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Keeping It Real Estate

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

Posted in Real Estate News

Right to rent legal challenge

A challenge to the government’s right to rent measures began yesterday (6 June) when permission was granted to the Joint Council for the Welfare of Immigrants (JCWI), a charity, to proceed with a judicial review challenge. A full hearing will follow.

The basis of the challenge is that the checks cause discrimination on grounds of race and nationality and breach the Human Rights Act and should be reviewed before further roll-out to the rest of the UK. The right to rent requirements were introduced into England in February 2016 under the 2014 Immigration Act, but have yet to be implemented in Scotland, Wales or Northern Ireland.

All private landlords must check that a tenant or lodger can legally rent a residential property in England. The policy also affects commercial landlords if, for example, they let residential flats over retail units.

The checks must be carried out before the start of a tenancy, on all people aged 18 or over who will live at the property as their main home, whether they are named in the tenancy agreement or not. Certain types of property, such as social housing, some student accommodation and leases of seven years or more of any residential property, are exempt. A full list of documents acceptable to demonstrate that a person has a right to rent can be found on the government’s website, but Windrush highlighted instances of people with a legal right to live and work in the UK being denied rental accommodation because they did not have documents which evidenced a right to remain in the UK.

Although a landlord has complete freedom of choice over its tenant, the JCWI’s 2017 report found that 42 per cent of landlords were less willing to rent as a result of the scheme.

A contravention of the right to rent requirements can result in a fine of up to £3000 but if landlords knowingly rent out their property to an illegal immigrant, or have reasonable cause to believe that the tenant has no legal right to remain in the UK, this amounts to a criminal offence which can attract an unlimited fine and up to five years in prison.

A landlord may have a defence where it takes reasonable steps to terminate the tenancy within a reasonable time of becoming aware of the true immigration status of the tenant, but the process of termination and possibly eviction is daunting even though the Immigration Act 2016 introduced provisions making it easier to evict illegal immigrants.

Landlords can pass on responsibility for carrying out (and accordingly, pass on liability for any failure to carry out) right to rent checks as part of the due diligence process on prospective tenants to their letting agents or managing agents. Delegation must be agreed in writing between the landlord and agent, and the agent must be acting in the course of its business, in order to effectively delegate responsibility and liability.

Whether the current legal challenge will be successful remains to be seen, but since the policy’s inception in 2014, and particularly since Windrush, hostility towards it has been growing in certain sectors, with support from a number of representative groups who question the effectiveness of the government’s “hostile environment” policy. What the challenge does suggest is that right to rent checks have led to a reluctance to grapple with a system that can be confusing and costly if you get it wrong.

Posted in Real Estate News

Whose shoes? What subrogation means and why it matters

Subrogation is a well-known principle of insurance law, which also affects real estate. It means that an insurer who has settled a claim may then “step into the shoes” of the insured and try to recover what it has paid from anyone who has contributed towards, or caused, the loss.

In real estate, landlords’ insurers can “subrogate” against a tenant if the tenant has contributed to the insured damage. As the tenant, in effect, pays for the insurance, that doesn’t sit well so tenants will typically get protection against this.

How do they do that? Mainly by getting the lease right. If the drafting requires the landlord to insure and to reinstate insured damage, and the tenant is required to contribute to the insurance premium but has no liability for damage by insured risks, the insurers cannot bring a subrogated claim against the tenant. This is generally known as the “Berni Inns” principle, after the case deciding it (Mark Rowlands v Berni Inns Ltd [1986] 1 QB 211). Generally, that should be enough, but (being cautious by nature) lawyers normally want to see more if possible.

Most professional property investors’ insurance policies include a clause by which the insurer expressly waives its subrogation rights against the tenant. Tenants often reinforce this with lease clauses requiring the landlord to ensure (or make efforts to ensure) that the policy includes a subrogation waiver.

The tenant could also be specifically named on the policy as a co-insured (or composite insured). This is more than being “noted” on the policy, which is covered through a “general interests” clause. However, co-insurance is not a normal arrangement, for both practical and technical reasons.

Tenants should also consider the position of their contractors carrying out works such as fit-outs. Neither co-insurance nor a subrogation waiver in favour of a tenant will automatically benefit a contractor and the Berni Inns principle won’t apply. The tenant could require the landlord to obtain a subrogation waiver in favour of a contractor. Not doing so could affect the way in which the contractor prices the work, as expensive additional contractor’s insurance will be needed. There is usually an additional premium for the waiver which the tenant would be expected to pay, but it should be substantially less than the cost of the additional insurance.

