Property Update - August 2014

31 minute read
14 August 2014

Our real estate experts bring you the latest property law issues and provide action points to help you and your organisation.

  • Landlord and tenant - a failure to keep a shop open meant that a tenant was not entitled to a new lease
  • VAT - Court of Appeal rules that VAT not payable by a buyer despite the contract stating that the price was exclusive of VAT
  • Noise nuisance - liability of landlords for tenants' actions
  • Land registration - rectification of the register of title can take effect retrospectively
  • Planning - Neighbourhood planning; enforcement using the Proceeds of Crime Act; and an LPA's scheme of delegation
  • Energy - another chance to read our alert on minimum energy efficiency standards that will have to be met before a building can be let
  • Construction - another chance to read our alert on the issuing of certificates for construction projects

Landlord and tenant - a failure to keep a shop open meant that a tenant was not entitled to a new lease

Key points

  • An obligation in a lease "to use the Premises for the purposes of any retail trade within Classes A1 and A3" meant that the tenant was required to keep the premises open for trade
  • A failure to do so constituted a substantial breach of the lease which meant that the tenant was not entitled to a renewal tenancy under the Landlord and Tenant Act 1954
  • Tenants should be wary of being too obstructive about allowing access to the property by the landlord, as this could be a breach of the lease and in an extreme case may affect their ability to renew
  • Landlords and tenants alike should always refer to the lease for the details of when and why the landlord may access the premises

Facts of Youssefi v Mussellwhite

Youssefi v Mussellwhite concerned a lease of a house and shop. There was some dispute about whether any trading was actually taking place from the property. However, the landlord accepted that the property was occupied for the purposes of a business and that, therefore, at the end of the term the tenant was entitled to security of tenure under the Landlord and Tenant Act 1954.

The tenant applied for a new lease pursuant to that Act. A landlord may object to the grant of a new lease on one of seven statutory grounds. In this case, the landlord argued that the tenant ought not to be granted a new tenancy in view of substantial breaches of the lease (known as ground (c)).

The court has a discretion whether to order a new tenancy under ground (c). The Court of Appeal ruled that, in exercising this discretion, it had to ask itself whether the proper interests of the landlord would be prejudiced by continuing in a landlord and tenant relationship with this particular tenant, or - to put it another way - whether it would be unfair to the landlord if the tenant were to be foisted on the landlord for another term. The court did not think that it was necessary for the landlord to show that the relevant breach adversely affected the rental income or the value of the reversion - although in many instances this might well be the case.

Two particular breaches were alleged: breach of the obligation to allow the landlord access to the property, and breach of the use covenant.

 

Access

 

The court found that the tenant had refused the landlord access to the property to inspect it on numerous occasions. It concluded that this was sufficiently substantial a breach of the lease to support a finding that the tenant should not be granted a new tenancy. The fact that the landlord may not have been able to show any financial loss resulting from the breach was irrelevant (although in fact such loss would almost certainly have been incurred in the form of wasted surveyor's fees etc).

Use clause

The use clause contained an obligation on the tenant:

"to use the Premises for the purposes of any retail trade within Classes A1 and A3 of the Town & Country Planning (Use Classes) Order 1987 and not to use the Premises … for any other purpose without the written consent of the Landlord (such consent not to be unreasonably withheld)".

The Use Classes Order has been amended since the lease was granted, but the court had to consider whether the tenant's use fell within the relevant description as at the date of grant of the lease.

The tenant had been using the premises for preparation of cold meals for consumption off the premises, but not to visiting members of the public as required by use class A1. There was no evidence of any walk-in trade, or use of the premises actually to make sales, even by way of telephone ordering. Nor had the tenant used the premises for a purpose within class A3 (sales of food for consumption on the premises, or of hot food).

The tenant argued that the use clause was not equivalent to a "keep open" covenant, which imposes a positive obligation on a tenant to keep a shop open. The tenant pointed out that the landlord could not reasonably have refused an application for consent to change of use, and that there was no evidence of any damage to the landlord's reversion through the shop not being kept open (unlike where for example premises form part of a retail parade).

The Court of Appeal disagreed. It thought that the clause did mean that there was a positive obligation actually to use the premises for one of the stipulated purposes, and not merely a negative obligation not to use the premises for some other purpose. The tenant had never in fact applied for a change of use. The court found that the tenant had no intention of running any business complying with the use covenant, whether within classes A1 or A3 or otherwise.

The landlord did not have to demonstrate a quantifiable loss to the value of the reversion, although it could be envisaged that a sale of the reversion subject to a business tenant in possession would be likely to achieve a better price if the tenant was actually carrying on a user compliant business. That would be the case even if the rent under a new tenancy were calculated on the basis that the tenant was complying with its covenants.

