Real Estate Legal Update - Winter 2021/22

A welcome from the editor...

Welcome to the latest edition of the Real Estate Legal Update.This quarter, we look at cases on easements, noise nuisance, the duties of receivers when selling a property and restrictive covenants.In the Landlord and Tenant round-up, we head north of the border and look at how the Scottish courts enforce keep open clauses and we also look at case where a landlord was put to proof of its intention to use premises for its own business after refusing the tenant a new lease.In the Planning Points, we revisit the challenge to permitted development rights and new use classes, and for Tax Tips, we look at two cases on VAT.

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CASE LAW UPDATE

Easements - Lost modern grant: Hughes v Incumbent of the benefice of Frampton-on-Severn, Arlingham, Saul, Fretherne & Framilode

Key points:

• It is possible to acquire easements by long user - these are known as prescriptive easements
• One method by which such easements can be acquired is under the 'doctrine of lost modern grant'
• A claim for an easement under this doctrine is based on 20 years' use and can be successful even if the use has been interrupted after the required 20 years has accrued

H owned a house that was accessed from the highway along a track. The incumbent vicar (S) owned the freehold of the village church next door, and claimed a prescriptive easement over the track for the benefit of the church, as both S (and previous incumbents) and visitors to the church had used the track to get from the highway to the church, and a grassed parking area, for many years. S applied to have the easement registered at the Land Registry and when H objected, the issue was referred to the First Tier Tribunal.As the track hadn't in fact been used for these purposes since 2015, S's claim was based on lost modern grant and in the First Tier Tribunal, S was successful in establishing the easement. H appealed to the Upper Tribunal, arguing that the use had only been occasional and had not been sufficient to establish an easement by prescription. H's appeal was dismissed.

Practical implications: The doctrine of lost modern grant is a legal fiction based on proof of user for any period of at least 20 years, but not necessarily the 20 years immediately preceding the claim. Claimants need to be able to show sufficient continuity of use, and this is a question of fact in each case. The requirement that use must be more than just occasional is not absolute - indeed, the word 'occasional' can have different meanings in different scenarios, so for example, weekly use might be considered occasional in some contexts, but frequent in others. What is required in each case is use of sufficient intensity or frequency to indicate that a right is being asserted. The judge in the Upper Tribunal in this case referred to the law on prescriptive easements as a 'legal jungle', so if you are looking to establish a right for the benefit of your property or you are having issues with third parties claiming rights against you, please get in touch with a member of our Real Estate Litigation team.

Easements - maintenance of a right of way: Barre & Another v Martin & Others

Key points:

• When it comes to easements, if there is no express covenant to repair, it is necessary to distinguish between who is entitled to carry out repairs, and who is obliged to do so
• Rights of entry and repair may be implied as rights ancillary to the grant of an easement, but it is better - where possible - to set everything out in an express agreement

B owned a property in Powys, known as The Gro. As well as living there, B had converted some barns on the property into holiday cottages. Access to The Gro was over a route that ran mostly over the adjoining property, a large country house owned and operated as a hotel and holiday lodges by M, known as Bryn Tanat. Back in 1993, prior to B's ownership, the route of the access had been changed by agreement between the then owners of the two properties. At that time, Bryn Tanat was owned by a company owned by M. There was a formal deed of release in which the owner of The Gro released the right of way over the previous access and was granted a right over a new route. The company covenanted to keep the new route in good repair and condition and to keep it clear and unobstructed at all times. When B bought The Gro in 1997/98, the access way was in good repair and sufficiently wide in places for two cars to pass each other, but by 2012, the access way had become almost impassable and was in such a state of disrepair that it was causing damage to B's car. B attempted to go onto Bryn Tanat to carry out maintenance works. M demonstrated his objection to this by lying down in front of the digger and the police had to be called! As a result of various planning applications (and objections) over the years, relations between B and M had deteriorated, and B alleged that since 2007, when B had objected to M's application to develop land at Bryn Tanat, M had persistently and systematically acted in a way that was intended to and had substantially interfered with their right of way, by placing boulders along the edges of the way to reduce its width and by erecting a gate and post that obstructed the route. B was successful in obtaining an injunction against M requiring M to remove the boulders and the gate and posts. The High Court also found that B was entitled to carry out necessary works of maintenance and repair for the purpose of putting or keeping the way in a satisfactory condition for B's permitted use of it.

