Real Estate Bulletin - Spring 2019

A welcome from the editor....

Welcome to the spring edition of the Real Estate Bulletin. This quarter, we look at compensation for listing a property as an asset of community value, a couple of cases on expert determination and a couple of cases on service of notices. We consider a different angle when it comes to Japanese Knotweed, revisit a case about a developer that built in flagrant breach of restrictive covenants and look at a worrying case for lenders about registration of charges. For landlords and tenants, we cover landlords' environmental liability after a tenant has abandoned a site and what costs landlords may, or may not, be able to recover from a rent deposit. The planning point covers refunds of planning application fees and there's a reminder in the tax tips about recent changes to the SDLT file and pay window. The Bulletin brings together highlights from our popular quarterly update training sessions, so if you are local to the East Midlands or pass through every now and again and would like details of our next event in July, please get in touch.

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Case Law Update

Assets of Community Value - compensation for listing: St John Ambulance v Teignbridge District Council

Key points:

• Listing a property as an Asset of Community Value (ACV) adversely impacts on the owner's ability to sell or develop the property

• Owners can ask for the listing to be overturned and can pursue this through the courts if necessary

• Local authorities can also be required to pay compensation for loss or expenses which likely wouldn't have been incurred if the property had not been listed

The charitable organisation SJA owned an ambulance hall in Devon that it proposed to sell at auction, as it was surplus to requirements. SJA accepted a bid of £135,000. The local community took exception to SJA's plans to sell the hall off for development, and a nomination to list the hall as an ACV was made not long after the hall went on the market. The hall was listed and the sale fell through, because of the six month moratorium on disposal that an ACV listing triggers. Some considerable time later, SJA agreed a sale to another buyer. As the price was only £80,000, SJA claimed the difference in the original auction bid and the new price (£55,000) in compensation from TDC. The First Tier Tribunal held that the relevant regulations were worded sufficiently widely to include loss or expense arising simply from the fact that the property had been listed, and that compensation could cover the diminution in value of the property or the fact that a sale had fallen through as a result of the listing. So far, so good. However, SJA had to establish the loss in value caused by the listing at the time the property was listed and an auction sale price some 16 months later was not a good measure of that. SJA's claim for the difference in the two sale prices therefore failed, and the Tribunal awarded SJA just £5,000 to cover the costs of the abortive sale and the administrative costs SJA incurred as a result of the listing.

 

Practical implications:

Whilst it is helpful to landowners to know that the scope of the regulations is wide enough to compensate diminution in value due to listing, as well as the expenses incurred in delayed or lost sales, bear in mind that the extent of any diminution must be established at the time of the listing. Before the ACV regulations came into force, an Impact Assessment carried out by the government did not anticipate that local authorities would face significant claims arising out of listing, and the expectation was that compensation claims would average around £2,000. This may prove to be of little comfort to cash-strapped councils if more - and more valuable - claims are issued. Local authorities should be mindful of the availability of compensation when considering whether to list properties that have been nominated by the local community. Although the amount of any award is decided by the council, a dissatisfied applicant could apply for that decision to be judicially reviewed.

 

Expert determination - valuation: Great Dunmow Estates Ltd v Crest Nicholson Operations Ltd & Others

Key points:

• It is not unusual in conditional contracts and option agreements to see provisions for the sale price to be agreed by the parties in accordance with a valuation process

• Where parties cannot agree on the valuation between themselves, the agreement will provide for an independent expert to determine the value, based on stated assumptions

GDEL entered into a contract to sell some land to CNOL. The contract was conditional on the grant of planning permission free from challenge and on the parties agreeing the price for the land. If the parties could not agree the price, this would be fixed by an independent valuer appointed in accordance with the terms of the contract. The parties could not agree on the price, so a third party expert was appointed. The parties presented an agreed statement of facts to the expert, in which the parties agreed that the correct valuation date was the date of the expert's determination (May 2017).The expert took counsel's opinion on a specific aspect of the valuation process, although in giving the advice, counsel went further and also stated that the correct valuation date was the 'Challenge Expiry Date' under the contract (which had happened in February 2015). Therefore, the expert provided a valuation for the land as at the Challenge Expiry Date. CNOL was happy with this but GDEL was not, so it sought a declaration that the expert was bound by the agreed statement of facts. The Court found in favour of GDEL - the expert was bound by the agreed statement of facts and should not have departed from it.