Some tenants also ask the landlord to insure the fit-out itself, which can be slightly cheaper than insuring it themselves. Many landlords are comfortable doing this (as long as they are given an accurate reinstatement value). Although there can be a debate over whether the landlord has an “insurable interest” in the tenant’s fit-out, most insurers seem quite happy to cover it.

Posted in Real Estate

The brave new world of the GDPR

It’s finally here. As from today the EU General Data Protection Regulation (GDPR) applies throughout the European Union.

Any entity that “processes” personal data will be subject to the GDPR. “Processing” is widely defined and catches virtually anything an entity does with data, from collection and storage through to analysis, sharing and destruction.

The GDPR only applies to “personal data”. Personal data is any information relating to an identifiable natural person such as name, identification number, location data or online identifier. Certain types of data are more sensitive than others, including data relating to health, race, ethnicity and biometric data.

WHO CONTROLS THE DATA?

A “data controller” is a person or entity who decides how and why personal data is processed. Data controllers will be directly liable for data processors and are directly responsible for compliance with all aspects of the GDPR.
A “data processor” is a person who processes personal data on behalf of a data controller.

Under the GDPR, a data controller is required to enter into a contract with the processor which imposes certain obligations on the data processor.

COMPLEX OWNERSHIP STRUCTURES

With common property ownership structures, the beneficial owner is likely to be different from the legal owner and decisions over the asset are likely to be shared between the asset manager and the property manager.

In these circumstances, each entity may have its own data protection responsibilities and should analyse what data is being collected and by whom, whether it is personal data, what the purpose of having the data is, and who is making the decisions as to how it is used, in order to establish who is the data controller and who is the data processor.

Although management agreements between asset owners, asset managers and property managers can helpfully clarify the role of each party in relation to data protection and compliance with the GDPR, ultimately the identity of the controller/processor is one of fact.

PRIVACY NOTICES

Data controllers have extensive obligations in relation to personal data, including an obligation to notify individuals how the data controllers use the data. This information is often included in a privacy notice and no-one can have escaped the flurry of e-mail activity as entities update these privacy notices to comply with the GDPR.

DATA BREACHES

Where there is a “personal data breach” the data controller must notify the Information Commissioner’s Office (ICO) of the breach within 72 hours of becoming aware of it. The data controller must also notify the individual of the breach, where the breach would be likely to cause a high risk to the individual’s rights and freedoms which may be given by a public communication.

In contrast, a data processor simply has to notify the data controller without undue delay after becoming aware of a personal data breach.

SANCTIONS FOR NON-COMPLIANCE

The consequences for breach of certain provisions of the GDPR are eye-wateringly high. Fines may be levied of up to:

• 20m Euros; or, if higher,
• 4% of annual worldwide turnover.

In relation to some other breaches, the ICO may impose sanctions of up to 10m Euros or, if higher, up to 2% of an undertaking’s total worldwide turnover.

And it won’t stop here. In the UK, when the new Data Protection Act is enacted, it will broadly implement the GDPR and it will continue to apply after Brexit, so future-proofing the transfer of personal data between the UK and EU.

Posted in Planning

Conditions, conditions…

A recent Court of Appeal decision serves as a cautionary tale for local planning authorities – and will no doubt result in landowners dusting down their historic permissions…

In 1985 LB Lambeth, the planning authority, granted permission for a DIY retail store at Streatham Vale. The permission was subject to a condition which restricted the range of goods which could be sold.

25 years later in 2010, permission was granted pursuant to Section 73 of the 1990 Act, to vary the condition to allow the sale of a wider range of goods. The Section 73 permission was granted subject to a condition which set out the terms of what could and could not be sold. The sale of food and drink was a no-no.

In 2014, Lambeth granted a further Section 73 permission (varying the 2010 permission) to allow an even wider range of uses. The planning permission described the range of uses and stated that “the retail unit permitted shall be used for the sale and display of non-food goods only and… for no other goods.” Although this restriction was set out on the decision notice, it wasn’t secured by a planning condition.

Having secured the 2014 permission, the owner of the property applied for a certificate of lawfulness of proposed use or development (“CLOPUD”) for open, unrestricted Class A1 retail purposes.