Practical implications: The grant of an easement will include, by implication, those ancillary rights that are reasonably necessary for its use and enjoyment. The extent of such ancillary rights will depend in each case on the particular facts, but will often include a right (but not a positive obligation) for the benefitting owner to enter onto the burdened land to carry out repairs. It is usual for the owner of land over which a right of way runs to agree to be responsible for maintaining the way, and for the benefitting owner to pay a proportion of the cost of doing so. Indeed, this is what was agreed in the deed of release between the previous owners of the two properties in this case, although was of little use to B, as the company that had the maintenance obligations had gone into administration and had been struck off the register of companies. The background to this dispute shows the lengths people will go to when neighbourly relations break down for whatever reason!

Nuisance - noise: Jones v Ministry of Defence

Key points:

• Private nuisance is concerned with the unlawful interference with a person's use or enjoyment of their land and can take many forms, including noise
• Not all disturbances are 'actionable' and claimants must be able to prove that they have suffered some form of damage, whether that be physical damage to their property or unreasonable interference with the use and enjoyment of their property
• There is a balance to be struck between the interference with the claimant's property rights and the reasonableness of the defendant's activity on their own land
• The nature of the locality in which an alleged nuisance is carried out is an important consideration for the courts

In 2003, J bought a site known as Parc Cefini on Anglesey, on which J intended to develop a holiday park, by converting some outbuildings into holiday accommodation and, in due course, erecting new units, including some for commercial use. J obtained planning permission and had some success with their business venture, but claimed that from 2007, increased noise from a nearby airfield had blighted the site and had effectively caused the business to fail. Attempts to sell the site since 2016 had also been unsuccessful. The airfield in question is Mona Airfield, which is about a mile away from J's site and which the RAF has used since the 1950s as a relief landing ground for the nearby RAF Valley and as a runway for trainee pilots to carry out circuit drills using fast jets and turbo prop aircraft. As a result of complaints from J, the MoD had changed some of the training routes and the height at which jets flew over Parc Cefini, but ultimately J issued proceedings alleging the noise constituted a private nuisance. Whilst the judge in the High Court was satisfied that the noise was very loud (loud enough to 'disrupt conversations and frighten small children') and likely to put off holiday makers and commercial tenants, it was not an actionable nuisance. The use of Mona Airfield was an ordinary use of that land consistent with the character of the locality.

Practical implications: Whether or not a nuisance is legally actionable is highly fact-specific and the character of the locality is an important consideration. In this case, the otherwise 'sleepy' locality had been disturbed by the sound of fast jets for many years and the noise had been 'part of the environment for generations' .Just because noise is pre-existing, it doesn't mean a defendant can carry on with its activities in whatever manner it wishes, but in this case, the Court was satisfied that the MoD had done what it reasonably could to minimise the impact. In addition, J had materially changed the use of Parc Cefini and made it more sensitive to the noise that already existed and this was a key consideration for the Court. The decision is a useful (one could say loud) reminder of the importance of selecting a site for a new business carefully and carrying out due diligence before buying, particularly where a change of use is intended.

Restrictive covenants - benefitting land: Bath Rugby Ltd v Greenwood

Key points:

• In the context of freehold land, a restrictive covenant is an agreement in a deed that one owner will restrict the use of its land for the benefit of another owner
• It may be possible for successive owners of the benefiting land to enforce against successive owners of the restricted land, if certain pre-conditions are met
• One of those pre-conditions is that the extent of any benefiting land must be ascertained

Readers may recall our coverage of the High Court decision in this case, back in Spring last year. BRL wanted to redevelop its home ground, the Rec, by building a new 18,000-capacity stadium, along with riverside regeneration, community use and a car park under a raised pitch. Part of the site was burdened by restrictive covenants prohibiting various business uses and preventing nuisances or annoyances and activities that 'otherwise prejudicially affect the adjoining premises or the neighbourhood'. The covenants were contained in a conveyance from 1922.G, who was one of eight objectors, owned property near the Rec and sought to enforce the covenants. BRL applied for a declaration that the covenants no longer affected the site. The High Court found that the covenants remained enforceable by G and the other current owners of various parts of the benefiting land. Given the impact on the proposed redevelopment, BRL appealed to the Court of Appeal, which found that the word 'neighbourhood' was not sufficient to identify the land to be benefited and so the covenants couldn't be enforced by G.

