Real Estate Legal Update - Summer / Autumn 2020

A welcome from the editor...

Welcome to the latest edition of the Real Estate Legal Update. This quarter, the Supreme Court has been thinking about cash machines and urns, and we take a look at cases on deeds (or not) of guarantee, the trigger for an option to purchase, and modification of leasehold covenants. We cover a couple of landlord and tenant cases on giving vacant possession following a surrender and ability to challenge a service charge certificate. We also highlight a government consultation on 'contractual control' of land, which will be of particular interest to housebuilders and developers who assemble development sites by entering into conditional contracts and option agreements.

CASE LAW UPDATE

Business rates - Cash machines: Cardtronics Europe Ltd & Others v Sykes (Valuation Office)

Key points:

• In the context of business rates, there is a concept known as the 'landlord-control principle': even where a third party occupies part of a particular property, the owner is in sufficient control of that part to be treated as being in rateable occupation of that part
• Most plant and machinery has no effect on the rateable value of the property in which it is installed
• The Courts (all of them!) have recently considered how properties hosting ATMs should be rated

A quick update on a case we've followed since it was first heard by the Upper Tribunal back in 2017, which has now gone to the Supreme Court, so we have a final decision on the issue. Readers may recall the case involved ATMs in various supermarkets, convenience stores and petrol stations. Before 2014, the ATM sites had not been distinguished from the host stores (including Sainsbury's, Tesco & the Co-op) for rating purposes. In 2014, the Valuation Office amended the 2010 ratings list and created separate entries in respect of the ATM sites - basically, the ATM sites became separate hereditaments with their own rateable values. There was no corresponding reduction in the rates liability of the host stores. The supermarkets and CEL (which operated ATMs in other stores and petrol stations) unsuccessfully challenged the change in the Upper Tribunal, but appealed to the Court of Appeal, where they won. The Supreme Court has upheld the Court of Appeal's decision, confirming that, in relation to each ATM site, the retailer, not the relevant bank or ATM operator, was in rateable occupation.

Practical implications: The 'boundaries' of a fixed ATM site are capable of existing as a hereditament - it is easy to satisfy the geographical requirement, but the host store owner/operator retains sufficient control that it is considered to be the 'occupier' of the site. A lot of money was at stake - around £300M in rebates - which is why the Valuation Office took this all the way to the Supreme Court. The ruling will apply to around 10,000 cases, which had been put on hold pending the outcome of the final appeal, and will not be welcomed by already cash-strapped local authorities, particularly given the additional financial hardship caused by the current pandemic. But, it's good news for rate payers and for those of us who use ATMs - had the decision gone the other way, free-to-use cash machines might've become a thing of the past.

Business rates - Sub-divided property: Atos IT Services Ltd v Fylde Borough Council

Key points:

• Liability for the payment of business rates falls to the person who is in 'rateable occupation' of the relevant property
• Rateable occupation requires actual occupation or possession, which is exclusive or at least paramount for the occupier's purposes; it must also be of some value or benefit to the occupier and must be sufficiently permanent
• Issues can arise where a property is sub-divided and let in separate parts to several different occupiers

AITS had a headlease of Serco House in Lytham St Annes. It let various parts of the building to a number of different sub-tenants, who occupied the relevant let areas. Serco House appeared in the rating list as comprising multiple hereditaments, reflecting seven sub-lettings of part, with the remainder being listed under a single entry (the single hereditament).FBC issued a rates demand for just over £164,000, which AITS paid, under protest, and then brought proceedings to recover the amount it had paid. AITS contended it was not liable for business rates in relation to the single hereditament because it didn't occupy the whole of it, having granted further sub-leases, and so did not satisfy the 'exclusive occupation' test. The proceedings were first heard in the Manchester County Court, which agreed with AITS and ordered FBC to repay the money. FBC appealed, arguing that the County Court didn't have the jurisdiction to order repayment and the matter should, instead, be dealt with by way of a challenge to the rating list, which would ultimately be heard by the Valuation Tribunal. The High Court upheld the County Court's decision. A person is only in rateable occupation if they occupy the unit as a whole, and because, in this case, AITS was only in partial occupation, it had no liability at all for business rates - and would not become liable until the rating list had been altered.

Practical implications: For liability to pay rates to arise in circumstances where a property has been split, the onus is on the local authority to make a proposal to the valuation office for the rating list to be altered to reflect the actual occupancy.

