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Commercial Property Titles ~ August 2021
- Break Clauses in Commercial Leases – What Does ‘Vacant Possession’ Mean?
- Charities and Business Rates Relief – Court of Appeal Clarifies the Law
- Court of Appeal Corrects ‘Absurd’ Drafting Error in Commercial Lease
- Court Upholds Planning Consent for Heliport Close to Fuel Storage Depots
- Restrictive Covenants and the Reasonable Use of Land – Guideline Ruling
Break Clauses in Commercial Leases – What Does ‘Vacant Possession’ Mean?
Commercial leases frequently stipulate that premises are to be handed back to the landlord ‘with vacant possession’ – but what exactly does that mean? The Court of Appeal pondered the issue in a case concerning an office block that was stripped back almost to the walls prior to the tenant’s departure.
Before it purported to exercise a break clause in the block’s 24-year lease, the tenant removed almost all fixtures and fittings, including ceiling tiles, window sills, pipework and floor finishes. Some of the features stripped out formed part of the original base-build of the premises and were either the landlord’s property or elements of the building itself.
After the landlord launched proceedings, a judge found that the break clause had not been validly exercised and that the lease therefore continued in force. The building having been left in a dysfunctional and unlettable state, the premises handed back by the tenant were considerably less than the premises defined in the lease. The stripped-out condition of the building posed a major impediment to the landlord’s use of the premises and the tenant could not, therefore, be said to have given up vacant possession.
In upholding the tenant’s appeal against that outcome, the Court found that the landlord’s interpretation of the break clause had implications that the parties were unlikely to have intended and that ran counter to business common sense. A situation would arise where the tenant would be able to validly terminate the lease if it handed back the premises in a dreadful state of repair, but not if a more than minimal number of ceiling tiles or other original features were missing, regardless of whether the deficiency was the tenant’s fault.
The landlord argued that, if the tenant’s interpretation were correct, it would have been able to exercise the break clause if it had demolished the building altogether, leaving a bare patch of earth. The Court, however, noted the improbability of such a scenario. The tenant had validly exercised the break clause in that it had, in accordance with the lease, handed the premises back to the landlord free of people, chattels and third-party interests.
After ruling that the lease had terminated on service of the break notice, the Court noted that the landlord was not left without a remedy. If it could establish that the tenant had, by stripping out the premises, breached repair or other covenants in the lease, it would be entitled to compensation.
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Partner Note
Capitol Park Leeds Plc and Another v Global Radio Services Ltd [2021] EWCA Civ 995
Charities and Business Rates Relief – Court of Appeal Clarifies the Law
Premises that are used by charities wholly or mainly for charitable purposes are to a large extent exempt from business rates. In an important ruling, the Court of Appeal considered whether that statutory test was met by a fitness and wellbeing centre where facilities were made available to paying members.
The centre was run by a charity that focused on the prevention and cure of illness and, to that end, operated a large portfolio of similar facilities, together with hospitals, medical centres and gyms. Those who paid membership fees of £852 a year, or £80 a month, enjoyed the use of almost all the charity’s fitness and wellbeing facilities nationwide. The charity’s turnover in 2017 was in excess of £900 million.
The charity launched proceedings after a local authority refused to grant it 80 per cent relief from non-domestic rates in respect of the centre. Following a hearing, a judge found that the premises were wholly or mainly used for charitable purposes, within the meaning of Section 43(6)(a) of the Local Government Finance Act 1988. On that basis, the council was ordered to extend the relief sought and to reimburse more than £900,000 in business rates previously paid by the charity.
Ruling on the council’s challenge to that outcome, the Court noted that the charity’s activities at the centre were, in terms of their character, indistinguishable from those of any commercial operator in the sector. Use of its facilities was largely confined to paying members and its offering to those without sufficient means to pay its membership fees was minimal. The element of public benefit, in the sense required to show that the centre was operated for charitable purposes, was absent.
Dismissing the appeal by a majority, however, the Court ruled that the charity was not required to show that the centre was being used for the public benefit in order to establish that such use was wholly or mainly for charitable purposes. The important question was whether the charity used the premises to further its overall charitable purposes, not whether the activity carried on at the centre would qualify as a charitable activity in its own right.
The public benefit requirement was to be applied to the purposes of the charity and not to its activities carried on at the individual centre. That requirement was met because the charity operated the premises for the purpose of getting in, raising or earning money that was used to indirectly support its charitable work. The Court acknowledged that the case had raised an important issue of principle on which there was, surprisingly, no previous legal authority.
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Partner Note
Nuffield Health v London Borough of Merton [2021] EWCA Civ 826
Court of Appeal Corrects ‘Absurd’ Drafting Error in Commercial Lease
Judges will generally interpret a commercial lease or any other legal document in accordance with its strict wording – but they are able to make an exception in the event of an obvious drafting error. The Court of Appeal did just that in relieving a tenant of the crushing consequences of an absurd rent review clause.
The case concerned a lease of 15 acres of land granted by a company to a tenant who used it as a solar farm. The lease was for a term of 25 years and 6 months and stipulated an initial rent of £15,000. It included a formula by which the rent payable was to be reviewed on an annual basis.
There was no dispute that the formula was clear and unambiguous on its face. On a literal reading, it meant that the rent would be recalculated annually by reference to a percentage reflecting the cumulative increases in the Retail Price Index (RPI) in all previous years since the start of the lease.
On the basis of average annual increases in the RPI over the preceding 20 years, the tenant estimated that application of the formula would result in its rent being increased to just over £76 million by year 25 of the term.