Practical implications: So, it's good news for BRL and the club's plans for the Rec, and the decision provides some useful clarification for the rest of us in terms of the passing of the benefit of the right to enforce restrictive covenants, particularly those created before 1 January 1926. The Law of Property Act 1925 introduced statutory annexation to assist with the passing of the benefit of restrictive covenants created after that date, but the benefiting land must still be ascertainable from the deed that creates the covenants or, potentially, extrinsic evidence. You can listen to a Tomkins Talks review of this case here. 

Security - duties of a receiver: Serene Construction Ltd v Salata & Associates Ltd

Key points:

• A receiver is someone appointed by a creditor that holds a charge (mortgage) over the assets of a debtor to manage those assets and receive the income from them
• Receivers usually have powers to sell assets and apply the sale proceeds towards the secured debt
• Receivers also have certain duties, which are generally owed to the appointing charge holder, but the duty to obtain a 'proper' price for the assets to which the receiver is appointed, is owed to the charge holder and the debtor

SCL bought a site at Brierley Lane, Bilston, on which it intended to build 13 residential properties. SCL was incorporated specifically to buy the site and its directors were initially a husband and wife, although later the husband was made bankrupt and was disqualified from acting as a director. Planning permission for the residential development was granted on 7 March 2003. The planning permission was subject to a condition that development commenced within five years of the date it was granted (so, by 7 March 2008).In 2007, Barclays Bank made the first in a series of loans to SCL. Barclays obtained a valuation of the site, which was set at just over £1M with the benefit of the planning permission, which, by that stage, had only nine months to run before it lapsed for non-implementation. This first loan was superseded by a second one, with a further valuation from the same valuers being given on 17 March 2008 (so, after the five-year period specified in the planning permission). The valuation referred to some site preparation and infrastructure works having been done, but there was no mention of the five-year planning issue. In July 2008, Barclays made a third facility available but by this time, the financial crisis was beginning to have an impact. Ultimately, Barclays called in its loan, which was secured by a fixed legal charge over the site, on 29 October 2008, at which point the debt outstanding was just over £327,000.In 2012, Barclays appointed receivers (S and J). They were aware that there was a potential issue with the planning permission and the question arose as to whether sufficient works had been done on site to satisfy the planning commencement condition. The receivers instructed a local land agent to advise on marketing and valuation, and the agent stated that the houses envisaged in the planning permission were too large and upmarket for the local area, so would be difficult to sell. S and J agreed a revised scheme with the local planning authority (whose view was that the works were insufficient) and then marketed the site with a letter of comfort from the planners to increase its appeal. The site was marketed to 15 local developers; three expressed an interest and two made offers, although only one of these was unconditional. The amount offered was £175,000 and S and J completed the sale in 2013.SCL alleged that the sale was completed in breach of the receivers' fiduciary duty to take reasonable steps to obtain the best price available (which, in the former director's view, was at least £575,000), and claimed damages of £400,000 plus interest. SCL was not successful. The Court found that S and J were under no duty to make a fresh planning application, nor were they under any duty to take proceedings to establish the status of the original permission.

Practical implications: This is a useful case that adds to the list of authorities on the nature and extent of a receiver's (or a mortgagee's) fiduciary duties. The duty at issue in this case was the duty to achieve the best price reasonably obtainable for the property in its then current state. There was no further obligation to take steps to enhance its value.

LANDLORD AND TENANT ROUND-UP

Keep open clauses - contempt of court: Sapphire 16 SARL v Marks and Spencer plc

Key points:

• It is not uncommon to see 'keep open' covenants in leases, particularly in leases of retail premises granted to anchor tenants
• A keep open clause does what it says on the tin - it requires a tenant to keep premises open for trade during 'normal business hours', sometimes subject to certain exceptions such as being closed for refurbishment
• The Scottish courts take a different approach to those in England and Wales when it comes to enforcing such covenants