On that basis, the court concluded that the breach of the use covenant was substantial, and that the tenant ought not to be granted a new lease for this reason as well.

Things to consider

The court ended its judgment by saying that there was an "exceptionally difficult" relationship between landlord and tenant in this case that was characterised by the two breaches of covenant outlined above. It thought that the facts of this case were unusual, and such situations would not often arise.

Ground (c) in fact has two limbs. The first limb, on which the landlord succeeded in this case, is that the tenant ought not to be granted a new tenancy in view of substantial breaches by him of his obligations under the current tenancy. The second, alternative limb to ground (c) is that the tenant ought not to be granted a new tenancy for any other reason connected with the tenant's use or management of the property.

In Horne & Meredith Properties Limited v Cox, the Court of Appeal refused to grant a new tenancy on the basis of the second limb of ground (c), because the relationship between the parties had completely broken down as a result of the history of litigation between them.

By contrast, in Youssefi, the Court of Appeal agreed with the trial judge that "it would be an impossible task to analyse the landlord and tenant relationship over the whole period of the lease to make findings with confidence in relation to the origins of the breakdown in trust and confidence between landlord and tenant". It therefore found that the second limb of ground (c) had not been made out - but this did not matter, since the landlord had already succeeded on the first limb of this ground.

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VAT - Court of Appeal rules that VAT not payable by a buyer despite the contract stating that the price was exclusive of VAT

Key points

  • Sale and purchase contracts must contain appropriate wording dealing with VAT
  • Failure to do so may mean either that a buyer may have to pay VAT when it did not think VAT was payable, or that a seller must account to HMRC for VAT out of the sale price

Facts of CLP Holding Company Limited v Rajinder Singh and Parvinder Kaur

In CLP Holding Company Limited v Rajinder Singh and Parvinder Kaur, the Court of Appeal had to consider the terms of a sale contract in order to decide whether the buyer was liable to pay VAT to the seller in addition to the agreed sale price.

A freehold purchase of commercial premises completed on 30 August 2006. The price was £130,000. The contract was in a standard form incorporating the Standard Conditions of Sale (4th edition) (which it referred to as the ‘general conditions’) and setting out special conditions. As is usual, the special conditions were to prevail over the general ones in the event of conflict.

The general conditions contained a clear obligation to pay any VAT for which the seller was obliged to account to HMRC. It also provided that all sums under the contract were exclusive of VAT (Standard Condition 1.4). The general conditions also contained a non-merger provision, confirming that completion did not cancel liability to perform any outstanding obligations under the contract.

The special conditions contained no reference to VAT, and defined the price simply as £130,000. In replies to requisitions, the amount due on completion was stated as "the balance of purchase monies". It appears that no preliminary enquiries had been raised in relation to VAT in the run up to exchange and completion, and no mention was made by the parties themselves of any option to tax. It turned out, however, that the seller had opted to tax - which meant that the seller would have to account to HMRC for VAT on the sale.

Was the buyer liable to pay VAT to the seller?

In 2007 HMRC raised an assessment on the seller for VAT on the sale of the property. The seller asked the buyer for payment of VAT and offered a VAT invoice. The buyer denied it was liable to pay VAT. In August 2012, the seller (finally) issued proceedings and sought summary judgment. Two questions arose for determination:

  • Did the contract contain an operative provision dealing with the value of the supply?
  • Did it impose upon the buyer an obligation to pay the tax chargeable to the seller?

A County Court Deputy District Judge thought the answer was yes to both questions. A High Court judge (on appeal) answered no to both questions, finding in favour of the buyer. And the Court of Appeal agreed.

The Court of Appeal noted that the special conditions made no reference to VAT and did not suggest that anything was payable above the defined purchase price of £130,000. On that basis, it concluded that, having regard to the particular circumstances of the transaction and the relevant facts known to the parties at the time, a reasonable person would consider that the special conditions could not be reconciled with the statement in the general conditions which made sums VAT exclusive. In that event, the special conditions prevailed and no VAT was due.

Things to consider

Admittedly, certain facts of the case - and the background circumstances the court was able to take into account in interpreting the contract - were unusual. However, the decision emphasises the importance for both buyers and sellers of properly investigating the VAT status of a transaction before exchange and expressly addressing the position in the contract.

The default position under the Standard Commercial Property Conditions (2nd edition), which would more usually be incorporated on a sale of commercial property, is that no VAT is payable in respect of the property itself (as opposed to any other items included in the sale). From the seller’s point of view, this makes it even more important that express VAT provisions are included.