 

Practical implications:

The drafting in the contract wasn't great - there was a confusing definition of the valuation date that didn't really make sense. Had the parties not submitted an agreed statement, the Court would have sided with the expert.The dispute could've been avoided by better drafting in the contract, but having agreed a statement as part of the litigation, parties should expect that this is binding, as it had been negotiated and involved compromise on both sides in an attempt to narrow down the issues before the Court. 

 

Expert determination - specific performance: Coventry City Council v GK Investments Ltd

Key points:

• Contracts and leases also usually contain a mechanism for appointing a third party to determine any issues between the parties that they cannot agree

• If parties are willing to submit disputes to an expert, they should be willing to comply with whatever decision is made, particularly where they had agreed that in the first place

GKL bought a leasehold property at auction. The property had been a pub, but GKL carried out works to convert it into a convenience store, take-away and two flats, which the landlord, CCC, claimed was in breach of covenants in the lease. CCC served a section 146 notice on GKL requiring it to remedy the breaches and pay damages. GKL argued there was no breach of covenant and agreed to refer the dispute to an RICS appointed expert for determination. The parties agreed that if the expert determined GKL was in breach of covenant, GKL would enter into one of two proposed deeds of variation. One deed required GKL to pay a premium and the other increased the rent to the then market level (the rent under the lease was a peppercorn). The parties agreed they would execute whichever one the expert determined as being the most appropriate to compensate CCC. The expert found that GKL had breached the covenants in the lease and decided that the parties should sign the deed of variation that increased the rent. The expert set the rent at £21,000. GKL then refused to sign the deed, arguing that the expert had no power to compel it to sign the document! The High Court did not accept this argument - the parties had agreed that the expert would make a determination and that this would result in the parties executing a deed of variation to give effect to that determination.

 

Practical implications:

Before appointing an expert to determine an issue or dispute, parties need to consider whether they will be compelled to give effect to the determination under the terms of the contract or the lease. Even where the parties do not expressly agree to be bound by an expert determination, the courts may imply such an agreement - this being the whole point of submitting an issue to a third party in the first place! Also bear in mind that the agreement to be bound may itself be capable of being enforced by specific performance. 

 

Japanese Knotweed - anti-social behaviour orders: Bristol City Council v MB Estates Ltd

Key points:

• Japanese Knotweed is highly invasive and its presence on or near to properties can render them unmortgageable and therefore potentially unsaleable

• As we have seen from the recent case against Network Rail, property owners need to take appropriate steps to stop Japanese Knotweed not only from encroaching onto adjoining properties but also to prevent its growth close to boundaries

• The Anti-social Behaviour, Crime and Policing Act 2014 may provide a mechanism for residential property owners to resolve problems arising from Japanese Knotweed

Property company MBEL owned a house in Bristol, which had Japanese Knotweed growing in the garden. The neighbours complained that the Knotweed was spreading to their property and BCC served a community protection notice (or ASBO). The notice required MBEL to do various things, including submit a management plan for BCC to approve, dig out the Knotweed or apply glyphosate to prevent its spread and install a root barrier on the edge of the affected area. MBEL also had to provide evidence of removal and of the ongoing treatment. MBEL failed to respond to the notice and was prosecuted by BCC. The Bristol Magistrates' Court convicted MBEL and fined it £18,000 plus costs, finding that MBEL had neither taken reasonable steps to comply with the notice nor given a reasonable excuse for failing to do so. The Court also ordered MBEL to remedy the problem by obtaining a plan to resolve the issue from a specialist company within 28 days.