M&S has a 99 year lease of a retail unit at The Plaza shopping centre in East Kilbride, Glasgow. The store has two entrances, one leading from the Mall within the shopping centre and the other leading in off the street. The lease, which was granted in 1972, contained a covenant by M&S to keep the store open during normal business hours, and trade from it until the end of the term (2071). M&S kept the store open for the sale of food when COVID restrictions were imposed in March 2020, but otherwise it was closed. It kept one of the entrance doors locked, so the store was not accessible from within the shopping centre. Even when restrictions on retailers were eased in July 2020, M&S didn't fully re-open the store: there was very little food on the shelves and no clothing stock at all. M&S also put signs on the doors directing customers to another M&S store, on the nearby Kingsgate Retail Park. M&S had strategic plans to rationalise its portfolio in the region and had intended to close its unit in the Plaza and focus on the store at the retail park. With M&S being an anchor tenant, the landlord, S16, sought and obtained an interim injunction requiring M&S to re-open the whole of the premises, to keep them open for business during normal business hours and to keep them sufficiently stocked and staffed. In response, M&S decided to use the unit as an outlet store, selling no food and only limited stock for clearance at reduced prices. The entrance door from the Mall remained locked, the windows into the Mall were blacked out and staffing levels were reduced. The matter came back to court in October 2021, with a decision to be made about whether M&S had breached the order requiring it to trade and, if it had, whether it was in contempt of court. The Court found that M&S had breached the order, but was not in contempt of court, as it had taken legal advice before reopening the store as an outlet unit and had not sought to deliberately defy the injunction despite its half-hearted efforts.

Practical implications: The courts in England and Wales have long been reluctant to enforce keep open covenants by way of injunction, partly because it can be difficult to define with precision what must be done to comply - as the fact that there was a second set of proceedings in the M&S case demonstrates. South of the border, aggrieved landlords who can prove they have suffered loss are awarded damages instead and, as a third set of Scottish proceedings will be needed to determine what compliance by M&S looks like, it seems unlikely that there will be any change in this approach. For further advice on the enforceability of keep open clauses in England and Wales, contact a member of our Real Estate Litigation Team.

Lease renewals - landlord's own occupation: Macey v Pizza Express (Restaurants) Ltd

Key points:

• Tenants who have security of tenure are entitled to a new lease at the end of the contractual term
• Landlords can refuse to grant a new lease on certain statutory grounds - some are fault-based (such as where there are rent arrears) but others are based on the landlord's future plans for the property, including an intention to occupy the property for the purpose of its business (or as a residence)
• The landlord's intention must be firm and settled, must have a reasonable prospect of being achieved and must not be conditional

PERL occupied restaurant premises in Exeter under a 25-year lease. The contractual term of the lease had expired on 22 August 2020, but continued by virtue of the Landlord & Tenant Act 1954 (the 1954 Act). The landlord (M) served a notice under section 25 of the 1954 Act seeking to bring the lease to an end with effect from 22 October 2020 and opposed the grant of a new lease, relying on ground 30(1)(g), stating that M intended to use the premises as a bistro. The matter came before the County Court, where the judge had to consider whether M had the requisite intention - and decided that he did not. M was unable to produce much in the way of evidence of his intention: M did not disclose his business plans as part of the litigation, and when he sought to rely on them on the day, they were lacking in detail and specifically in any sort of financial projections. M appealed to the High Court, but fared no better there.

Practical implications: When it comes to opposing a lease renewal on either Ground 30(1)(f) - demolition, or Ground 30(1)(g), a landlord must be able to demonstrate, as at the date of the hearing, that it has done more than just think about a course of action. Ultimately, a tenant's business is potentially at stake, and vague notions on a landlord's part about what it might like to do with premises once the tenant's lease has ended are not sufficient.

PLANNING POINTS

Permitted development rights - judicial review: R (Rights: Community: Action) v Secretary of State for Housing, Communities & 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
• The Town and Country Planning (Use Classes) Order 1987 (as amended) categorises different uses of land and buildings into 'Use Classes'
• Certain changes of use can be implemented without needing to get planning permission, and these permitted changes are also set out in the Use Classes Order
• Other permitted development rights are introduced from time to time, allowing other types of development without the need for planning permission

In our Winter 2020 Update, we looked at an unsuccessful High Court challenge to the Government's measures introduced to bring flexibility to the planning system by extending permitted development rights and making changes to the Use Classes Order 1987.The campaign group RCA applied for judicial review of three statutory instruments implemented to make significant changes to the Use Classes Order 1987 and to introduce new permitted development rights for upwards development and for the demolition and replacement of office building with residential ones. The basis of RCA's challenge was that Parliament hadn't had sufficient time to properly consider the proposed legislation (the statutory instruments were laid before Parliament the day before the summer recess in 2020) and that strategic environmental assessments had not been carried out. The High Court dismissed the challenge, and the Court of Appeal has dismissed RCA's subsequent appeal, finding that the Secretary of State had not acted unlawfully.

Practical implications: The changes introduced by the statutory instruments came into effect (in England only) on 1 September 2020, but we have been in a state of limbo whilst these hearings have been going on, particularly in the context of drafting leases that use the shorthand of the Use Classes Order to define the permitted use and any changes of use. You can read more about the changes to use classes in this article and can contact a member of our Planning & Environmental Team for further advice. 