For more details on this, please contact: Lee Nuttall, partner

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Noise nuisance - liability of landlords for tenants' actions

Key points

  • Operators of a motocross stadium had been previously held liable for noise nuisance
  • Subsequent claim to extend liability to include operators' landlords was unsuccessful
  • Active or direct participation by the landlords was required to establish liability
  • The various factors considered were not sufficient alone or collectively to constitute such participation

Background

In a judgment earlier this year, the Supreme Court had allowed an appeal against the Court of Appeal's rejection of a claim brought by residential owners against the operators of a neighbouring motocross stadium for noise nuisance. This resulted in the restoration of an injunction prohibiting activities causing the noise nuisance - which had originally been granted by the High Court in favour of the residential owners - but on its original terms (i.e. suspended, pending reconstruction and reoccupation of the house which was presently unoccupied, following extensive fire damage).

In that earlier judgment, the court had also held that it was possible, as a matter of principle, to establish a positive prescriptive easement to make noise which would otherwise be a nuisance.

Claiming against the landlords

Following from the finding of liability against the operators, the Supreme Court was asked in Coventry and Others v Lawrence and Another (No 2) to consider and rule on consequential issues arising from that judgment, particularly the question of whether the operators' landlords could also be held liable for the nuisance caused by its tenants.

The court confirmed the position, from previous authorities, that to establish liability against the landlords it had to be shown that the landlords had actively or directly participated in the nuisance, which was largely a question of fact in the circumstances.

The court considered a number of factors which it was contended pointed to such participation in the present circumstances, and ruled as follows:

  • Unless the nuisance was an inevitable, or nearly certain, consequence of the letting, the granting of a lease alone could not impose liability on the landlords for the nuisance arising from the tenants' use of the premises
  • The fact that the landlords were aware of the tenants' intended uses when granting the lease and that such uses in fact resulted in a nuisance, did not thereby make the landlords liable for the commission of such a nuisance
  • Inaction by the landlords in not taking steps to discourage the tenants' actions did not amount to participating in the nuisance; and this was so, even where the landlords had the power to prevent the nuisance
  • Given that the landlords would not be liable for the tenants' nuisance by failing to enforce a covenant which could curtail the nuisance, it followed that the inclusion (or not) of such a covenant in the lease would make no difference to the landlords' position
  • The taking of positive steps by the landlords to mitigate the nuisance (here, erecting a hay bale wall around the complainant's property to reduce noise and to discourage complaints) did not infer that the landlords had authorised the nuisance
  • The fact that the landlords had taken a co-ordinating, or even leading, role in resisting local authority (noise abatement notices etc.) and private complaints did not amount to participation in or authorisation of the nuisance; the landlords would naturally want to minimise the adverse effects on the commercial value of their reversionary interest by reason of any possible curtailment of the racing activities

While acknowledging in principle that a number of points which separately did not justify a particular conclusion could result in a different conclusion when taken collectively, the factors raised here were not considered strong enough and the claim against the landlords was dismissed by the court, albeit only by a 3-2 majority.

Setting the bar high?

The approach taken by the majority of the court and the reasoning for rejecting the various arguments raised suggests that a high bar may be set for imposing liability on landlords for their tenants' nuisance.

Every case will turn on its particular facts, but in the present case the majority of the court was not prepared to hold the landlords liable despite noting that by their actions they had gone "further than most landlords would have done" and notwithstanding that by their role in resisting the concerns of the local authority they "may well have indirectly caused a degree of nuisance....[and]....may have caused the noise levels to have been at a higher level than they would otherwise have been".

Nevertheless, the view of the majority of the court was that this was "quite insufficient" to amount to authorisation of or participation in the nuisance.

The two dissenting judges were, however, of a different view, suggesting that the landlords' "close involvement" over many years with the activities at the premises went "far beyond the ordinary role of a landlord protecting and enforcing his interests under a lease...[and]...involved active encouragement of the tenants' use and direct participation...to enable it to be continued..."

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Land registration - rectification of the register of title can take effect retrospectively

Key points

  • Registered titles to leases were wrongly closed following ineffective forfeiture
  • A new long lease had been granted to a third party before the de-registered leases were restored
  • The application for rectification of the Register raised the question of priority between the leases to be restored and the new lease
  • The landlords' argument that rectification could not be of retrospective effect was rejected
  • The court held that from the date of rectification the restored interests took effect in priority to the new long lease

Background

In Gold Harp Properties Ltd v Macleod & Others, having purported to forfeit two long leases of roof space forming part of a house for non-payment of rent, the landlords (L) applied for and obtained closure of the registered titles of those two leases and secured removal of reference to the leases in the Schedule of leases on L's freehold title.