 

Practical implications:

As we saw in the Network Rail case, allowing Japanese Knotweed to spread to an adjoining property may amount to a statutory nuisance as well as a private nuisance. However, the 2014 Act may provide a more straightforward route for residential owners to resolve problems than bringing an action for nuisance. That said, the first step is for affected owners to notify the local authority and persuade the council to take action. Note that this route is not open to commercial property owners affected by Knotweed spreading from adjoining properties. 

For further advice on this issue, please contact a member of our Planning & Environmental Team.

 

Notices - service by email: UKI (Kingsway) Ltd v Westminster City Council

Key points:

• Local authorities will serve statutory completion notices on owners of new or substantially altered commercial properties

• The notice is served on the owner of the property - this means the person who is entitled to possession

• This case involved an important point of law regarding the service of completion notices, which could've proved costly for the rating authority in question

A rating authority served a statutory completion notice on the owner of a building, which would bring the building onto the rating list on the specified date. The authority delivered a paper copy of the notice to the receptionist at the building. The receptionist was employed by the management company for the building, not by the actual owner, and was not authorised to accept service of notices. The receptionist scanned and emailed a copy of the notice to the owner. The owner appealed against the listing and claimed that the notice had not been validly served. The issue went all the way to the Supreme Court, which found, on the facts, that the notice had been validly served.

 

Practical implications:

Indirect service of a notice is not valid service in every situation in which the intended recipient ultimately comes to know of the contents of the notice: the intended recipient has to actually receive the notice and there has to be a sufficient causal link between that receipt and the sender's actions. Previous case law had decided service by fax was valid, and in this case, the Supreme Court took the view that there was no reason to distinguish fax from email. Although the Kingsway case relates to a statutory notice, the judgment may be equally applicable to the service of contractual notices. When agreeing deals which include permissive notice provisions, it is sensible to specify if particular methods of service will not be acceptable (for example, service by email will never be accepted). 

 

Notices - service by text: SK Properties (Midlands) Ltd v Byrne

Key points:

• Many legal agreements contain provisions that require or allow one party to serve notice on the other

• These provide for an agreed means of sending formal notices

• Even where there are no express provisions, certain statutory provisions may apply to ensure notices come to the attention of the recipient and when notices are deemed to have been given and received

Parties exchanged contracts for the sale of a property. The contract contained a provision that the buyer would complete the purchase 'as soon as their legal and banking formalities are completed', but did not specify an actual completion date. The parties disagreed about what had been said about when completion would take place at a meeting they had to sign the contract. After exchange, the seller and the buyer's agent exchanged text messages, which culminated in a message from the agent on 5 February 2016 informing the seller that the banking formalities should be complete by 19 February. The seller replied on the same day saying “we had an agreement...that this would be completed within six weeks and we are now nearing nine and nowhere near completion, I want this matter completed in the next week or I will find someone else”. The matter came before the Upper Tribunal because the buyer applied to protect the contract by registering a notice at the Land Registry against the seller's title to the property and the seller wanted this removing, arguing firstly that the contract was void for uncertainty (around the completion date) and secondly that the text message on 5 February amounted to a notice to complete, which the buyer had not complied with. The Tribunal ruled that the contract was not void for uncertainty - a term could be implied into the contract that the buyer would use its best endeavours to complete the legal and banking formalities as soon as reasonably practicable. The Tribunal also refused to order the removal of the notice from the title at the Land Registry. The seller knew that the formalities would not be completed until 19 February, so giving seven days' notice on 5 February was not a reasonable period.