Contracts - deed of guarantee: Umrish Ltd & Others v Gill

Key points:

• For a deed to be valid, certain formalities must be complied with when it comes to signing...
• ...but there is also a requirement for a deed to be 'delivered'
• Whether a party has delivered a deed is a matter of intention, to be judged objectively

G signed four personal guarantees in connection with an investment arrangement with four investors. The guarantees were in the form of deeds; G's wife witnessed his signatures. G emailed scanned copies of the signed signature pages to the representative of the investors and the transactions went ahead. When the investment arrangement was due to be renewed, there was a dispute and UL and the other claimants requested the original (or at least full copies) of the guarantee. They also demanded payment of all sums due, including £1.5M of principal and interest! G argued he wasn't liable as he had not 'delivered' the guarantees; he had only emailed the signature pages as a gesture of goodwill at the time the deal was being done. The High Court didn't agree, finding that G understood that by returning the signed pages, he was indicating his intention to be bound by them.

Practical implications: The implications for G are clearly not good, but happily, others can learn from G's misfortune. In property transactions, it is uncommon for a party to a deed to deliver it as soon as it is signed - normally, parties will execute a deed in advance of completion and it is not delivered until completion. A couple of other points to note: a guarantee doesn't have to be made by deed, so it may be that the Court would have found the guarantee to be enforceable as a contract; and signing and emailing just the signature page of any document, without the rest of it, is not the way to create effective deeds.

Covenants - modification: Edgware Road (2015) Ltd v The Church Commissioners for England

Key points:

• An owner of land that is burdened by a restrictive covenant as to user can apply to the Upper Tribunal to have the covenant discharged or modified
• The same applies to a leaseholder, where the lease in question has a term of 40 years or more, of which 25 years have expired
• A frequently-used ground for discharge or modification applications is that the covenant impedes some reasonable use of the land, such that it doesn't secure any practical benefit of substantial advantage to the benefitting owner(s) and money would be adequate compensation if the covenant was ultimately discharged or modified

TCCE own the Hyde Park Estate in London; ERL has a lease of the internal parts of the basement, ground and first floors and part of the second floor of a particular building within the area of the Estate known as The Water Gardens. The ground floor and part of the basement are sublet to various retail, restaurant and other commercial occupiers; the upper floors are offices, albeit stripped out and vacant. ERL wanted to convert the property into a 'pod hotel' and obtained planning permission. The user clauses in the lease prohibited the use of any of the building for residential/sleeping purposes and restricted use of the upper floors to offices. ERL therefore needed to modify the covenants in the lease so that it could proceed with its conversion. TCCE refused, so ERL made an application to the Upper Tribunal for various modifications to the lease - modifying the existing covenants, but also adding new provisions related to hotel use. TCCE objected to ERL's proposed redevelopment on the basis that it would threaten their 'Estate Control System'. TCCE had evolved various estate management schemes over the years, to regulate tenant-mix and ensure the ongoing viability and vitality of the Estate through considered asset management decisions and the imposition of covenants, both  in leases and on freehold owners within the Estate. TCCE was also concerned that the change of use would adversely affect the value of TCCE's interest in the Estate and those of other owners and tenants and that a successful application might mean other tenants would be more likely to secure changes to their own lease arrangements. ERL was unsuccessful - the Tribunal found that TCCE's ability to prevent the property being turned into a hotel was, in the context of its overall estate management system, a practical benefit of substantial advantage.

Practical implications: There was an initial argument at the hearing about the extent to which the Upper Tribunal had jurisdiction to insert new clauses into a lease, and whether this was above and beyond the Tribunal's power to modify or discharge covenants. The Tribunal took the view that this was within its remit and, although it did not need to do so in light of the decision, it's worth bearing in mind that this is a possibility. The decision will be welcomed by large estate owners, particularly where there is a mix of uses and a need to maintain some control that benefits occupiers and residents whilst maintaining value. Each case will turn on its own facts, but many estates are regulated by formalised estate management strategies, and it is helpful to know that these will be taken into account in the context of applications from tenants or owners to relax prohibitions.