Lambeth refused that application, but the Secretary of State granted the certificate on appeal. Lambeth, none too pleased with that decision, applied to the High Court to have it quashed. When the High Court upheld the Secretary of State’s decision, Lambeth appealed to the Court of Appeal.

The Court of Appeal dismissed the appeal.

The Court found that, whilst it would be wrong to conclude that the decision notice permitted the sale of goods other than non-food goods, this didn’t matter in practical terms. A change of use from the retail sale of non-food goods to the retail sale of food (both of which are in Class A1) would not require planning permission.

The only way that Lambeth could prevent the change of use (and therefore the grant of the CLOPUD) was to show that the change of use would be a breach of condition.

Unfortunately for Lambeth, the permission didn’t contain a condition to trigger such a breach. Worse still, the Court couldn’t apply a “corrective” interpretation of the 2014 permission to include such a condition, and nor could it imply such a condition: although the decision notice hadn’t achieved what Lambeth had intended it to do, it hadn’t, as a document, lacked practical and commercial coherence. Lambeth’s failure to restate the conditions attached to the previous permissions was not so obvious a mistake that it went without saying.

So, what can we take away from this?

  • Don’t forget that applications to vary or remove conditions under Section 73 result in a fresh planning permission.
  • Planning permissions are to be read as a standalone document. The courts are rightly reluctant to imply conditions where they do not exist.
  • As such, planning authorities should take care when granting consent and remember that restrictions (such as those on permitted use) need to be dealt with by an express planning condition. It’s not sufficient simply to rely on a description of the use.

And for landowners? Perhaps it’s time to dig out those dusty permissions and look again at the purported use restrictions…

London Borough of Lambeth v Secretary of State for Communities and Local Government and others [2018] EWCA Civ 844

Posted in Real Estate News

It’s just not cricket (but it is Blockchain)

Last week, the property press ran the tantalising story that parcels of Lord’s cricket ground were up for sale by New Commonwealth, an enterprise which describes itself as a “new property-owning democracy” that provides “access to prize assets for the man on the street, not just the landed elite”.

Of course, part of Lord’s is not really up for sale. This is in fact the latest chapter in one of England’s longest running property sagas which began in 1890 when the Great Central Railway wanted to purchase part of the famous cricket ground to construct its railway. A compromise was reached and they acquired a 200 by 38 metre strip under the eastern edge of the cricket ground (known to cricket fans as the Nursery) so that they could construct tunnels underneath it instead. Meanwhile, Marylebone Cricket Club was given a lease of the surface.

By 1999, two of the three railway tunnels were disused and put up for sale by Railtrack on a 999 year lease. The lease was not, however, bought by MCC, but by the Rifkind Levy Partnership. Rifkind had spotted a development opportunity, but it would not be straightforward. In 2017, after nearly two decades of debate, MCC members voted against collaboration, effectively scuppering any wholesale redevelopment of the land until the expiry of MCC’s lease in 2137.

Enter New Commonwealth who intend to use Blockchain technology to allow the public to purchase (for £500) “a piece of cricket’s most famous ground…. as a gift or simply as a souvenir”.

So what will cricket fans be buying? Not, it should be clear, a physical piece of real estate. They will be investing in a regulated property fund and when an investment threshold is reached these will be “tokenised” and can be bought and sold on an online platform (a physical token will also be provided to fulfil the souvenir part of the offering). Investors are unlikely to have a say over any development proposals when MCC’s lease expires in 2137. It is also questionable whether they will make any return on their investment before then, but the attraction is to own a share in an iconic site.

The news is probably the highest profile example of a concept which has been long anticipated by the more technological players in property industry. At its most basic, Blockchain is a secure digital ledger system which records digital transactions. Each completed transaction is a block which is added to other blocks to create a chain. It’s a technological way of cutting out the traditional middle man between investors and investments.

Blockchain is an unconventional way of raising money, but real estate is a prime candidate for it. The tangible, unique nature of real estate is readily understood by the general public and trophy assets carry premium appeal. It is clear from New Commonwealth’s marketing that they have understood this. Their other investment opportunity is 103 Mount Street in Mayfair,  “one of London’s prized assets” which is sold with “bragging rights”. The technology behind Blockchain also offers an efficient way of communicating with investors so if MCC comes back to the table the news can be quickly disseminated.

