Our real estate experts bring you the latest property law issues. Read their comment on these issues and take note of any action points that will help you and your organisation.
- Landlord and tenant - the Court of Appeal has agreed with the High Court that a surety was released from all liability because of a 1987 licence to alter, granted by a previous landlord.
- Implied periodic tenancy - one of the cases mentioned in our last property update is heading to the Court of Appeal.
- Break notice - a case mentioned in our September/October alert is, unsurprisingly, also heading for the appeal court.
- Dilapidations - speaking of appeals, the tenant's appeal against the amount of damages it must pay to its landlord has been dismissed in the case of Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd.
- CRAR - another set of regulations has been laid before Parliament, in anticipation of the new commercial rent arrears recovery procedure coming into force on 6 April 2014.
- High Speed 2 - two of the latest pieces of news in relation to the HS2 project.
- Planning - Two cases involving an out of date Local Plan, a revoked Regional Spatial Strategy and the National Planning Policy Framework.
Landlord and tenant - the Court of Appeal has agreed with the High Court that a surety was released from all liability because of a 1987 licence to alter, granted by a previous landlord
- Variations to a lease are usually obvious, so the landlord can readily spot the need to join in any current guarantors (including former tenants standing under an authorised guarantee agreement) where required to preserve the guarantee. However, granting a permission to the current tenant, which goes beyond the terms of the lease, can sometimes count as a variation. This may not be so obvious, but it can have the same dramatic consequences - namely, the release of the guarantors.
- A landlord's safest course will usually, therefore, be to include any current guarantors as a party to the licence documentation. Alternatively, if it is lawful to do so in all of the circumstances, it might be better simply to refuse the tenant's request.
In an article in our June 2013 Property Update, we examined the question of guarantors being released because of variations to the lease. This was written in response to the High Court decision in Topland Portfolio No. 1 Ltd v Smiths News Trading Ltd. In that case, the original landlord to a 1981 lease had entered into a licence to alter (in 1987) with the original tenant. However, the original guarantor had not joined in as a party to that licence; nor had it given its consent to the proposed works in any other way.
The landlord's reversion to the lease was assigned in 2001 to the current landlord, Topland Portfolio No.1 Limited, who was the claimant in the case. The tenant's interest was not assigned at any time.
When, in 2012, Topland brought a claim against the surety (the defendant in the case) for rent arrears which had accrued because of the tenant's collapse into administration, the surety argued that the 1987 licence to alter had discharged it absolutely from its obligations to the landlord.
The surety relied on the common law rule laid down in the 1878 case of Holme v Brunskill: if a guarantor does not consent to a variation to a lease, it is released unless the variation is self-evidently insubstantial or one which cannot be prejudicial to the surety.
The landlord argued that the licence to alter did not amount to a variation of the lease; it was merely a concession, a permission that was given notwithstanding the terms of the lease.
Alternatively, argued the landlord, even if there was a release of the surety, the "proviso" to the guarantee clause meant that the surety was still liable to pay. In common with many leases, the clause stated that the surety was to be liable to the landlord "... notwithstanding any neglect or forbearance on the part of the Lessor ... to enforce observance or performance of any of the covenants or conditions on the Lessee's part ... or any time which may be given by the lessor to the Lessee ... shall not release or exonerate or in any way affect the liability of the Surety under this [guarantee] covenant".
The High Court's decision
In accordance with previous case law, the burden of proof fell on the landlord. It was for the landlord to show that either there had been no variation of the lease, or that any variation there was could not be prejudicial to the guarantor. It was not for the surety to disprove these two points.
The alterations clause in the 1981 lease had essentially prohibited all types of work, including structural alterations and those which affected the external appearance of the premises. Therefore, when the tenant sought - and obtained - consent in 1987 to make an opening in a wall, in order to create a door by which customers could come and go from a new outdoor garden centre, the court felt able to say that the licence to alter amounted to a variation: the landlord had granted permission for something which went beyond the terms of the lease.
The court found that the same could also be said of the substantial security fence which the tenant erected around the external garden area, to which consent was also given by the 1987 licence. Again, the landlord had consented to something expressly prohibited by the lease. The licence to alter therefore constituted a variation to the lease.