Development - trigger for option to purchase: Fishbourne Developments Ltd v Stephens

Key points:

• An option is a right to buy or sell land for a fixed price or at a price to be ascertained by an agreed calculation method
• Option agreements often provide that the right to buy or sell is 'triggered' by a specified event, such as obtaining planning permission
• It's important to be clear and precise when defining trigger events

An option agreement entered into in 2002 related to the purchase of 117 acres of farmland. The buyer's ability to exercise the option was triggered by the grant of planning permission, defined in the agreement as “a planning permission granted by the Local Planning Authority permitting any development of the Property”. The buyer, FDL, obtained planning permission for a new roof on one of the agricultural buildings on the farm, which it had no intention of implementing and which ultimately expired, but FDL argued that the grant of planning consent enabled it to exercise its option to buy the farmland at a discount from its market value. The Court found in favour of S, interpreting the agreement such that 'Planning Permission' in this context had to mean permission for development by new building of the whole or substantially the whole of the farm. The Court also had to take more account of the background and the history of the matter in this case than it might otherwise do - there had been a series of poorly drafted agreements over the years and a 'muddled' sequence of contractual obligations, so the surrounding facts known to the parties were given more weight.

Practical implications: We've seen a number of cases where the parties' interpretation of defined terms such as 'Planning Permission' or 'Development' has been very different. It is important that documents reflect the intentions of the parties, particularly when drafting option agreements that may be in existence for many years. This becomes even more critical when a buyer is given the option to acquire land in parts - consideration should be given to defining which parts, whether there is a maximum area and whether the seller could potentially be left with land that it cannot make use of.

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LANDLORD AND TENANT ROUND UP

Agreement for surrender - conditions: Dreams Ltd v Pavilion Property Trustees Ltd & Another

Key points:

• The surrender of a lease is a consensual arrangement between a landlord and a tenant
• Surrender can be achieved by operation of law, but the parties often prefer the certainty of a written deed of surrender
• Completion of the surrender can be conditional and it is important that the conditions are understood by both parties

DL was the tenant of a lease of shop in Margate; PPTL was the landlord. The parties entered into an agreement for the surrender of the lease, giving each party the right, on six months' written notice, to require the surrender of the lease on a specified surrender date. The form of surrender deed (a transfer) was appended to the agreement. It was a condition of completion, under the Standard Commercial Property Conditions (2nd Edition), which were incorporated into the agreement, that the tenant was to 'pay any money due on completion', and that the surrender was to be with vacant possession. In October 2018, DL served notice to end the lease on 25th April 2019 and PPTL served a schedule of dilapidations, requiring payment of over £170,000. PPTL refused to complete the surrender without the dilapidations payment having been made, arguing DL had not complied with the condition to 'pay any money due'. At a hearing of the preliminary issues, the Court found that the dilaps payment was not, in fact, 'money due', rather it was a claim for damages for breach of covenant. Therefore, payment of this sum was not a condition of completion. Delivery of vacant possession was a condition of completion however. DL's predecessor, Dreams PLC, had installed a mezzanine floor and a lift; these amounted to tenant's fixtures and a failure to remove them would mean vacant possession had not been given.

Practical implications: The question of whether or not vacant possession has been delivered also crops up in relation to tenant break rights, which are often conditional on this. As a vacating tenant, you don't have to remove every last item but the test is that you do not 'substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property'. In relation to tenant's fixtures and fittings, you should consider whether these have become part of the demised premises (this is a matter of fact and degree). You should also check what the lease says about how these should be treated - are they excluded from the definition of the demised premises such that the tenant is required to remove them and will be in breach if it does not? One final point is worth a mention; a deed of surrender (or a Land Registry transfer where the lease is registered), will include a mutual release from the future performance of the obligations in the lease. Usually, the deed will expressly carve out pre-existing breaches, so that things like dilapidations can still be pursued notwithstanding the surrender. The transfer deed in this particular case did not include a carve-out, which is not ideal for the landlord, but the Court was reluctant to re-write the contract that the parties had entered into, so it's worth remembering this potentially important point!