Parallels can be drawn with schemes set up in the 1970s and 1980s for the sale of “souvenir land”, which were very small plots of land with sentimental or commemorative value. These schemes found a ready market, but (in contrast with the new schemes) would be unworkable where the whole of the property needs to be readily managed and transferred.

However, there is one note of caution. Blockchain is on the FCA’s radar and that of the government. Tighter oversight and regulation is anticipated and it is not clear what form that will take. Despite this, a market for iconic real estate is self-evident and Blockchain may present a real opportunity for sourcing new money to invest in it.

Posted in Real Estate News

Directors disqualified for breach of competition law

For only the second time in its history, the Competition and Markets Authority (CMA) has secured the disqualification of directors whose companies have infringed competition law.

In May 2017, the CMA concluded its investigation into the conduct of six residential estate agents operating in the Burnham-on-Sea area. The CMA found that the estate agents had breached competition law by participating in a cartel agreement to fix their minimum commission rates at 1.5%.

On 10 April 2018, the CMA announced that it had secured legally binding undertakings from two directors of one of those estate agents. The undertakings effectively disqualify them as directors and prevent them from being involved in the management of any UK company. One director will be disqualified for 3 years and the other for 3.5 years.

The CMA can apply to court (under the Company Directors Disqualification Act 1986) for a disqualification order to be made against a company director for up to 15 years where: the company of which the individual is a director has breached competition law; and that individual’s conduct renders them unfit to be a director. Alternatively, the CMA may accept a disqualification undertaking from a director to avoid the need for proceedings (as it has done in this case). This will usually result in a reduction in the disqualification period.

This is only the second time that disqualifications have been secured by the CMA in connection with a company’s breach of competition law. In December 2016, Daniel Aston (managing director of Trod Ltd) gave undertakings not to act as a director of any UK company for five years. The CMA had concluded that Trod Ltd, an online poster supplier, breached competition law by agreeing with one of its competitors not to undercut each other’s prices for posters and frames sold on Amazon.

In a speech in November 2017, CMA Executive Director Michael Grenfell described the use of disqualification from company directorships as an “innovation” in enforcement by the CMA, “ensuring personal responsibility for competition law compliance”. Though the CMA’s use of director disqualifications has so far been underwhelming, Grenfell’s speech and the Burnham-on-Sea case may signal a shift towards a greater application of this enforcement tool.

The Burnham-on-Sea case also demonstrates the CMA’s continued interest in estate agency services. The Authority said the case “raises concerns that the sector does not properly understand the seriousness of anti-competitive conduct and the consequences of breaking competition law”.

Participation in a cartel in the UK can also constitute a criminal offence under Section 188 of the Enterprise Act 2002. A person found guilty of this offence may be liable to an unlimited fine and up to five years’ imprisonment. The CMA may also impose fines on companies which are found to have broken competition law – the fines imposed in this case totalled £370,084.

Case: Residential estate agency services, Case 50235

Posted in Real Estate News

New Lease Code for Old

The professional statement, “Code for leasing business premises”, published by the Royal Institution of Chartered Surveyors (RICS) incorporates the proposal for a new lease code. The consultation period in relation to this proposal ends on 12 April 2018.

Following the consultation period, the RICS intends for the revised Code to replace the existing Code for Leasing Business Premises in England and Wales 2007 (the 2007 Code), which was first published on 28 March 2007.

Unlike the 2007 Code, the revised Code will contain a number of mandatory statements that must be complied with by agents and landlords who are RICS members or registered firms.

Failure by members or registered firms to act in accordance with the mandatory requirements may lead to a finding of negligence against a surveyor as the court is likely to take account of the relevant statements in cases where allegations of professional negligence are made against a surveyor.

The revised Code states that there must be written heads of terms. It is mandatory to provide certain information in the heads of terms, and as a minimum the heads of terms must state the position on the following:-

  • the identity and the extent of the premises
  • any special rights to be included
  • the duration of the lease
  • whether rights of renewal are to be included or excluded
  • details of any break rights
  • whether there is a requirement for a rent deposit or a guarantee
  • the amount of rent, the instalment frequency of rent, such as quarterly or monthly payments, whether VAT is payable on the rent, any rent free or other inducement and the basis of any rent review and review dates
  • the tenant’s rights to assign, sublet, charge and share the premises
  • service charges, insurance costs and other outgoings
  • repairing obligations
  • use or range of uses permitted at the premises and details of alterations permitted and/or restrictions to be imposed on different types of alteration
  • insurance and damage

In addition to the mandatory requirements, the revised Code contains best practice statements, which should be complied with. The guidance states that these best practice statements should only be departed from for “justifiable good reason”. However, further clarification is required as to what constitutes “justifiable good reason”. Importantly for landlords, it is not clear whether commercial reasons alone would sufficiently justify a departure from the best practice statements.