The court next considered the question of prejudice. It found that the landlord's decision to grant permission for the works meant that the on-going repair obligations on the tenant, as well as the reinstatement obligation at the end of the lease, had increased. In turn, this meant that the obligations on the surety - in the event that the tenant ever defaulted - had also increased. Because the surety did not join in the licence to alter, it was released by virtue of these increased obligations under the Holme v Brunskill rule.
The landlord's attempt to argue that the "proviso" to the surety clause saved the day was also unsuccessful. The High Court found that an express grant of permission to carry out works, in the face of a clause which prohibited alterations from ever being made, was not "neglect" or "forbearance" in enforcing the terms of the lease. In fact, quite the opposite: it was a positive step, taken by the landlord, to enable the tenant to do something which was otherwise prohibited.
If the tenant had simply carried out the works in breach of the lease, and presented the landlord with a fait accompli, then the question of neglect or forbearance could have come into the picture. The judge agreed with previous case law that "neglect" or "forbearance" necessitated a breach in the first place, with the landlord failing - or deciding not - to take enforcement action.
The Court of Appeal decision
The landlord appealed, with a view to still trying to get the arrears paid off by the surety. However, the Court of Appeal was not persuaded by the landlord's arguments either.
At the appeal, the landlord ran a new argument (with the consent of the defendant surety): could the question of "time" in the proviso wording assist the landlord, and make the surety still bound? Counsel for the landlord argued that the grant of the licence amounted to a deferment of the day on which the landlord would enforce the tenant's obligation not to carry out structural works, or works which affected the external appearance of the premises.
This argument failed as well, for the same reason as the neglect and forbearance arguments had not worked. The landlord had expressly agreed to the works being carried out; it could not, therefore, at a later date, decide to enforce the alterations clause. What it could do, eventually, was to require the tenant to remove the works in accordance with the reinstatement obligation; but not until that separate obligation was triggered. Until that point in time, the lease had been expressly varied to allow the carrying out of works which were otherwise not in the contemplation of the original parties - including the surety. Hence the surety was released.
Things to consider
We can but reiterate what we said in June. When buying an investment property, landlords should check what consents have already been given (whether pursuant to the alterations clause or otherwise, such as alienation or use) and consider whether there is a danger that a party could have been released because of a variation to the lease terms.
Could an existing guarantor (including a former tenant currently liable under an authorised guarantee agreement or, in the case of an "old" lease, under the law of privity of contract) have accidentally been released? The release could either be total or, where the works were carried out by an assignee, the guarantor's liability could be capped at the level they originally signed up to, following the Court of Appeal's 1995 decision in Friends Provident Life Office v British Railways Board, or under section 18 of the Landlord and Tenant (Covenants) Act 1995.
However, even if it appears that a guarantee may have fallen by the wayside, all may not be lost. The obligations entered into by the guarantor may have included an indemnity as well, which may well continue despite the failure of the "pure" guarantee.
And, of course, while the tenant continues to comply with the obligations and covenants imposed by the lease, there is no need for recourse to the guarantor at all.
Implied periodic tenancy - one of the cases mentioned in our last property update is heading to the Court of Appeal
Last month, we reported on the decision in Barclays Wealth Trustees (Jersey) Limited v Erimus Housing Limited. In that case, a housing association remained in occupation of office premises for almost three years beyond the contractual expiry date of its lease. Because the lease had been "contracted out" of the Landlord and Tenant Act 1954, the tenant had no statutory right to remain in the premises beyond the contractual expiry date.
The question was, therefore, on what basis did the tenant occupy the premises when it stayed on? On the particular facts, the judge held that an implied annual periodic tenancy had arisen between the parties.
Under the common law rules relating to implied tenancies, a minimum of six months' notice must be given in order to terminate an annual tenancy, and such notice must expire on the date that is the end of the "period". Because of the way various dates fell in this case, the application of these common law rules meant that the tenant had to give notice of 13 months. This meant that the tenant was liable for 13 months' rent and service charge etc payments - amounting to some £185,000 - even though it had already moved out of the premises a few months earlier.
The tenant has appealed, and a date for the appeal has been set for early March 2014. We will report on the outcome in due course.