 

Practical implications:

The contract in this case was a one page document, drawn up by a family member of a director of the seller and, whilst it contained the essential terms of an agreement for the sale of a property, it was somewhat lacking in the detail it would've included had the instructed solicitors done the drafting. Where there are gaps in a contract, the court will generally be willing to imply terms to give the arrangement 'business efficacy', but it is obviously better to have everything set out expressly, including what each party is required to do and by when. The Tribunal judge in this case was prepared to assume that the seller's ultimatum was a notice to complete. He refers to it at the end of his judgment as an email but it appears that the message was a text message. A text message (or an email) is writing and so if, on evidence, the intended recipient receives a notice sent by text or email it may, in certain circumstances, be validly served 

 

Restrictive covenants - development in breach: The Alexander Devine Children's Cancer Trust v Millgate Developments Ltd & Others

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

• 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 from Summer 2017. M built 23 social housing properties on a development site called 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 on the basis that it impeded a reasonable user of the land. The land with the benefit of the covenant had been donated 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 for modification, 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. The Upper Tribunal decided to modify the covenant even though M accepted it had been aware of the covenant when it purchased Exchange House. The Tribunal thought 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 Tribunal had placed too much weight on the fact that planning permission for the development had been granted when considering the public interest. The Court felt that it was also in the public interest for contractual and property rights to be enforced.

 

Practical implications:

If you are buying land that is subject to restrictive covenants, the message is quite clear: don't just go ahead and build in breach of those restrictions. The tribunal/court will expect you to have made fair use of opportunities to negotiate a waiver or release of the covenants before you break ground or apply for modification before starting to build. The Court of Appeal was scathing about M's conduct: it said the developer had acted in 'an unlawful and precipitate manner' and had acted 'with its eyes open and completely at its own risk'. This is a risk we would not advise our clients to take! Remember also that planning and covenants are two different things. The grant of planning permission for a scheme that is in breach of covenant, whilst relevant, is not determinative.

 

Security - rectification of the register: Antoine v Barclays Bank & Others

Key points:

• The court can order the Land Registry to rectify a mistake on the register

• Whether there has been a mistake on the register has to be judged at the time of registration, rather than in light of subsequent dealings

• This can lead to unfortunate consequences, particularly where there has been a fraud

A was the personal representative of J, who had owned a property in London. A third party, T, claimed that he had loaned £11,000 to J in 1987, and that the loan had been secured against the property. T produced some documents 'evidencing' the agreement and alleged that J had defaulted on the loan. T brought proceedings against J's estate either for repayment of the loan or for an order vesting the property in him. A did not respond to the claim, being overseas and unaware of the proceedings, so the Court made the vesting order, which entitled T to be registered as the proprietor of the property at the Land Registry. T then borrowed £80,000 from BB, secured against the property, and a charge was registered. Later, A successfully challenged the vesting order and it was set aside because the loan documents were forgeries. A was registered as proprietor of the property, but the BB charge remained on the title. A applied for an order that the register be rectified because registration of T on the basis of the (now voided) vesting order had been a 'mistake'. BB and the Land Registry both argued that the registration of T as proprietor of the property was not a 'mistake' within the meaning of the relevant legislation and the High Court and subsequently the Court of Appeal agreed with them. At the time BB's charge was registered, T was correctly registered as the proprietor of the property, because the vesting order had not been set aside.

 

Practical implications:

This is clearly an undesirable outcome from A's point of view, although lenders will take some comfort from the decision, particularly at a time when property fraud is on the increase. The perceived unfairness suffered by A has to be set against the need for the registers to be conclusive, a fundamental tenet of the land registration regime. The fraud in this case happened some years ago, and fraudsters have become increasingly sophisticated over time. If you own, or become responsible for, property that you do not occupy yourself (for example, if you are administering a deceased's estate or own a vacant investment property), you can register with the Land Registry's property alert service or register a restriction preventing a third party registering a sale or mortgage of the property without a certificate signed by a conveyancer that the seller or owner is the genuine registered proprietor.

