marks & Spencer could recover from its former landlord excess rent relating to the period between a break date in its lease and the end of the rental quarter in which it fell. M&S had been required to pay the full quarter’s rent in advance in order validly to exercise the break clause. There was no express clause in the lease entitling M&S to a reimbursement.
The High Court took into account that the break conditions also included the payment of a penalty by the tenant (which had been satisfied). Therefore, it was concluded that the parties could not have intended that the landlord should keep the excess rent as well. It followed that there should be an implied term that the excess rent should be repaid.
The Court of Appeal disagreed, saying that any such intention should have manifested itself in an express term and no such term could be implied.
M&S applied for permission to appeal to the Supreme Court. In a move which may take some by surprise, the Supreme Court has granted permission. The highest court in England & Wales only concerns itself with cases which “raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at that time, bearing in mind that the matter will already have been the subject of judicial decision and may have already been reviewed on appeal.”
As break clause cases are very much based on their own facts, it might seem unlikely that a simple interpretation point (based on whether the landlord was already adequately compensated by the penalty payment) would attract the Supreme Court’s interest. The fact that permission has been given raises the possibility that the Supreme Court wishes to look at break conditions more generally or even the wider issue of implying unwritten terms into leases to achieve a commercially “fair” result. In that case, there is the potential for this area of law to change fundamentally. Watch this space!
Case: Marks and Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anr EWCA Civ 603
The Coventry v Lawrence litigation attracted a lot of attention earlier this year on the subject of when an injunction would be granted to restrain a nuisance (such as interfering with rights to light). A further decision by the Supreme Court in the same case has now provided some welcome guidance on the different topic of when a landlord may be found liable for nuisance caused by a tenant.
By way of reminder, in Coventry, Mrs Lawrence was the owner of a bungalow near to a stadium that had been let to a tenant who ran motor racing events. She brought a claim against the tenant and the landlord, claiming that the noise from the motor races interfered with the reasonable use and enjoyment of her home.
Case law has established that a landlord can only be found liable in nuisance in two circumstances: one, where the landlord authorised it by letting the property in circumstances where nuisance was an inevitable result; and two, where the landlord has participated directly in the commission of the nuisance. In the Supreme Court, Lord Neuberger found that the landlord had neither authorised nor participated in the commission of the nuisance.
Lord Neuberger dismissed any argument that the landlord had authorised the nuisance because it was an inevitable consequence of letting the stadium. Even though the intended use of the stadium was known to the landlord at the time of the letting and nuisance did in fact result from the letting, this was not in itself sufficient to render the landlord liable in nuisance.
Although there is little authority on the issue, the Court found that the question of whether a landlord has directly participated in a nuisance must largely be one of fact. This should be based principally on what happens subsequent to the grant of a lease, although that may take colour from the facts surrounding the grant. If a claim in nuisance is to succeed then it must be based on “active” or “direct” participation. By extension, the Court found that a landlord failing to stop or discourage a tenant from causing a nuisance cannot amount to “participating” in the nuisance. Other than in very unusual circumstances, attempts by a landlord to mitigate a nuisance should not imply that the landlord has authorised such nuisance.
Where the lease contains covenants against the tenant causing a nuisance, Lord Neuberger did not consider that a landlord’s position would be weaker simply because it had failed to enforce such covenants. At the same time, landlords cannot avoid liability simply by including covenants against nuisance in their leases.
This decision should provide some comfort to landlords facing claims for nuisance caused by their tenants. However, the very fact that Lords Carnwath and Mance found that the landlord actively encouraged the tenant’s nuisance (and should therefore have been liable for it) indicates that Coventry is no panacea for landlords. Nuisance cases will continue to turn on their facts and landlords should continue to act with care when confronted by potential nuisance claims against their tenants.
Coventry and others v Lawrence and another (No. 2)  UKSC 46
On 4 November 2014 Hogan Lovells, in partnership with International Building Press, hosted its popular Annual Strategic Land Debate. Peter Bill of the London Evening Standard chaired an animated discussion on topics focusing on the chronic housing shortage in Britain.