Break notice - a case mentioned in our September/October alert is, unsurprisingly, heading for the appeal court
The case of Siemens Hearing Instruments Ltd v Friends Life Ltd is due to be heard by the Court of Appeal in late March 2014. As you may recall from the piece in our September/October 2013 alert, the case centres on whether a tenant had served a valid break notice under its lease.
At first instance, the High Court acknowledged that the tenant's notice did not strictly comply with the requirements laid out in the lease for a valid notice: it failed to state something in the notice that the break clause specifically required. Based on case law to date, the tenant's notice would therefore have been invalid, and would not have succeeded in bringing the lease to an early end. However, the court went on to find that the tenant had in fact served an effective break notice, despite this.
The judge drew a distinction between a pre-condition and a mere requirement. While acknowledging that a pre-condition must be satisfied to the letter, he noted that a requirement needed only "adequate compliance". Indeed, the judge went further, and considered requirements where "even non-compliance ... is not fatal. In all such cases, it is necessary to consider the words of [the relevant] ... contract, in the light of its subject matter, the background, the purpose of the requirement - if that is known or determined - and the actual or possible effect of non-compliance on the parties. We assume that ... the parties ... would have intended a sensible and ... commercial result".
As with all cases, the outcome is fact-specific. However, many commentators - including ourselves - felt that the tenant got something of a lucky break with this decision. It is therefore no surprise that the landlord has lodged an appeal. We will report on the Court of Appeal's judgment once it is issued.
Dilapidations - the tenant's appeal against the amount of damages it must pay to its landlord has been dismissed in the case of Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd
In our May 2013 Property Update, we looked at whether a tenant, who hands back out-of-date plant and machinery, has complied with its repairing obligations. The High Court, in the case of Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd held that, as long as the equipment is working, there is no obligation to replace, renew or upgrade a dated system to modern standards (unless the lease or legislation says otherwise).
Despite winning on that particular issue - and therefore not being liable to replace the outmoded air conditioning system - the tenant appealed.
The High Court judge had found the tenant, Tiger Aspect, liable to pay £1.4 million in damages to its landlord. The judge had undertaken a meticulous examination of the competing sets of evidence, presented by the parties' respective surveyors, and found the tenant to be in breach - in many respects - of its obligation to hand back the premises in a state consistent with the repair and decoration covenants imposed by the lease.
The judge looked in detail at both parties' suggested lists of works, and the sums involved, and he applied various valuation criteria to them. He also took section 18 of the Landlord and Tenant Act 1927 into account when considering whether the amount of damages claimed by the landlord should be limited by the caps set out in that section:
- Damages, for breach by the tenant of his covenant to put or leave premises in repair at the termination of the lease, cannot exceed the amount (if any) by which the value of the landlord's interest in the premises is reduced because of that breach; and
- No damages shall be payable by the tenant for any such breach if his landlord is going to make "such structural alterations" to the premises as would render valueless the repairs which the tenant would need to carry out in order to comply with his obligations in the first place.
It was the tenant's view that one of the valuation methodologies used on by the judge was incorrect, so it appealed on the ground that the judge's decision was incorrect as a result. The Court of Appeal has dismissed the tenant's appeal.
None of the law considered by the High Court was challenged, and the decision - as reported on in our earlier update - therefore stands.
CRAR - another set of regulations has been laid before Parliament, in anticipation of the new commercial rent arrears recovery procedure coming into force on 6 April 2014
- In England and Wales, the process of seizing goods, and selling them to satisfy debts, is being modernised. The procedures which enforcement agents (who replace bailiffs) will have to follow are going to be much more heavily prescribed.
- The fees and disbursements which enforcement agents will be able to recover from debtors have been set out in this latest set of regulations.
- These regulations will apply in debt situations involving the recovery of arrears of rent on commercial property, just as they will to any other type of debt.
Our alert of July/August 2013 contained an article about The Taking Control of Goods Regulations 2013. In that, we looked at some of the background to the forthcoming introduction of the commercial rent arrears recovery (CRAR) procedure, and some of the issues raised by those 2013 regulations.
At the time of writing that piece, some of the detail in relation to the modernisation of the bailiff system was still missing. Even as at today's date, we have still not seen what the government proposes by way of the training and certification requirements which individuals will have to satisfy before they can act as enforcements agents (as they are to be called). The legislative framework for this is expected soon.