TAX TIPS

VAT - listed buildings: Richmond Hill Developments (Jersey) Ltd v HMRC

Key points:

• Generally speaking, the sale of residential land and buildings is exempt for VAT purposes
• However, the sale of dwellings resulting from the 'substantial reconstruction of a listed building is zero-rated...
• ...but zero-rating will not apply if any of the original building remains, other than the external walls and other external features of architectural or historical interest

RHDL acquired the impressive Grade II listed Royal Star and Garter Home building that had previously been used as a nursing facility for servicemen returning from the First World War. RHDL converted it into a purpose-built block of 86 flats, with a communal area and a swimming pool and gym. The works were extensive, costing in the region of £95M, and the project took two and a half years. In order to comply with planning conditions, RHDL left external walls and the roof intact, as well as retaining some of the internal features of the building, such as the chapel, the marble entrance and staircase, concrete floor slabs and the building's steel frame and the chimney stacks. When it came to selling the flats, an issue arose as to whether, for VAT purposes, the sales would be zero-rated (meaning RHDL could recover the VAT it incurred on the construction project) or exempt (meaning that it could not).HMRC took the view that the retention of internal features meant that zero-rating did not apply, despite RHDL's arguments that certain internal features had to be retained to preserve the structural integrity of the building and others in order to comply with the planning permission. RHDL also argued that the internal features could be ignored as they were de minimis in nature, compared to the extent of the project overall. The First Tier Tribunal sided with HMRC, finding that the redevelopment was exempt, rather than zero-rated. Practical implications: Given the sums involved in the case, it may be that there is a further appeal, but in the meantime, RHDL is left with a large amount of VAT that it is unable to recover. Developers undertaking similar conversion schemes should be mindful of the tension between the planning position and the VAT status of such projects, as the rules on zero-rating will be strictly applied. For further advice, speak to a member of our Tax Team.

VAT - break payments: Ventgrove Ltd v Kuehne + Nagel Ltd

Key points:

• VAT is a tax on the supply of goods and services (including, in certain circumstances, the supply of land)
• Historically, payments made to terminate agreements for the supply of goods or services where generally outside the scope of VAT
• There has been a confusing sequence of announcements from HMRC following decisions of the European Court of Justice on cancellation fees payable for terminating mobile phone contracts early
• HMRC has now published updated guidance on its policy on early termination fees and similar payments, which will come into effect on 1 April 2022

KNL had a 10-year lease of premises in Dyce, at a rent of £450,000 a year. The landlord, VL, had opted to tax the property and KNL had been paying VAT on the rent and other payments due under the lease. The lease contained an option for KNL to terminate the lease as at 3 January 2022. KNL was required, by 3 April 2021, to serve written notice to terminate on VL and to make a break payment of £112,500 'together with any VAT properly due thereon'. KNL served its notice to terminate on 23 February 2021 and paid £112,500 by BACS transfer to VL's bank account. It did not pay VAT on the break payment. On 4 June 2021, so after the 3 April deadline for satisfying the break conditions, VL's agents wrote to KNL stating the break option had not been validly exercised, as it had not paid the VAT of £22,500 on the break payment and this was properly due following HMRC's change in policy on termination payments. KNL argued that, at the break date, no VAT was due on the break payment and the Court agreed. The Court's reasoning was that although HMRC had indicated, in guidance published in September 2020, that it would be changing its policy on termination payments to bring them within the scope of VAT, that guidance was updated in January 2021 to postpone the change in policy to an unspecified future date.

Practical implications: Although the courts in England and Wales are not bound by decisions of the Scottish courts, VAT applies across the whole of the UK and the wording in the lease in question might well be found in leases of properties south of the border, so the decision would at least have been persuasive for the courts here when considering the issue. However, HMRC published updated guidance on 7 February 2022. Its revised policy on early termination payments and compensation payments will come into effect on 1 April 2022. The main impact is that fees charged for early termination will be regarded as further consideration for the contracted supply, and will be liable to VAT. The key question to be answered in determining whether a payment is subject to VAT, is whether that payment is directly linked to a supply. As an aside, the guidance does expressly confirm that dilapidations payments will continue to be outside the scope of VAT. Given the complexities of this area of law, and the possible financial implications, speak to a member of our Tax Team for further advice.