A new long lease of the roof space was granted by L to a third party and registered at the Land Registry; that new lease was subsequently assigned to another party and thereafter assigned to the current tenant (G).

The County Court judgment

Following a finding by the court that there had been no forfeiture of the original leases (the rent having in fact been paid), the tenants under the original leases (M) applied for and obtained an order in the County Court for rectification of the Register, to the effect

  1. that the titles to the original two leases be reinstated and reopened as if never closed and
  2. that the Schedule of notices of leases in the registered freehold title be amended to insert the original two leases above and to rank in priority to the new long lease subsequently granted.

The judge found that the conditions for ordering rectification of the register for correction of a mistake as provided for in Schedule 4 to the Land Registration Act 2002 had been met, given that neither L nor the assignees of the lease were able to take advantage of the protection for proprietors in possession and, as an alternative, given that L had caused or substantially contributed to the mistakes.

The judge's order was made on the basis that the closure of M's titles was a mistake, as no forfeiture had occurred and the removal of the reference to those leases from the freehold Schedule of leases was similarly a mistake.

G raised two challenges to the order: firstly, that there were "exceptional circumstances" (per paragraph 3 (2) of Schedule 4) for not ordering rectification at all, and secondly (if there was to be rectification) that the original leases should not be ranked in priority ahead of G's new long lease.

Challenging the Order: priority of interests

The key point considered by the Court in relation to the question of priority between the leases was G's argument that rectification could not take effect retrospectively, given the inclusion of the words "for the future" within the terms of paragraph 8 of Schedule 4, which provides that: "The powers under this Schedule to alter the register, so far as relating to rectification, extend to changing for the future the priority of any interest affecting the registered estate or charge concerned".

However, having carried out a lengthy and detailed review of the conflicting case law, the commentaries, and pre-2002 Act Law Commission reports, the Court of Appeal concluded that the judge had been entitled to make the order referred to above. Among the reasons given by the court were:

  • G's argument that an alteration to a priority that already exists (the priority of its new long lease prior to any rectification) could not be described as an alteration "for the future", was rejected by the court on the basis that if this were so the court would be unable to change priorities in the very situation that paragraph 8 is intended to address
  • The purpose of Schedule 4 was to facilitate the correction of mistakes and this extended to correcting the consequences of those mistakes. If the narrower (non-retrospective) construction suggested by G was accepted, only an incomplete (and, in the present case, valueless) correction could be made where derivative interests were created during the period of mistaken de-registration
  • In any event, the correct contextual meaning of the words "for the future" meant that the person whose interest is restored can exercise his ownership rights to the exclusion of the competing interest as from the moment the rectification order is made, but not before. From the date of the order, the effect is that going forward M could exercise their rights under the original (restored) leases to the exclusion of G; but they could not, for example, claim mesne profits from G or its predecessors for any occupation (had there been any) prior to that date
  • As a question of policy, although the approach taken by the court would mean additional qualification to the indefeasibility of the Register, the LRA 2002 is not intended to provide an absolute guarantee of title; and the terms of Schedule 4 are such as to recognise explicitly the possibility of rectification prejudicing the interests of parties who have relied upon the register
  • In considering the arguments for resisting the wider application of rectification, the court found unconvincing the reasoning in commentaries and in previous adjudications , based on "preserving the register" and on the legislative history of the LRA 1925

Challenging the Order: exceptional circumstances

The court rejected arguments by G that there were exceptional circumstances requiring a departure from the presumption in favour of rectification:

  • Despite the fact that M had only sought an order for rectification some 18 months after commencing original proceedings (and some three and a half years after first becoming aware of the cancellation of the original leases), the court ruled that delay would not as a matter of course constitute an exceptional circumstance; indeed, it would be unlikely to do so in the absence of the delay having caused some substantial identifiable prejudice (and none was alleged here). Failure by the judge to address this point did not undermine his decision
  • Notwithstanding G's claim that it would suffer the greater loss in terms of development potential of the property if rectification was ordered, the judge had assessed the available evidence and had been entitled to rule that this was insufficient to justify his not making the order. It was only in a clear case (which this was not) that a court might be justified in reversing the judge's findings on appeal

Accordingly, the court dismissed G's appeal against the making of the order for rectification and the terms upon which it was made.

Welcome clarity

This ruling by the Court of Appeal brings welcome clarity to an issue that has been subject to uncertainty for some time, given the doubts expressed in previous adjudication decisions and in established texts.

