Real Estate Legal Update - Winter 2020

A welcome from the editor...

Welcome to the latest edition of the Real Estate Legal Update.This quarter, we revisit a couple of cases we've covered before that have been appealed - one to the Supreme Court on modifying restrictive covenants and one to the Court of Appeal on service charge certificates. We also look at how expanding or diversifying your business could be impacted if you exceed the scope of rights that benefit land and how things can unravel if you don't have properly executed deeds.In the Landlord & Tenant round-up, we also look at disputes arising out of lease termination - one on what tenants should and should not remove when they vacate, one on how obligations to keep a property in 'good repair and condition' interact with yield up provisions and one on how the courts look upon applications for relief from forfeiture where the aggrieved tenant has delayed in taking action.The Planning Points cover a case on how not to respond to an enforcement notice and an unsuccessful challenge to recent Government measures introduced to bring flexibility to the planning system by extending permitted development rights.

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CASE LAW UPDATE

Easements - Extent of rights: Mills v The Estate of Philip John Partridge, deceased

Key points:

• Rights can be granted for the benefit of land on the basis that the land is used for a specified purpose

• Whilst what is understood by a particular use may evolve over time, where there is a dispute about how rights are to be interpreted, the starting point will be the factual background at the date of the grant and how the relevant wording would've been understood by a reasonable person at that time

PJP had owned land at Iverley House Farm in Staffordshire, which was used as a nursery (growing bedding plants from seed) and an adjacent field, originally used for growing potatoes and other vegetables. The field was subject to a covenant in favour of M, restricting its use to agricultural land. Access to the nursery and the field from the main road was along a farm track, owned by M, over which PJP had a right “to pass and repass at all times for all purposes in connection with the use of the land...as agricultural land only”. Both the covenant and the right were created in a conveyance of the land and the field in 1979.Over the 40 years that PJP had owned the nursery and the field, the business had grown and diversified to include polytunnels, stables, a shop and a licensed tearoom, which had a purpose-built kitchen and dining area. The field was used partially for storage, but mainly for parking, by both staff and customers. M sought a declaration that the use of the track to access the nursery business was a trespass, and that the use of the nursery and the field was not use as “agricultural land only”. The question for the Court, which found in favour of M, was whether the changed nature of the original business meant that the current use had infringed the restrictive covenant and exceeded the scope of the right of way. The tearoom in particular was a diversification from agricultural use; it could not even be said to be ancillary to the nursery - it was run as a separate business through a separate company and the income from the tearoom made up over 50% of the nursery's total turnover. Ultimately, the use of the field for parking was in breach of the restrictive covenant and PJP's estate did not have the benefit of a right of way over the track to access the field for the purpose of parking to visit the tearoom and neither did customers.

Practical implications:

Many businesses, particularly in the agricultural sector, have had to diversify over the years in order to remain viable. This decision highlights the importance, when thinking about plans for expansion or diversification, of checking existing rights that benefit the land and considering any restrictions on use that neighbouring landowners may seek to enforce. The interpretation of the meaning of a particular use, such as agriculture, can of course change over time, and along with it, the rights and covenants associated with such use, but there is a fine line between evolution and diversification into a completely different type of activity.

Restrictive covenants - Modification: The Alexander Devine Children's Cancer Trust v Housing Solutions Ltd

Key points:

• Where land is burdened by restrictive covenants, a landowner can make an application for the covenant to be modified or discharged if certain criteria are satisfied (section 84 of the Law of Property Act 1925)
• When considering such an application, the tribunal/court has to balance the public interest in allowing a reasonable use of the land and the public interest in upholding property rights
• The tribunal/court will be less inclined to modify or discharge where the landowner has deliberately flouted the restrictions