In the meantime, The Taking Control of Goods (Fees) Regulations 2014 (the Fees Regulations) have been issued. They deal with what had been the other outstanding issue: the fees which enforcement agents will be able to charge for their services, and the types of expenses which they will be able to recover.
The Fees Regulations will apply whenever an enforcement agent uses the statutory procedure for taking control of a debtor's goods in order to sell them to enforce the payment of a debt. As of 6 April 2014, this procedure will replace the current common law remedy of distress. For tenants of commercial premises, the landlord will be able to instruct an enforcement agent to take control of goods without having to first get a court order permitting the same. A court order will be necessary for all other types of debt.
The debtor - in our scenario, the tenant of commercial premises - will have to pay the enforcement agent's fees and disbursements in addition to the principal debt (regulation 4). As mentioned in the July/August 2013 piece, the debt to a landlord of commercial premises will be able to include only the unpaid rent "proper", together with VAT and interest on that rent. Other sums are not recoverable under CRAR, even if reserved as rent in the lease.
If the tenant's goods are taken away by the enforcement agent and sold, or if they are made subject to a controlled goods agreement (a CGA, which replaces the current walking possession agreement) and sold, then the fees and disbursements will be deductible from the proceeds of sale.
The Fees Regulations divide the enforcement process into three "stages" (regulation 5). The agent's fees are recoverable by reference to these three stages, meaning it is necessary to work out into which stage any item of work falls:
- The compliance stage - covering the steps which an enforcement agent takes from the moment he receives his written instructions from the landlord down to, but not including, the start of the enforcement stage.
- The enforcement stage is further sub-divided, depending on whether the debtor and the enforcement agent enter into a CGA over the tenant's goods or not:
- If they do, and the tenant complies with the terms of the CGA, the enforcement stage starts with the agent's first attendance at the premises, and runs until the CGA is completed.
- If they do, but the tenant breaches the terms of the CGA, the enforcement agent has to take further enforcement steps. The enforcement stage therefore starts with the agent's first attendance at the premises but it runs down to the sale or disposal stage, and includes any extra action which the agent has to take as a result of the tenant's breach.
- If the agent and the tenant do not enter into a CGA, the enforcement stage starts with the agent's first attendance at the premises, and runs until the sale or disposal stage.
- The sale or disposal stage - this starts with the enforcement agent's later attendance at the property, in order to remove the tenant's goods so that they can be sold, and runs down to the sale of those goods, together with all of the administrative (and other) steps which must be taken by the agent following that sale.
In a schedule annexed to the back of the Fees Regulations, a series of fixed fees are prescribed for each stage of the enforcement process. In terms of the amounts recoverable, the Fees Regulations draw a distinction between an enforcement agent who acts under a power arising out of a High Court writ, and an agent who acts under a power of enforcement which has arisen other than under a High Court writ. The exercise of CRAR in relation to commercial premises will fall under the latter, unless (unusually) the landlord had, in fact, first sought an order of the court.
Under CRAR, therefore, the fixed fees are £75 for the compliance stage, £235 for the enforcement stage, and £110 for the sale or disposal stage. The fees recoverable from the debtor by the enforcement agent are higher where enforcement action is taken under a High Court writ.
If the value of the sum to be recovered exceeds £1,500 (which it generally will do in a CRAR scenario), regulation 7 provides for a further fee to be payable, calculated on a percentage basis. However, this additional percentage fee is recoverable only in relation to the enforcement and sale/disposal stages of the process: presently, the percentage is set at zero for the first stage - compliance.
For the two later stages, the additional percentage fee is calculated by multiplying the amount of the sum to be recovered which exceeds £1,500 by 7.5%. This percentage fee is recoverable in addition to the fixed fee(s) payable by the debtor.
The Fees Regulations also lay out which disbursements are recoverable from the tenant debtor (regulations 8 to 10). These include the cost of storing the tenant's goods if they are removed from the premises, the auctioneer's fee for the sale of the tenant's goods, or the locksmith's fee for entering the premises and leaving them secure after the enforcement agent's attendance. The agent can ask the court's permission to incur or recover other disbursements in exceptional circumstances, for example the cost of insuring a valuable or rare item while it is out of the debtor's control.