Landlord And Tenant Round Up

Lease termination - environmental liability: Stone v Environment Agency

Key points:

• Waste operations are regulated under an environmental permitting regime, which means you need a permit to carry them out

• It is an offence to knowingly cause or permit a breach of the requirement to have a permit; no positive act by the defendant is necessary, it is enough that a defendant knew and did nothing about it

• Company directors can be found liable if their companies commit a permitting offence with their consent or connivance or through the director's neglect

S was a director of a company that let some land to a tenant that operated a waste business recycling mattresses. The EA served an enforcement notice on the tenant, which ceased trading and abandoned the site, leaving over 20,000 mattresses behind! The EA argued that S and his company had knowingly permitted unauthorised waste operations to continue at the site after the tenant had left. S claimed the storage of the mattresses didn't amount to a waste operation or that if it was, he could not have 'knowingly permitted' it because he had been overseas when the EA served the enforcement notice. S and his company were convicted in the Magistrates' Court of the offences mentioned in the key points above, but appealed to the High Court. Unfortunately for them, the appeal was dismissed.

 

Practical implications:

The High Court found the Magistrates had been correct to interpret storage of the mattresses on site pending removal after the tenant had left as 'waste operations' and that it was sufficient that S knew about the unauthorised waste operations and did nothing to prevent it. S was fined £12,250 and was ordered to pay the EA's costs. S also faces a further claim from the EA to cover the clean-up costs. Landlords of waste management company tenants, particularly smaller, independent companies that may be vulnerable in the current economic climate, should, in conjunction with their managing agents, take steps to protect themselves in case the same happens to them. Before granting leases, check that tenants are properly qualified to run any business that has an environmental risk associated with it and that they have, and maintain, all necessary licences and permits. Negotiate lease obligations to ensure regular assessment and reporting, at the tenant's expense and by qualified environmental consultants, to ensure ongoing compliance with environmental law. Try to obtain site remediation bonds or other deposits and also ensure that environmental risks remain with the tenant as far as contractually possible. Of course, the best lease in the world is no use if the tenant goes out of business and just disappears into the night, so it is also important to take appropriate and timely steps to deal with any waste left on site, ideally before the EA has to get involved.

For further advice on permits, waste management and remediation, please contact a member of our Planning & Environmental Team.

 

Rent deposits - costs incidental to forfeiture: London Trocadero (2015) LLP v Shinners & Others

Key points:

• Landlords will often ask a new tenant for a rent deposit, which provides them with a ring-fenced pot of cash they can withdraw from if  certain agreed events of default happen

• The terms of the arrangement are set out in a rent deposit deed

• Where there is a dispute about what, or how much, a landlord can withdraw, the courts will interpret the wording of the deed in light of any relevant provisions in the lease

LT owns The London Pavillion, a large five-storey building in a prominent location on Piccadilly Circus. Parts of the building were let on various leases to a company, which operated an 'Odditorium' trading under the name Ripley's Believe It or Not! The company had paid a rent deposit of over £2M when it entered into the lease. The company went into administration and, with the consent of the administrators, LT forfeited the lease. Eight or so months later, LT relet the premises to a new tenant at a higher rent but with a four and half month rent free period as an inducement to the new tenant. LT claimed it was entitled to withdraw sums from the rent deposit to cover rent, service charge and insurance rent during the period that LT was carrying out works to the premises to put them back in repair and whilst it was marketing the premises for re-letting. LT also claimed it was entitled to withdraw a sum equivalent to the rent 'lost' during the rent free period and the costs incurred in connection with the re-letting. LT argued these were all sums it could legitimately withdraw from the rent deposit because of the wording of the deed, which mentioned 'any proper loss which the Landlord may incur in or incidental to and consequent upon forfeiture of the Lease'. So, the question for the Court was: which of the losses LT suffered could be said to be incidental to and consequent to forfeiture? LT was successful in part. The Court decided that the wording of the rent deposit deed, read in conjunction with the lease, would cover losses that were in the reasonable contemplation of the parties at the time the lease and the deed were completed. In this case, this meant that losses would cover a possible rental void of up to six months or until the premises were re-let, if this happened sooner. However, the deed did not cover rent that was 'lost' due to giving a new tenant a rent free period or the costs of re-letting.