Readers may recall this case, which we have followed since the Upper Tribunal decision back in summer 2017. Millgate Developments Ltd (M) built 23 social housing properties on a development site, Exchange House, in Maidenhead. This was a planning requirement imposed in connection with a scheme of 47 market sale properties on another site. Part of the Exchange House site was subject to a restrictive covenant preventing any building on the land and requiring it to be used only for parking. M had built 13 social housing properties on the burdened land, so was clearly (and knowingly) in breach. M applied to have the covenant modified. The land with the benefit of the covenant was owned by S, who had donated some of it to the Trust, with the intention that it be used as a children's hospice with private outdoor amenities. S and the Trust objected to M's application, arguing that the development would seriously compromise the environment of the hospice and the scale and proximity would in particular impact on the planned outdoor amenities, which would lose their privacy. M argued that the building of affordable housing met a pressing social need in the area and the fact that planning permission had been granted for such development was a material consideration. M had offered a contribution of £150,000 to the objectors for a tree planting scheme to provide privacy and to reduce noise. M also argued that the covenant had been imposed to enable the beneficiary to obtain a share in the future development value rather than securing a practical benefit of substantial value for the hospice site. The Upper Tribunal decided to modify the covenant despite M's acceptance that it had been aware of the covenant when it purchased the site, finding that the covenant was contrary to public interest, as it impeded the use of the land for much-needed social housing. The Trust appealed to the Court of Appeal, which overturned the earlier decision. It held that the Upper Tribunal had placed too much weight on the fact that planning permission for the development had been granted and not enough weight on M's flagrant breach of the covenant. The Court's view was that there was also a public interest in upholding and enforcing contractual and property rights. The social housing properties were transferred to a housing association (HSL) and the case was further appealed to the Supreme Court. The Supreme Court ruled that the Upper Tribunal had failed to take account of the fact that M could have built the houses on the part of the Exchange House site that was not burdened by covenants. It also felt that M should not be rewarded for deliberately presenting the Upper Tribunal with a fait accompli. The application to modify the covenant was therefore refused.

Practical implications: Although it came to the same conclusion as the Court of Appeal, the Supreme Court disagreed with its reasoning, and took the opportunity to set out guidance on how tribunals and courts should approach applications for modification going forward, particularly in terms of considering the public interest. Whilst this case turned very much on its facts, the message to developers is not to take a 'build and be damned' approach where restrictive covenants are involved, and to seek modification - or discharge - before breaking ground. Click here to watch Tomkins Talks on the case, which also highlights other steps developers can take to avoid finding themselves in this situation.

Deeds - alteration after execution: Bioconstruct GmbH v Winspear & Another

Key points:

• Certain transactions have to be documented in a deed
• In order to be valid, deeds need to meet certain statutory formalities in terms of form and execution
• In particular, swapping in pre-signed pages or signed pages from another version of the document in question will invalidate the deed

B, a company that provides financial support for renewable energy projects, agreed to lend £2.6 million to Biopower Group Ltd (BGL) to build an anaerobic power plant. The loan was to be secured against the land on which the power plant was to be built, owned by the second defendant in the case, SRL. SW, who was a director of BGL at the time, was also to give a personal guarantee. The document at the heart of this dispute was a deed of indemnity and security in relation to the loan, which was dated 19 July 2016.SW did not actually sign the original version of the deed; the deed was executed on behalf of SRL, by a director. There were then further negotiations and a new version of the deed was prepared. SW initialled the pages of the new version that contained the changes, but still didn't sign the document on the signature page and SRL didn't execute the new version at all - the page it had signed in the original version was removed from that document and added to the new version. As you've probably guessed, BGL defaulted on the loan and B sued both SW and SRL for the outstanding balance, both of whom argued the deed was not validly executed and was therefore unenforceable. The High Court agreed, so SW and SRL were off the hook.