Accordingly, inclusion of the best practice statements in the revised Code raises the following questions:-

  • To what extent will the best practice statements be enforceable i.e. will they have any “teeth” or will they in practice still be voluntary?
  • If the best practice statements are enforceable, where will the liability lie? Will it lie with the corporate entity or the individual surveyor who structures the deal? In practice, if the industry sees these best practice statements as being enforceable and having teeth, there will be pressure on both parties to adhere to the statements. At the minimum, members of the RICS will be conscious of reputational consequences for non-compliance.
  • Should the best practice statements be considered in light of sector-specific requirements? For example, could a landlord or agent argue that it is appropriate to depart from certain statements on retail or office lettings?

Despite the uncertainty surrounding enforceability, the following elements of the best practice statements are likely to cause concern to landlords and their agents:-

  • Renewal rights – “Leases should carry rights of renewal under the Landlord and Tenant Act 1954 unless there is good reason to exclude them”. If enforceable, this statement could restrict landlords in the management of their assets. For example, if retail landlords are required to offer leases with statutory renewal rights as standard, they could be prevented from regulating tenant mix.
  • Rent review – “Landlords should explore possible alternatives to upwards only reviews to market rent”. Although landlords are increasingly using alternative methods of rent adjustment, such as index-linked rent reviews and turnover rents, open market rent review is still the most common method of periodically recalculating commercial rent. Any departure from this industry standard is likely to be unpalatable to most landlords, particularly if such alternatives do not involve an upwards only review model.
  • Subletting – “Leases should allow tenants to sublet the whole of the premises”. Landlords may be concerned that this default position is inappropriate for certain types of asset. Once again, restricting subletting is conducive to regulating tenant mix. Although the revised Code does acknowledge that a more restrictive approach to subletting may be appropriate for “shorter term leases or leases of particular types of property”, many landlords will still feel that the revised Code is too prescriptive in this respect.
  • Repairs – “Tenants should not normally be obliged to give the premises back at the end of the lease in any better condition than they were in at its grant”. This statement is a considerable departure from market practice, as a commercial landlord will generally expect a tenant to keep the premises in good and substantial repair and condition. This means that, if the premises are not in good repair at the beginning of the lease, the tenant has to put and keep the premises into good repair. The best practice statement contradicts this concept, suggesting that tenant’s repairing obligations would ultimately need to be evidenced by reference to a schedule of condition instead.
  • Insurance – Landlords should “give the tenant the benefit of any premium discounts and disclose to the tenant whether the landlord is receiving commission”. For landlords with large property portfolios who are able to negotiate group policy discounts because of their unique bargaining position, adherence to this statement is likely to be unappealing.

As with the 2007 Code, the revised Code will also contain an updated template for heads of terms (which are not compulsory), and a checklist. While most landlords and agents are likely to want to use their own heads of terms, the checklist will be a useful tool in ensuring that the minimum mandatory information required by the Code is being included.

The revised Code will include an updated occupier’s guide which is aimed at tenants and which explains the main factors that a tenant should consider when agreeing a lease.

Given the potential for legal and/or professional disciplinary consequences as a result of departing from the revised Code and particularly given the uncertainty surrounding the enforceability of the best practice statements, all interested parties are encouraged to review the recommendations and participate in the consultation before it closes on 12 April 2018.

Posted in Real Estate News

Update: public register of beneficial ownership of UK property by overseas entities

What’s new?

The government has published its response to the April 2017 call for evidence on proposals for a register showing who owns and controls overseas entities that own UK property or participate in UK government procurement. The regime would catch any legal owner of registered land which is “overseas” and therefore would include commonly used Jersey and Guernsey, and Luxembourg structures.

The response also confirms the government’s previous announcement that it intends to publish a draft bill this summer and subsequently introduce it to parliament in the autumn. The intention is for the register to become operational in 2021.