 

Practical implications:

The Court looked at the wording of the lease as well as the deed, to get an indication of what was in the reasonable contemplation of the parties at the time. The lease provided for a six month period prior to the expiry of the term of the lease where LT could put up 'to let' signs, market the premises and show prospective tenants around. This is a common provision in commercial leases, although is generally more limited in cases where the tenant has a statutory right to renew the lease at the end of the term. The lease also provided that any guarantor of the tenant company (although there was not one in this case) could be asked to pay rent for up to six months after forfeiture of the lease. Looked at in the round, the Court decided these other provisions demonstrated an expectation between the parties that it could take around six months to re-let the premises. LT could not recover anything over and above this. The decision is just one judge's interpretation of the documents against the context of the case. If the facts were different, for example if an outgoing tenant had left the premises in such a state that a rent free period was the only way to get a new tenant to take them on, a landlord might have a better chance of recovering the rent 'lost', because it is more obviously a consequence of the forfeiture. Clearly the parties to a lease and a rent deposit deed have differing - if not entirely opposing - interests. It remains to be seen whether drafting practice will change as a result of the decision, with landlords maybe wanting to clarify what 'in consequence of forfeiture' means and with tenants wanting to fix the period for which loss of rent could be claimed.

 

Planning Point

Planning applications - refund of fees: Provectus Remediation Ltd v Derbyshire County Council

Key points:

• Planning regulations from 2012 provide that where a planning application is made, the applicant must pay a fee to the local planning authority (LPA)

• The regulations also provide for a refund of planning application fees where an LPA fails to determine the planning application within a 26 week period (or if the planning application is invalid)

In September 2014, PRL submitted a planning application to DCC to develop an area of land for coal mining. PRL paid a fee of nearly £45,000. In December 2015, PRL withdrew the original planning application and submitted a fresh one, but was not required to pay a further fee. The parties agreed an extension of time for determining the application. At the end of December 2016, PRL appealed against DCC's failure to determine the application within the agreed time period and asked for a refund of the fee. DCC refused, arguing the requirement to refund fees if an application was not determined within the statutory period of 26 weeks did not apply where the parties had agreed to extend the time period for determination. The High Court agreed with DCC.

 

Practical implications:

A planning application fee should only be refunded if 26 weeks has elapsed from the receipt of a valid planning application and the LPA has not determined that application. If, after submitting a planning application, you agree with the LPA, in writing, that the 26-week period should be extended, the fee will not be refunded even if the LPA fails to determine the application within the extended period. Be aware when applying for planning permission that agreeing to an extension of the period for determination effectively waives your right to a refund of the planning application fee. Also bear in mind that it is important to take all measures possible to assist the LPA with determining applications promptly and within 26 weeks; consider pre-application discussions with the planners on complex or controversial schemes. For further advice on planning applications, please contact a member of our Planning & Environmental Team.

 

Tax Tips

SDLT - reduced file and pay window

HMRC has changed the SDLT regime. As a result of the Stamp Duty Land Tax (Administration) (Amendment) Regulations 2018, the time limit for filing an SDLT return and for paying any SDLT due has reduced from 30 to 14 days. The change applies to transactions with an effective date (usually the date of completion, but sometimes earlier, if the contract is 'substantially performed') on or after 1 March 2019. It relates to SDLT only; for properties in Wales, the time limit for filing Land Transaction Tax returns is still 30 days. The regulations make other amendments/improvements to the SDLT return forms, to make it easier to comply with the new deadline.

 

Practical implications:

It is important to ensure you provide all relevant information needed for SDLT returns, and any tax that is due, in plenty of time to allow submission and payment within the statutory deadline. We will always ask you for this before completion, to avoid missing the deadline. Failure to meet the deadline incurs an automatic penalty of £100 and interest may be due on late payments. The new 14-day deadline also applies to supplemental returns.