Practical implications: We've seen various cases on the execution (or not, as the case may be) of deeds recently, although this is the first decision since a significant case in 2008, on recycling signature pages from one document to another. From a signatory's point of view, there's probably nothing more annoying than having to re-sign documents on the basis of what seem like technicalities, especially when there is some urgency to getting the deal done - but the consequences of failing to comply with the technical requirements are likely to be far more serious than the inconvenience of having to sign the documents again! Where documents need to be signed by multiple signatories in diverse locations, it's important to ensure that the formalities are followed and that all parties can have confidence in the integrity of the process and of the resulting deeds.

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LANDLORD AND TENANT ROUND-UP

Break rights - vacant possession: Capitol Park Leeds Plc v Global Radio Services

Key points:

• A tenant's break right in a lease may be conditional on the tenant giving vacant possession of the demised premises
• 'Vacant possession' in this context is very much tied to the way the lease defines the demised premises
• Usually, a dispute arises if the tenant leaves things behind, but a recent case considers the position where the tenant has taken away too much
• Failure to comply with any conditions on break can mean the break is ineffective and the tenant is stuck with the lease until the next break opportunity or the end of the term

GRS had a lease of commercial premises in Leeds, which was due to expire in 2025. GRS had the right to break the lease in November 2017, subject to certain conditions being satisfied, including giving vacant possession of the premises. The lease defined the premises as including the original building on the site, any landlord's fixtures and fittings and all additions and improvements to the premises. GRS served its break notice and started stripping out the premises to try and avoid or minimise liability for terminal dilapidations. GRS removed key features of the property, including ceiling tiles, flooring, lighting and radiators with the intention of replacing these before moving out. For various reasons, GRS did not do this and CPLP argued that GRS had not given vacant possession of the 'premises' because it had handed back “an empty shell of a building which was dysfunctional and unoccupiable”. The High Court agreed, so GRS's break was ineffective and the lease remains in place for now.

Practical implications: A vacant possession condition requires a tenant to hand a property back in a state in which the landlord can both physically and legally occupy it. Whilst current market practice is to limit the conditions on a tenant's right to break, particularly around vacant possession, if a lease does require this, tenants have to look carefully at the wording of the lease, the way the premises are defined and how the break provision interacts with other clauses in the lease on repair and yield up. Click here to watch Tomkins Talks on the case, which also touches on why GRS did not get round to replacing the items it had removed, and how the second element of its defence, based on this, did not work. Note that GRS has been given permission to appeal to the Court of Appeal, so this may not be the last we hear of this case.

Relief from forfeiture - delay: Keshwala & Another v Bhalsod & Another

Key points:

• Leases usually contain a right for the landlord to terminate (forfeit) if the tenant breaches its obligations
• Landlords can forfeit by 'peaceable re-entry' or by issuing court proceedings (subject to current restrictions in the Coronavirus Act 2020 of course)
• Relief from forfeiture is an equitable remedy, available to tenants (and third parties with an interest in the property) at the court's discretion
• Where a lease has been forfeited by peaceable re-entry, a tenant should make any application for relief in a timely fashion and within the required timescale for the relevant court

B had let a property in Leicester to K for a 20 year term. The property had a lock-up shop on the ground floor and residential accommodation above. In June 2018, K mistakenly only paid £1,500 of the £2,000 quarterly instalment of rent, leaving arrears of £500. On 1 September 2018 B's managing agent issued an invoice for the September rent, which was due on 29 September. The invoice did not mention the arrears. On 13 September 2018, B forfeited the lease by peaceable re-entry. At that point, K paid the arrears and indicated to the managing agents that the September rent would be paid (although, ultimately, it wasn't).Time passed without much further substantive contact between the parties and on 4 February 2019, B re-let the shop and the living accommodation on two separate leases to new tenants. Some three weeks later - so, five and a half months after the lease had been forfeited - K applied for relief from forfeiture. The judge in the County Court refused to grant relief due to K's delay, even though she thought B's decision to forfeit based on a small proportion of arrears was “harsh business practice”. K appealed and the High Court did grant relief.