After the tenant launched proceedings, a judge corrected what he found to be a clear drafting error. He granted a declaration that the rent should increase with the RPI on a non-cumulative basis. If the RPI continued on its average trajectory, that would result in an annual rent of less than £30,000 at the end of the term.
Dismissing the company’s challenge to that outcome, the Court acknowledged that the RPI can, in the rare event of deflation, go down. It was, however, abundantly clear that the literal application of the formula would lead to an absurd, arbitrary and commercially nonsensical result. It was impossible to imagine that any rational landlord or tenant would have intended such a consequence. The Court noted that, although the error was obvious enough when pointed out, it was easy to believe that a draftsperson might not have noticed it at the time.
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Partner Note
Monsolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961
Court Upholds Planning Consent for Heliport Close to Fuel Storage Depots
Few human activities are entirely risk free but, when deciding whether to authorise potentially hazardous developments, planning professionals have to keep the worst-case scenario well in mind. In a case on point, the High Court opened the way for construction of a commercial heliport despite fears that its proximity to huge fuel storage depots would present a risk of catastrophe.
The heliport was proposed for a site in the docklands area of a major city. Within a few hundred metres of the site, two companies operate depots with a joint capacity of over 100 million litres of highly inflammable distilled fuel. Both depots are sites regulated under the Control of Major Accident Hazards (COMAH) Regulations 2015. They also take on petroleum products from ships that dock at a nearby wharf, which typically contain 12-13,000 tonnes of fuel.
In challenging the local authority’s decision to grant planning consent for the heliport, the companies argued that inadequate consideration had been given to the risk of a helicopter crash triggering a disaster of catastrophic proportions. The council, they asserted, had acted irrationally in abdicating responsibility for analysing the public dangers created by the proposed development.
Rejecting the companies’ arguments, however, the Court found that members of the council’s planning committee, and the planning officer who advised in favour of the heliport, had recognised that the risks posed to the COMAH sites were a principal issue in their consideration of the planning application.
In giving extensive consideration to that issue, the committee considered that the site’s current ad hoc and ancillary use as a private helipad and hangar was less safe than a commercial heliport, which would be under the regulatory control of the Civil Aviation Authority. Use of the facility would be restricted to high-performance helicopters, flown by professional pilots. Flight paths, which would be mainly over water, would be strictly controlled.
The Court acknowledged that the planning officer erred in stating to the committee that the risk of a catastrophic helicopter failure was one in 9 billion, rather than one in 1 billion. The risk was, however, correctly recorded in the officer’s written report. The report, and the debate before the committee, should not be subjected to hypercritical analysis and it was ultimately a matter of planning judgment whether the risks and mitigation measures were acceptable.
Partner Note
R on the Application of Valero Logistics UK Ltd and Another v Plymouth City Council [2021] EWHC 1792 (Admin)
Restrictive Covenants and the Reasonable Use of Land – Guideline Ruling
Privately agreed restrictions on the use of property sometimes do not sit easily with the wider public interest in making the most of land as a scarce resource. The latter interest prevailed in a case concerning residential development of part of a golf course.
On purchasing the course from a pension trust for £1.2 million in 2001, a family company signed up to restrictive covenants that were to last for 30 years. The covenants forbade, amongst other things, any form of residential development of the land without the vendor’s written consent.
Residential occupation of any part of the land, save by the course’s proprietors, persons employed on the course or their respective families, was also banned. The company was barred from selling any part of the land without taking steps to ensure that purchasers would continue to be bound by the covenants.
The company had subsequently built a ground keeper’s cottage on part of the course and two more houses were under construction. Those developments did not breach the covenants in that the houses were either unoccupied or lived in by a golf course employee. The company, however, wished to be at liberty to occupy and deal with the houses as it chose, free from the covenants. It applied to the First-tier Tribunal (FTT) for the covenants to be discharged insofar as they affected the part of the course where the development had taken place.
Ruling on the matter, the FTT noted that the vendor retained no land that could benefit from the covenants and made no bones about the fact that its interest in maintaining them in force was purely financial. It was content for the covenants to be discharged provided it received compensation in the form of a share of the land’s development value.
Granting the order sought by the company under Section 84 of the Law of Property Act 1925, the FTT found that the covenants impeded reasonable use of the land and secured no practical benefit of substantial value or advantage to the vendor. The loss of an opportunity to demand a price for consenting to development did not amount to an injury for the purposes of the Act.
The vendor pointed out that the company had only 10 more years to wait before the covenants would expire. The FTT found, however, that the short-term nature of the covenants, and the fact they had been agreed to by the company itself, rather than a predecessor in title, did not prevent them from being discharged. Arguments that the development was the thin end of the wedge, easing the way for further houses to be built on the course, also fell on fallow ground.
In ruling that the vendor was entitled to no compensation for the loss of its rights under the covenants, the FTT noted that the correct way for a vendor to obtain a negotiated share of development value is to impose an overage covenant. The developed land formed only a small part of the course and the imposition of the covenants had no effect on the price paid by the company in 2001.
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Partner Note
Father’s Field Developments Ltd v Namulas Pension Trustees Ltd [2021] UKUT 169 (LC)
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These articles are provided for general interest and information only. They do not constitute legal advice. Whilst every effort is made to ensure that the content accurately reflects the law in England as at the date of its transmission, no liability is accepted for any loss or damage arising from any act or omission resulting from any information contained herein.