The Fees Regulations require an enforcement agent to minimise fees and disbursements where more than one enforcement action is underway between the same landlord and tenant at the same time (regulation 11). They also require additional steps to be taken in relation to a debtor who is a "vulnerable person" (regulation 12) although there is no definition of this phrase, either in the Fees Regulations or in the Tribunals, Courts and Enforcement Act 2007 under which this new regime is being introduced. We believe this to be an intentional omission, allowing enforcement agents to exercise a discretion which will be part and parcel of their training. An enforcement agent will have to offer vulnerable debtors the opportunity to seek advice and assistance.
The Fees Regulations deal with various other issues: the order in which the money realised from the sale of the tenant's goods is to be applied; how to deal with a co-owner's interest in some or all of the tenant's goods; what happens if the proceeds of sale are insufficient to meet all of the costs and disbursements, as well as the debt; the provision of information to the debtor at the various stages of the enforcement process; and whether the fees are recoverable if an enforcement power ceases to be exercisable in various situations.
The question of VAT on fees is apparently to be dealt with in a separate guidance note, to be issued by HM Revenue & Customs.
Things to consider
Fees and expenses, incurred in relation to the enforcement process, will be recoverable only in accordance with the Fees Regulations. It is not yet known whether landlords will end up meeting any costs and disbursements which are irrecoverable from debtors, or whether the Fees Regulations mean that any costs or expenses over and above the prescribed amounts are simply not to be paid to an enforcement agent at all. Either way, agents and landlords should familiarise themselves with the requirements of the Fees Regulations.
A forthcoming alert will include a further update on CRAR, concentrating on the practical application of the rules and how they will affect landlords and tenants on a day to day basis.
As an aside, it seems that the Fees Regulations will apply to all types of debt owed to the public sector. For example, council tax arrears or uniform business rates; even unpaid parking tickets issued by a local authority. Any separate fee (and administration) structures for these will be repealed, so that the Fees Regulations can take effect as of 6 April 2014. And, of course, these regulations will apply to costs incurred, and the recovery of debts, in the enforcement of court judgments.
The above analyses were written by Cassandra Cartwright, associate in Wragge & Co's Real Estate group.
High Speed 2 - two of the latest pieces of news in relation to the HS2 project
We reported in our November/December Property update that the High Speed Rail (London - West Midlands) Bill received its first reading in the House of Commons on 25 November 2013. The bill, once enacted, will give consent for the first phase of the new high speed rail project, including the powers to construct and operate the line from London Euston to Birmingham Curzon Street, with stations in West London and at Birmingham Airport.
It is expected that the second reading of the bill in the House of Commons will take place in April 2014. Between then and now, the government is consulting on the environmental statement, which seeks to assess the likely significant effects of the construction and operation of the railway line on the environment. The original deadline of 24 January 2014 for lodging a response to the consultation has been extended to 27 February 2014 due to procedural issues.
Once the consultation period has finished, a summary report of the comments made on the environmental statement will be prepared, which will inform the second reading. At the second reading, the principle of high speed rail will be debated.
The next stage after the second reading will be the formal petitioning process, during which those specially and directly affected by the bill can make representations in relation to it, with the aim of securing changes to the detail of the bill, and/or to securing parliamentary undertakings. The bill will then continue through the remainder of the parliamentary process.
Separately, on 22 January 2014, the Supreme Court unanimously dismissed the appeal brought by objectors against the government's decision to proceed with HS2. The appellants sought to argue that the government had failed to carry out a strategic environmental assessment - as required under the Strategic Environmental Assessment Directive - before deciding to proceed with HS2.
They also argued that the hybrid bill process would not comply with the procedural requirements of European law in relation to environmental impact assessment. All seven Supreme Court judges rejected those arguments, agreeing with the decisions of the High Court and the Court of Appeal. The Supreme Court's ruling marks the end of a legal challenge spanning over 18 months.
Two cases involving an out of date Local Plan, a revoked Regional Spatial Strategy and the National Planning Policy Framework
The Court of Appeal heard the case of City and District Council of St Albans v R (on the application of Hunston Properties Ltd) and Secretary of State for Communities and Local Government  EWCA Civ 1610 in December.
