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

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

Posted in Real Estate News

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

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

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

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

Posted in Case Updates

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

Sunlife Europe Properties Limited v Tiger Aspect Holdings Limited and Another

(CA) [2013] EWCA Civ 1656

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

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

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

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

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

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

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

 

Posted in Real Estate News

Fair Game: Law overturned on rent payable during administrations

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

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

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

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

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

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

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

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

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

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