Practical implications: This decision demonstrates that the fact that a landlord has re-let a property to a new tenant does not necessarily mean that the court will deny relief to the former tenant. In this particular case, K was happy to take a 'reversionary lease', which would come into effect at the end of the new lease of the ground floor shop (the living accommodation had already been vacated), but B would have been in a difficult position if K had wanted to resume occupation immediately. The case also serves as a reminder for tenants to act in a timely fashion when it comes to applying for relief. Something else to bear in mind, which didn't come up in this case, is how easy it is for landlords to waive the right to forfeit. Any conduct by a landlord that recognises the continuing existence of a lease, such as demanding rent or progressing an application for consent, means the right to forfeit is lost. It's important that landlords and managing agents are on the same page where one or other is aware of arrears or other breaches, to ensure the landlord's remedies are preserved.

Repair obligations - remediation works: Pullman Foods Ltd v Welsh Ministers & Another

Key points:

• A lease covenant to keep premises in 'good repair and condition' is potentially more onerous than a covenant to keep premises in 'good repair'
• Use of the word 'condition' indicates the covenant extends to doing works that go beyond the concept of repair

PFL was the tenant of premises at Swansea Dock. In 2013, the landlord, WM, served notice on PFL to terminate the lease. PFL moved out in 2015.PFL's lease included a covenant to yield up the premises at the end of the term “in good and substantial repair and condition to the satisfaction of [WM]”. Under the same covenant, PFL was obliged - if required by WM to do so - to have first “removed any buildings or works and...made good to the satisfaction of [WM] all damage occasioned to the demised premises by or in such removal”. At the time WM served the notice to terminate the lease, it also gave notice to PFL that it required the removal of any buildings on the premises by the end of the term. So far, so good. PFL instructed contractors to remove the buildings, but this work had not been completed by the date for termination of the lease - parts of the buildings remained, in the form of concrete slabs, which contained asbestos-related materials. WM granted licences to PFL's parent company (BFS) to remove the slabs after the lease had come to an end. Unfortunately, the removal works resulted in asbestos materials being dispersed over the site! WM then had to carry out remediation works at significant cost. In 2019, PFL commenced proceedings against WM for statutory compensation of £42,500 for the termination of the lease under section 34 of the Landlord & Tenant Act 1954 and WM counterclaimed firstly against PFL for damages for breach of the yield up covenants in the lease and against BFS for breaches of the subsequent licences. The Court found PFL was liable for damages for the breach of the yield up covenant and BFS was liable for the full cost of the remediation works, which amounted to almost £1.4 million!

Practical implications: Although too late for PFL, tenants should undertake environmental due diligence to ascertain the presence of any hazardous substances or contamination before entering into a lease. The extent of such investigations will be dictated by the nature, location, age and physical condition of the premises and by the tenant obligations both in terms of repair during the term and yield up at the end. Most leases these days will not oblige a tenant to keep premises in good repair 'and condition' but it is worth bearing in mind the additional expectations where this wording appears in older leases.

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

Readers won't have to cast their minds too far back to remember this case, which we covered in the last edition of the Bulletin. 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, which was calculated by reference to the net internal floor area of the premises. 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. SHAHL claimed the unpaid service charge, but was unsuccessful in the High Court, which 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. The Court of Appeal has overturned the decision, finding that, without express wording in the lease or a necessary implication, the two elements could not be separated.

Practical implications: This is a disappointing decision for retail tenants, who are already suffering under successive waves of lockdown and regional tiers restricting their ability to trade, but the Court took the view that, in this case, the wording in the lease was very clear and it was not the Court's job to get a tenant out of a bad bargain. Reasonably-drafted service charge provisions will give tenants the ability to challenge service charge certificates or at least ask for further information on both the amount and the nature of the costs that are included, and this is something tenants should be mindful of when negotiating new leases. However, in existing leases, there may be no ability to make a meaningful challenge, particularly where there is a 'sweeper' clause that brings in services provided in the interests of 'good estate management'. Click here to watch Tomkins Talks on this case.