What you need to know

Here are the 10 key points that come out of the government’s response:

  1. The compliance burden will catch not only freehold owners but also leasehold owners, including all leases that are registrable at the Land Registry. This would include occupational leases. The government originally suggested it would catch leases over 21 years only but their response indicates that this will be expanded to all registrable leases (all leases over a 7 year term or with a term that starts in the future).
  2. The definition of “beneficial owner” and the information that is required will be the same as under the PSC regime (persons with significant control) which requires UK corporates to maintain a register of individuals with “significant control”. This avoids any mismatch between the different registers and compliance requirements.
  3. Most respondents to the call for evidence thought that the new register could have a negative impact on the UK real estate market by deterring overseas investors. Whilst the government confirms in its response that it has commissioned research on the impact of the new register, this has not softened its intended approach.
  4. There is no change on the retrospective effect of the register although the transitional period (originally one year) will be extended to an as yet unspecified longer period of time. All overseas entities that already own UK property will, therefore, have to comply with the requirements after the transitional period.
  5. The response confirms that the “bite” will be in the form of restrictions on the relevant title, combined with statutory restrictions backed up by criminal offences.
  6. Transferring a property to an overseas entity that does not yet have a valid registration number (the number supplied by Companies House once the beneficial ownership information has been supplied) will not void the transfer; instead, an overseas buyer will not be able to register its transfer without the registration number meaning that it will remain as a beneficial owner only (and not the legal owner) of the property until the registration is completed. In practice, overseas buyers will still need to have complied with the register’s requirements and obtained the registration number in advance as remaining in limbo as beneficial owner comes with significant risks.
  7. Where overseas entities are unable to obtain information about their beneficial owners (in circumstances that mimic the PSC regime), they must instead provide information about their managing officers.
  8. There will be an ongoing obligation on overseas owners to keep the register up to date. The government has reserved its position on the preferred approach but has confirmed that it will not be triggered by particular events and instead will be a regular update requirement, likely to be more frequent than every two years. It will be a criminal offence to fail to comply with this.
  9. Despite some respondents (albeit the minority) objecting to the register being public, the government has strongly reiterated its view that one of the essential aspects of the register (which will be held at Companies House) is that it is publicly and easily accessible so as to improve transparency and accountability.
  10. It is not yet clear how the proposed restrictions on the title might impact on more complex commercial transactions such as options, pre-emption rights, joint ventures. The government’s response states that it is confident that pre-existing contractual and statutory rights will be protected but no further detail on the wording of the restrictions has been provided.

The detail of the draft bill will need to be pored over when it is released to understand exactly how the regime will work and how the intricacies of the protections (both statutory and by way of restrictions on the title) might impact more complex transactions. The register may also presage an intention by the Government to start levying SDLT on transfers of shares in UK-property rich companies since it could provide much of the toolkit for enforcing such a charge.

Posted in Real Estate News

Why did commonhold fail? The Law Commission issues call for evidence asking for the industry’s views

The Law Commission has issued a call for evidence on commonhold law to understand why commonhold as a form of ownership has proved to be so unattractive to the property market.

This aligns with the government’s announcement in December 2017 to look at whether and how it can reinvigorate commonhold law, following the widely publicised criticisms of leasehold, and reflects one of the Law Commission’s projects announced in its 13th programme of reform launched in December last year.

Commonhold – a false dawn

Introduced in 2002, commonhold was set to become a new form of property ownership that would address the difficulties faced by leaseholders and other landowners.  Similar systems have operated successfully in a number of other countries including Australia and the USA.    However, the take up rates in England and Wales have been low.  There are currently only 20 commonhold developments in England and Wales.

Commonhold allows an individual to own a freehold “unit”, such as a unit on an industrial estate or a residential flat.  Property ownership can be divided vertically or horizontally.  Each unit holder is a member of the Commonhold Association (CA), a limited company, which owns and manages the common parts.  The CA determines the financial contribution to be paid by each unit holder for the management of those common parts.

An attractive proposition to property owners?

There are a number of benefits to commonhold over straightforward freehold or leasehold ownership, which include:

  • Freehold ownership – interests in the units are held on a freehold basis, so there is no depreciating leasehold asset;
  • Common objectives – the objectives of the unit holders and the CA should be aligned.  The unit owners can actively participate in decisions on repair and maintenance rather than having these decisions imposed by a landlord;
  • Standardised documents – commonholds have standard rules and regulations and so there is no discrepancy between each unit’s rights and obligations.  In addition conveyancing should be simpler and cheaper;
  • There is a simple procedure for adding or removing land from commonhold.