The case turned on two points contained in paragraph 47 of the National Planning Policy Framework (NPPF). The NPPF advises local authorities to "boost significantly the supply of housing" by making sure the local plan meets housing need in their area including - where consistent with other policies in the NPPF - the identification of key sites critical to the delivery of housing strategy. Local authorities should also update annually their "supply" of specific deliverable sites, in order to provide five years' worth of housing (plus a buffer of five per cent).
Hunston had applied for outline planning permission in relation to a proposed residential development on some agricultural land near St Albans, in Hertfordshire. Permission was refused by the council, principally on the basis that the site was in the Metropolitan Green Belt. Hunston appealed, but the inspector dismissed the appeal. Hunston then challenged that dismissal, and succeeded: the Administrative Court upheld Hunston's appeal and quashed the refusal of permission. The council challenged the decision of the Administrative Court.
St Albans is almost entirely surrounded by green belt; there is very little undeveloped land which could be identified as a key site in the terms of the NPPF. In addition, there is a "policy vacuum in terms of the housing delivery target" - partly because there is no up to date local plan, but also because the Regional Spatial Plan for the East of England (the East of England Plan) has been revoked.
The inspector at the planning appeal found herself in a difficult position. She was faced with a green belt site, where "very special circumstances" are required by the NPPF to justify inappropriate development. Decision-makers in these circumstances have to determine whether those "very special circumstances" outweigh the contribution which the site makes for green belt purposes. The ultimate decision will turn on a number of factors, including the shortfall in the housing supply, the scale of that shortfall, and also the context of the shortfall (including issues such as planning constraints on development).
When reaching her decision, the inspector had no housing targets on which to form her view of the "very special circumstances". The inspector heard the council's evidence on housing need, which took into account the restraints on available sites for development. That figure was 360 units per annum - as set out in the revoked East of England Plan.
The Court of Appeal found that the inspector had erred in using a quantified figure, which departed from para 47 of the NPPF, for the council's five year housing requirement. The Court of Appeal held that, in the absence of a current Local Plan, the inspector should have found that there was a shortfall in housing land supply.
Further, the Court of Appeal found that there may be nothing special (let alone "very special") about a shortfall in a district with very little undeveloped land outside the green belt. That would be a matter of planning judgment for the decision-maker. But, quite aside of this issue, there was an error in the inspector's decision, which would therefore be quashed. The council's appeal was dismissed.
Hunston approached the case on the basis that, if an authority failed to get a new Local Plan in place which was compliant with the NPPF, then it would only have itself to blame if the objectively assessed housing need figures showed a shortfall, and led to permission being granted on protected land. However, the Court of Appeal had little sympathy with that approach.
It said that, instead, planning decisions are to be made in the public interest and are not to be used as a sanction on local councils. The court added that it is the community which may suffer from a bad decision, not just the council.
Another NPPF case
In R (on the application of Sienkiewicz) v South Somerset District Council and Probiotics International Ltd  EWHC 4090, Ms Sienkiewicz (S) challenged the grant of planning permission to Probiotics International Limited (P) on various grounds, including that:
- The authority had failed to recognise the primacy of the development plan, and had assumed that the NPPF superseded it;
- The authority should have required an environmental impact assessment; and
- A particular condition imposed in the planning permission was invalid.
The site was a former nursery, and the application was for a building to be used for B1 (office), B2 (light industrial) and B8 (storage) purposes. Part of the former nursery was allocated for employment uses, and P already occupied a building there, producing animal and human health care products. P wanted to expand by erecting a new building on part of the site not allocated for employment uses.
The development plan contained policies which prevented large scale business expansion in rural areas. However, the NPPF stated that policies should promote and support economic growth in rural areas.
The High Court held that the NPPF could not change or replace the development plan. However, it also held that the NPPF was a "material consideration" which might provide a reason why permission should be granted despite prevailing development plan policies. This would be especially the case where the plan policies are long in the tooth.
The court also found that the authority's position on the environmental impact assessment was sound. As to the third point, however, it held that the condition imposed - requiring the proposed building to be constructed only by P (or any successor company to it, and not to the site) - was sufficiently irrational that the permission was quashed.