On the panel were: Bill Hughes, Managing Director at Legal & General Property; Emma Cariaga, Head of Residential Development at British Land; Nick Taylor, UK Head of Planning at Carter Jonas LLP; and Waheed Nazir, Director of Regeneration at Birmingham City Council.
One of the main issues raised during the debate was whether garden cities are the answer to the housing shortage. The panel displayed the full spectrum of views on the merits of garden cities as a method of addressing the housing crisis. Nick Taylor advocated a return to regional planning, while Bill Hughes suggested that investors may be reluctant to focus their funds on a comparatively high-risk, ‘new settlement’, garden city project with little existing infrastructure. Investors may well prefer urban extensions – the ‘safer’ option. Emma Cariaga took a stand for garden cities but made the point that garden cities alone will not solve the housing crisis. Our panellists all agreed on one point – for the first time the lack of housing in Britain is high on the political agenda and has at last become a cross-party issue.
The debate was followed by a lively networking evening and Hogan Lovells looks forward to the fifth Annual Strategic Land Debate in 2015.
When a tenant leases equipment from third parties for use in their premises or enters into hire-purchase arrangements, the finance/ leasing companies often ask the landlord to waive their rights over such equipment. Tenants can put great pressure on landlords to sign waiver letters urgently, claiming that without them they will not be able to take delivery of a vital (and usually very expensive) piece of equipment and that any delay will be detrimental to their business. Although landlords may want to accommodate such requests, they should view these letters with caution.
The main thrust of a waiver letter will be that title in the equipment will not pass to the landlord. At first glance this seems uncontroversial, but to the extent that the equipment is attached to the building, it may become part of the premises. Without an agreement to the contrary, such equipment will belong to whomever has the right to occupy the building which will be the landlord once the lease expires or is terminated. Air conditioning plant and lifts are obvious examples of equipment which is attached to a building, but the point may also apply in relation to equipment which needs to be bolted into the structure.
Any acknowledgement that title will not pass to the landlord (and indeed any agreement by the landlord not to take control of the equipment to recover rent arrears) should only, therefore, be agreed by the landlord on condition that the finance/ leasing company has to remove the equipment following the termination of the lease (however that comes about) within a specified period of time. Until the equipment is removed, the landlord may not be able to relet the premises so if the finance/ leasing company fails to do so, the landlord should have a right to remove, store or dispose of the equipment. Any proceeds of sale (less removal, storage and disposal costs) will then belong to the finance/ leasing company. This point is often highly contentious, not least because the equipment may have little or no value once it is removed or because it may need specialist disposal agents to obtain the best price on a sale.
Whilst the lease subsists, it may not be possible for the landlord to grant the finance/ leasing company a right to enter the premises to remove the equipment so any such right should only be agreed in so far as the landlord is lawfully able to do so.
Finally, the finance or leasing company should have an obligation to rectify any damage caused by the entry and removal of goods and any entry should be at their own risk. The finance/ leasing company should also indemnify the landlord against any resulting costs or claims.
Waiver letters are often presented to landlords as “non-negotiable”. However, it is highly unlikely that the landlord will owe any contractual obligation (in the lease or elsewhere) to the tenant to sign one, so the starting point should be that the landlord will only do so at the tenant’s cost and on terms which it considers satisfactory. With this in mind, a tenant who requires a landlord’s waiver should raise the issue as early as possible to avoid delays.
Last week saw the launch of the Local Data Company’s third ‘Openings and Closures’ report at an event hosted by Hogan Lovells. Matthew Hopkinson of LDC gave a presentation on the report’s findings which was followed by a panel discussion chaired by Samantha Fenwick, a reporter with You and Yours – BBC Radio 4′s consumer programme. The panel included our own Mathew Ditchburn, Michael Weedon of the British Independent Retailers Association, Professor Paul Longley of UCL, Simon Danczuk MP for Rochdale and Hussein Lalani the founder of 99p Stores. Continue Reading
London is a seller’s market. Many are looking to maximise the price they can achieve by adopting a more formal bid process, particularly for high profile assets such as the former Canadian Embassy last year and, currently, the Gherkin.