It is often the case that on a sale and purchase transaction, where the asset itself is relatively straightforward, issues can arise from the management of the estate which causes delays.  These can range from lost share certificates and defective restrictions on title to purchasers being unable to appoint directors to the management company.  Commonhold ownership would remove those issues at a stroke.

Concerns in the property market

Despite the clear benefits, commonhold has not established itself within the property market.    There has generally been a low take up rate by property developers, who have been unwilling to take the risk on untested structures and procedures.  In addition, there has been a reluctance for mortgage lenders to lend on commonhold properties, with one contributing factor being a nervousness of the effects of liquidation of the CA.

The Law Commission’s call for evidence is open until 19 April 2018.  They will then examine how to make the existing commonhold system a more attractive and workable alternative to current ownership structures.  The purpose of this call for evidence is to obtain views and evidence which will guide a future consultation on the detail. Whilst at this stage, the Law Commission is not making proposals for reform, could this herald the first step of a new dawn?

We are planning to respond to the call for evidence, and so if you have any views please feel free to let us know via the contacts page on this blog.  Details of the call for evidence can be found here.

Posted in Real Estate News

BHS Company Voluntary Arrangement – Landlords Win on Penalties

Collapsed retailer British Home Stores cannot challenge its own company voluntary arrangement as an unenforceable contractual penalty and must repay rental discounts to its landlords, the High Court in England and Wales decided yesterday.

The case, in which Hogan Lovells represented the successful landlord, provides important guidance on the operation of company voluntary arrangements (CVAs), particularly after termination, and the payment of rent as an expense of a company’s administration in priority to other debts.

CVAs

A CVA is an insolvency process that allows a company to settle its unsecured debts with creditors, or come to an arrangement with them over its affairs.  They have become a popular tool for struggling retailers and restaurant chains to improve their financial position by reducing rents and off-loading unprofitable leases.  If approved by three quarters by value of creditors voting on the CVA, it binds all creditors regardless of how or whether they voted.

Background to the case

In 2016, BHS entered into a CVA with its creditors, reducing rents by up to 75%.  The CVA provided that, if it was terminated, these discounts would be deemed never to have happened so that all landlords would have the claims against BHS that they would have had if the CVA had never been approved.

Just a month later, BHS entered administration.  The administrators traded from the BHS stores whilst looking to sell the business, paying the reduced rents under the CVA.  When no buyer was found, the company was liquidated and the CVA terminated.

The liquidators sought directions from the High Court to determine whether BHS was obliged to honour its agreement to pay full contractual rents to its landlords dating back to the approval of the CVA, arguing that this would amount to a contractual penalty.  The rule against penalties makes unenforceable any contractual provision which imposes liabilities on a party for breaching their obligations that is out of all proportion to the other party’s interest in the contract being performed.  It provides relief, as a matter of public policy, against oppressive contracts where there was an imbalance of bargaining powers.

The High Court’s decision

Finding for the landlord, the High Court decided that the rule against penalties did not apply to CVAs, and BHS had to pay the full back rent as an expense of the administration.  The Court held:

  • A CVA is a hypothetical contract to which it is unnecessary and inappropriate to consider the usual principles of contract formation.
  • It was impossible to see how the rule against penalties could apply where there was no negotiation, or how a company putting forward a CVA could subsequently claim to have been oppressed by it.
  • There are limited statutory grounds for challenging a CVA, and a strict 21 day timescale. There is no room in that process for separate grounds of challenge.
  • The landlords had a legitimate interest in the CVA’s success or failure and it was not exorbitant, extravagant or unconscionable for them to be returned to their pre-CVA position if it should fail.
  • The clear intention of the CVA was to ensure that landlords were not disadvantaged if the CVA was terminated, by being forced to accept a concession which was expressed only to apply while the CVA remained in force.
  • Administrators had to pay amounts accruing in respect of any period during which they used premises for the purposes of the administration.  This included sums that were only contingent or yet to be ascertained at the time, such as an uplift under a rent review that had not been determined

Anthony John Wright and Geoffrey Paul Rowley as joint liquidators of SHB Realisations Limited (formerly BHS Limited) (in liquidation) v The Prudential Assurance Company Limited [2018]