While accepting that the reference to priorities being changed "for the future" would qualify the scope and extent of any rectification ordered, the court concluded that the way in which it was qualified had to be interpreted in the context of the primary intention of giving the restored interest "...the priority which it should have had but for the mistake...".

As mentioned above, if the de-registered leases were restored on the basis that they would be subject to the subsequently created interests, the rectification would be at best incomplete and at worst valueless to the restored party in both legal and practical terms.

Although in circumstances such as these there will inevitably be winners and losers, the court was of the view that "...the carefully structured [LRA 2002 rectification] provisions...allow a fair balance between the competing interests to be struck in any particular case; and Schedule 8 gives the loser the right to an indemnity..."

These comments are very timely, given the Law Commission’s recent announcement that later this year it is going to start work on a review of the land registration regime. Among the topics for consideration are the extent of Land Registry’s guarantee of title, rectification and alteration of the register, and the impact of fraud. Recommendations for reform are not however expected until late 2017.

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Planning update

Neighbourhood Planning - changes to criteria for recovered appeals

The Secretary of State for Communities and Local Government has the power to "recover" appeal decisions. An inspector will hear the evidence or consider the written submissions in an appeal and instead of making the decision, will send a report to the Secretary of State who will decide the appeal.

As from 10 July 2014, the criteria for recovered appeals will be extended to include residential development schemes for more than ten units in areas where a qualifying body has submitted a neighbourhood plan. The new criteria will be reviewed after 12 months.

Ignoring a planning enforcement notice can damage your wealth

A man who continued to store and sell cars in the green belt despite enforcement action by the local planning authority has been ordered to pay almost £225,000 under the Proceeds of Crime Act. Kirklees Council prosecuted under s179 of the Town and Country Planning Act. The defendant was also fined £650 for each offence (total £4,500) and ordered to pay £10,000 costs.

In another matter, the Royal Borough of Kensington and Chelsea prosecuted a man who extended his house in Holland Park but failed to comply with an enforcement notice requiring removal. He was fined £15,000, had £25,350 confiscated under the Proceeds of Crime Act and ordered to pay £3,580 costs. He faces imprisonment if he fails to pay the confiscation order within three months.

Local Planning Authority's scheme of delegation

A local authority has the ability to delegate some of its functions. During an application for judicial review, the court considered the power to delegate, the scope for sub-delegation and the purpose of an authority's constitution. The judicial review was brought by a third party objecting to the grant of permission to a restaurateur for an outside seating area.

In 2010 permission was granted for the change of use of a building to a restaurant but permission for outside seating was refused. In 2011 the restaurateur renewed his application for the outside seating and a temporary permission was granted subject to conditions limiting the number of seats and hours of operation.

Complaints were made to the enforcement team but in the meantime, at the end of the temporary period, the restaurateur applied for permanent permission. The planning officer's report wrongly stated that there had been no complaints and that there had been no enforcement team investigation.

The authority's constitution authorised the Divisional Director to make planning decisions. She had further authorised named planning officers to take decisions. One of these officers made the decision on the permanent seating application and granted permission.

The governing legislation allows a local authority to delegate its functions to a committee, sub-committee or an officer. A committee or sub-committee can arrange for sub-delegation to an officer, but an officer cannot further delegate. However, in this authority, a guidance note allowed an officer with delegation to nominate another officer to exercise the function on his or her behalf. While the court found that the constitution was not clear, it found that the decision making process was not outside the powers of delegation.

However, the officer who made the decision had been unaware of the complaints. These were material considerations because:-

  1. They were part of the planning history;
  2. There were previous issues about controlling the number of customers using the seating area;
  3. The reason for the temporary permission was to enable the use to be monitored;
  4. The local authority's system was supposed to cross reference enforcement cases with planning applications; and
  5. The absence of complaints had been treated as a material consideration, with the implication that the officer acknowledged that the presence of complaints would also be material.

It was impossible to say whether the officer would have made the same decision had she known about the complaints and the decision should therefore be quashed and remitted for re-determination.

R (on the application of Pemberton International Ltd) v Lambeth London Borough Council and Shahrokh Parvin.

For more details on this, please contact Jan Hebblethwaite, associate

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Energy - Consultation on minimum energy efficiency standards for non-domestic buildings

Improvements will have to be made to some commercially-let premises in order to meet minimum energy efficiency standards starting from 1 April 2018. The government is consulting on the detail of the proposed regulations.

Read our alert on minimum energy efficiency standards that will have to be met before a building can be let.

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Construction - another chance to read our alert on the issuing of certificates for construction projects

We revisit the case of Hunt and Others v Optima (Cambridge) Ltd and Others after its trip to the Court of Appeal.

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