The benefit of such a process to the seller is clear, but for prospective buyers it can be a very costly way of failing to spend that £100m. The main cause of this is that the structure of most bid processes requires bidders to undertake substantial amounts of due diligence before they know whether they are going to be the chosen one. The ease of the process depends on how well organised the seller’s team is and how transparent they are prepared to be over timing and selection criteria.
Most bid processes will follow a two stage approach, with an initial round of offers and then a shortlist of bidders. Those shortlisted will be expected not only to fine tune their price offer, but often also to mark up the purchase contract and confirm that they have completed their due diligence on the asset. So serious bidders will have done most of the work at the point they submit their best offer, as they will be expected to exchange the purchase agreement within a couple of days of the chosen offer being accepted.
One of the initial decisions to make, therefore, is how much due diligence to undertake at each stage. Most bidders will want to limit how much they spend at the initial stage and reserve the bulk of the work to be done if they are shortlisted. At the initial stage it is mostly a question of identifying key issues that impact on value and, as ever, there is a risk/reward balance.
Buyers’ costs could be mitigated if sellers were prepared to make Certificates of Title available to bidders, but they often avoid even that effort (and cost) and only provide access to a website on which title information is available for bidders to review. Some such websites are clear and comprehensive, but not all.
It is also essential to check the requirements of the process and make sure they are followed, so in addition to due diligence on the asset, prospective buyers need to prepare their bid carefully to try to get an edge – it is not just deciding on the bid price. This includes preparing appropriate background material on themselves and their track record. Financial substance will be key, so if the proposed bid vehicle is for example, a special purpose vehicle with no substance in itself, buyers should consider providing guarantors.
Proof of funds will usually also be needed, so bidders will need to get letters from their bankers confirming the sums available. The more reputable the bank providing such a letter, the better. It all adds to the credibility of the bid. Ultimately, what the seller wants to know is that the bidder can exchange and complete quickly, if its bid is accepted.
An earlier version of these top tips appeared in the Autumn 2014 EG London Investor Guide.
Dion Panambalana lifts the lid on the top tips he is giving to office tenants – useful for a savvy investor keen to plot occupiers’ next moves.
Now that the leasing market is back in central London for office occupiers, here are the top five issues I would suggest tenants consider on a major office letting:
- Certainty on rent and rent at review – and what they are going to pay by way of service charge – have always been top of a tenant’s shortlist of issues that need to be addressed. Rent reviews are relatively rare because leases tend to be 10 years or less, unless they are major occupiers taking a lot of space. So it is quite common to see some sort of “fix” in years 5 to 10. Similarly with service charge, although that tends to be over a shorter period.
- If tenants are taking space that has been constructed to shell and core, I recommend they ask the landlord to put their fit out contractors onto their insurance policy, so that if they cause damage to the building, the landlord’s insurance policy covers it. Otherwise their contractors will need to take out their own insurance and add that to the cost of the fit out. There is a debate to be had between landlord and tenant on cost as typically the landlord might have built to a Cat A standard of finish anyway. Either way it is probably cheaper for the landlord to insure this than for the tenant’s contractors to have to bear it.
- The Model Commercial Lease suite of documents (“MCL“) has now launched and is intended to represent a fair starting point for landlords on all classes of institutional property. Many tenants can use the drafting in it to reflect their final negotiating position. A position that has gained a lot of traction in the last year or so is the good neighbour arrangements. This means that when a landlord is spending a tenant’s money, or making decisions that affect the tenant’s business at the premises, it must behave reasonably and not overspend, or unreasonably regulate. The MCL reflects current practice in this regard as these clauses tend to be accepted by landlords, if they have not already included them in their lease, without murmur.