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PLANNING POINTS

Enforcement notices - extension of time: Kpogho v Brent London Borough Council

Key points:

• A Local Planning Authority (LPA) can issue an enforcement notice requiring breaches of planning control to be remedied
• Such notices will specify a time limit for compliance, which can be extended at the LPA's discretion
• The recipient of a notice can appeal against it on various prescribed grounds, but must do so before the notice expires

K built side and rear extensions to his property, and made various other alterations and additions, all without the proper planning permission. In fact, he had obtained planning permission to build the extensions some years earlier, but what he actually built differed from what he had permission for. BLBC served an enforcement notice on K, requiring him to remove the unauthorised extensions, with a six-month deadline. Rather than appealing the enforcement notice, K applied, before expiry of the enforcement notice, for retrospective planning permission to retain and alter the works under section 73 of the Town & Country Planning Act 1990. BLBC refused this application, so K appealed to the Planning Inspectorate. Because time was still ticking on the enforcement notice, K asked BLBC to exercise its powers to extend the time limit for compliance with it to allow time for the appeal to be heard and a decision made. This was on the basis that he didn't want to go to the expense and effort of taking down the extensions in order to comply with the enforcement notice, only to be given retrospective planning permission and having to build them again. Again, BLBC refused, so, nothing if not committed to his chosen course of action, K applied for the decision to refuse to be judicially reviewed, on grounds including that BLBC had acted irrationally by failing to extend the deadline for compliance with the enforcement notice to align with the planning appeal. K was not successful - and had to pay BLBC's costs!

Practical implications: The Court found that BLBC had been entitled to take account of the fact that K had not appealed against the enforcement notice and of the fact that K's application for retrospective planning permission had been refused. The decision is useful guidance for LPAs in relation to exercising their discretion to extend the time period for complying with an enforcement notice, but is a stark warning for recipients of such notices that, even where you intend to apply for retrospective planning permission, you should still take steps to appeal against the notice before the deadline for compliance has passed. Applications for retrospective permission are not guaranteed to be successful (indeed, the LPA can refuse to entertain the application at all) and there are serious consequences for failure to comply.You can contact a member of our Planning Team for further advice.

Use classes - judicial challenge: R (Rights: Community: Action) v Secretary of State for Housing, Communities and Local Government

Key points:

• Planning permission is required for the carrying out of 'development', which includes a material change in the use of buildings or land
• However, certain changes of use can be implemented without needing to get planning permission and these permitted changes are set out in Use Class Orders
• Other permitted development rights are also introduced from time to time

The campaign group RCA applied for judicial review of three statutory instruments that make changes to the Use Classes Order 1987 and introduce new permitted development rights for upwards development and for the demolition and replacement of office buildings with residential ones. The one that has caused the biggest potential headache for real estate lawyers and for agents trying to agree heads of terms is the new Use Classes Order, which introduced fundamental changes to the 1987 Order and which came into effect in England only on 1 September. All of the statutory instruments at issue were laid before Parliament the day before the summer recess, and RCA's argument was that this did not give legislators sufficient time to consider changes which will have a “profound impact on Britain's built environment”.The High Court dismissed the application; the judge commented “The court is not responsible for making political, social, or economic choices. Those decisions, and those choices, are ones that Parliament has entrusted to ministers and other public bodies”.

Practical implications: You can read more about the use class changes in our article here. However, RCA intends to appeal the decision, so there is still an element of uncertainty that will affect lease negotiations and drafting until the position is finally settled. The underlying purpose of the changes is to introduce more flexibility for the use of buildings at a time when the way we interact with bricks and mortar has been profoundly impacted by the current pandemic. This is seen as a positive step for tenants, but could have unintended consequences for landlords. For more information on this subject, please contact a member of our Planning Team.