Service charge - certification of expenditure: Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd

Key points:

• Tenants in multi-let buildings will often pay a 'fair and reasonable' proportion of the total service charge costs incurred in relation to that building, with landlords providing a certificate at the end of each service charge year, setting out the total cost of expenditure and any balancing payment
• Leases usually provide that such certificates are conclusive, unless there is a mathematical error or fraud

BORL was the tenant of retail premises in Liverpool. The lease included a service charge, which BORL was required to pay quarterly on account and each year, SHAHL was required to provide a certificate showing the total amount of the cost, and the sum payable by BORL. The lease provided that 'in the absence of manifest or mathematical error or fraud' such certificates were 'conclusive'. In the last year of the lease term, BORL was charged over £400,000 in service charge, which was eight times what it had been charged in the previous year! BORL sought to argue that some of the expenditure set out in the certificate was not within the scope of the service charge as defined in the lease. The problem for BORL was that, although the lease provided for expert determination of any disputes about the proportion of service charge payable, there was no similar mechanism for the resolution of disputes about whether particular costs had properly been included in the service charge in the first place. SHAHL claimed the unpaid service charge, but was unsuccessful. The Court found that although the certificate was conclusive as to the amount of costs incurred, it was not conclusive as to the question of whether those costs, as a matter of principle, fell within the scope of the service charge payable by BORL. Therefore, it was open to BORL to challenge this through court proceedings.

Practical implications: SHAHL has been given leave to appeal, so this may not be the last we hear of this case. This is not good news for retail tenants generally, who are already under a great deal of financial pressure. Reasonably-drafted service charge provisions will give tenants the ability to challenge service charge certificates or at least ask for further information on the costs that are included, but not all leases are so balanced, so it's worth checking service charge demands against the provisions of the lease to ensure unauthorised expenditure does not slip through the net.

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PLANNING POINTS

Listed buildings - chattels: Dill v Secretary of State for Housing, Communities and Local Government & Another

Key points:

• Although we might think we know what a 'building' is in the context of listing, there is a lack of clarity around the criteria and different councils take different approaches
• The decision of whether a building is correctly listed in the first place can be questioned at an enforcement appeal, not just at the point of listing
• The Supreme Court has given some useful guidance on the factors relevant to determining whether or not something is a 'building'

D came to own Idlicote House in Shipston-on-Stour in 1993. The manor house had been listed with Grade-II status in 1966 and 20 years later, a pair of 18th Century lead urns, standing on limestone piers, were added to the listing. In 2009, D sold the urns at auction. D had been unaware of the urns' listed status and received correspondence from the local planning authority in 2014 stating that he should not have sold the urns without obtaining listed building consent for their removal. D applied for retrospective consent, which was denied and the council also issued an enforcement notice requiring the urns to be returned and reinstated (which was going to be difficult to achieve, as the buyer of the urns had exported them overseas).D appealed against both the decision to refuse listed building consent and against the enforcement notice, on the basis that the urns were not buildings for the purposes of the relevant legislation. The Planning Inspector refused the appeals, finding that the urns and piers were listed buildings in their own right. D was also unsuccessful in the High Court and the Court of Appeal, but felt strongly enough about the issue to take the case all the way to the Supreme Court, which allowed his appeal and has remitted the case back to the Planning Inspector to reconsider D's argument that the urns are not a 'building'.

Practical implications: A useful case for owners and local authorities alike; the Supreme Court was unanimous in its decision, reiterating that 'it is an essential element that the thing in question be a 'building'. If it is not in truth a 'building' at all, there is nothing to say that the mere inclusion of it in the list will make it otherwise'. The Supreme Court highlighted the lack of clarity about the criteria adopted by different local authorities when it comes to listing buildings and other structures and free-standing items. In this case, the urns had been brought from a different building, so were not even part of the original design of Idlicote House. In referring the matter back to the Planning Inspector, the Supreme Court has also cautioned the local authority as to the wisdom of continuing with the case.

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ON THE HORIZON

Land Registry consultation - contractual control data

In conjunction with the Government's recently-announced 'build, build, build' strategy, the Land Registry has issued a call for evidence on proposals to improve the transparency of contractual mechanisms, such as options and pre-emptions, used to exercise control over land that is separate from actual ownership. You can read the full document here, but the gist is that those taking options, pre-emptions or conditional contracts may be required to disclose additional information when protecting their interests at the Land Registry. The consultation closes on 30 October.

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IN CASE YOU MISSED IT...

Over on the Real Estate blog, we've recently covered the new Code for Leasing Business Premises, the major overhaul of the Use Classes Order and we've dusted off the crystal ball to consider what leases might look like in a post-Covid world. And if you're interested in residential property, you can read our Summer Newsletter here.