- On many lettings, some sort of schedule to reflect reinstatement, rent review (if there is one) and dilapidations liability tends to be the norm. If tenants are taking new space this will be covered. But it is also important for older space, where tenants might want to limit their repairing liability and be as clear as they can on dilapidations and reinstatement.
- Finally the relationship between landlord and tenant, which has been changing to a customer-based relationship for many landlords over the last 15 years, has finally started to change in the legal market. So, tenants can ask for something that they genuinely need for their business and which the landlord can reasonably accommodate at no extra cost, but maybe with minor inconvenience. If the tenant can fully and fairly explain their position and is prepared to concede something else in return, I would advise them to ask and they may receive!
An earlier version of these top tips appeared in the Autumn 2014 EG London Investor Guide
In the latest round of litigation on the vexatious issue of repeat guarantees, the Court of Appeal reached a sensible, commercial decision in Tindall Cobham 1 Limited v Adda Hotels . You will remember that repeat guarantees require the same guarantor to guarantee successive tenants. They were seen as a practical solution for both landlord and tenant when subsidiary companies of little covenant strength wished to transfer leases between themselves as part of a corporate re-structuring. Landlords had no objection as long as each tenant was backed by the same parent guarantee. Repeat guarantee clauses were relatively commonplace until the Court of Appeal’s decision in House of Fraser –v- K/S Victoria Street , when the Court decided that a direct guarantee of the immediate assignee’s obligations given by the current tenant’s guarantor would be void under the Landlord and Tenant (Covenants) Act 1995.
In the Tindall case, the Tindall companies were the tenants of a portfolio of hotels owned by Adda. The Tindall companies were part of the Hilton Group and their obligations under the leases were guaranteed by the Hilton parent company.
The leases under which Tindall occupied the portfolio all contained two alienation provisions in respect of assignment. First, the usual qualified covenant, subject to a number of stringent conditions under the Landlord and Tenant Act 1927. Second, a covenant permitting assignment to associated companies subject to Tindall (a) providing notice of any assignment within 10 working days and (b) procuring that the “Guarantor and any other guarantor of the Tenant ” would directly covenant with the Landlord as guarantor of the assignee.
Following the K/S Victoria Street case, Tindall argued that condition (b) was void and should be struck out. This would mean the leases gave them an unrestricted right to assign to any associated company provided that they gave notice as per condition (a).
The landlord disputed this interpretation. The Court at first instance held that the principle of “validate where possible” applied. Consequently, condition (b) should be interpreted as imposing an obligation to procure a guarantee from “any other guarantor [of equivalent covenant strength]” as opposed to from “the Guarantor“. This then allowed the covenant to survive “intact“. Tindall therefore could not assign unless it procured a guarantor of equivalent covenant strength to Hilton.
Tindall appealed. The Court of Appeal held that the trial judge’s interpretation went too far. Condition (b) was indeed void under the 1995 Act. However, conditions (a) and (b) were part and parcel of the same proviso to the qualified covenant and therefore they must stand or fall together. They were both struck down by the Court and the clause was reduced to a standard qualified covenant against assignment.
After months of waiting, the results are finally known. Scotland has voted to remain part of the Union, established back in 1707. When it joined, it kept its own established legal system which it has retained to this day, distinct from that of England and Wales. Scotland even has its own land registry – the Registers of Scotland. Advice on real estate law in Scotland will continue to be sought from a Scottish lawyer rather than dealt with by English lawyers.
All three major Westminster parties have signalled their approval for further devolved powers to Scotland. Commenting on the result David Cameron raised the West Lothian question, confirming his commitment to greater devolution across Great Britain, including votes on English issues by English MPs at Westminster.
It remains to be seen how far real estate is likely be affected by further devolution in the future. Areas such as taxation, planning, enforcement of disputes and statutory regulation of leases have already begun to evolve. That evolution will inevitably now hasten in the wake of today’s results and the clear appetite for constitutional reform.