Commercial Property Titles ~ Autumn 2006


Case Shows Value of Making Arguments Early
A recent case involving a landlord and a tenant highlights the importance of making sure that possibly contentious points are not agreed by default in negotiations concerning other matters.
The landlord had sought possession of the property occupied by the tenant because of arrears of rent. That action was settled on the basis of a compromise agreement in which an order was made that the tenant was a statutory tenant and would resume its tenancy when the landlord had made certain repairs to the property. The issue of the nature of the tenancy (statutory or non-statutory) was not raised in the original proceedings. However, in the wording of the compromise agreement it was stated that the tenancy was a statutory tenancy and this was not disputed at that time.
A year later, the landlord again sought a possession order on the basis of rent arrears. The judge in the second possession proceedings agreed that had the issue of the nature of the tenancy been raised at the original hearing, he would have denied the tenant the protection that a statutory tenancy gives. However, the issue was not raised then and it would be an abuse of process for it to be raised in subsequent proceedings. The Court of Appeal agreed.
The key issue here is that the point about the nature of the tenancy should have been dealt with at the first hearing. Since it was accepted by the landlord at that time that the tenancy was a statutory tenancy, that point could not be reopened. This case makes it clear that it is important to make one's arguments early in proceedings, or the right to make them later may be lost.
Case Spells Rent Review Danger
It is common for rent review negotiations to drag on for some considerable time and it has been normal for any increase in rent payable by a tenant, for the period between the review date and the agreement of the new rent, to be recoverable without any particular problems. Usually, the lease provides that an uplift in rent becomes payable from the review date and it is paid (usually with interest at a stipulated rate) with the next rent payment following agreement. If the lease is assigned to a new tenant who cannot pay the additional sum, a ‘Section 17’ notice is served by the landlord on the old tenant specifying the sums due and payable and the old tenant is then responsible for the shortfall.
Recently, this procedure was tested in court with surprising results. The case involved a tenant who occupied the landlord’s premises for a period of time after the rent review date and assigned the lease to a new tenant before the revised rent had been agreed. The new tenant failed to pay the balance of the rent due. Under the lease terms this allowed the landlord to pursue the old tenant for payment of the unpaid sum. The landlord duly served a S17 notice.
The Court ruled that the S17 notice must be served within six months of the normal rent review date to be valid, even when the new level of rent is not known. Since the notice was not served at the proper time, the arrears were not recoverable.
In practical terms this means that landlords who have tenants who are seeking to assign a lease whilst a rent review is ongoing should consider refusing to agree to the assignment of the lease until the new rent is agreed.
The implication for landlords may be that it is now reasonable for them to withhold their consent to the assignment of a lease where the rent review is still to be settled, as otherwise they run the risk of failing to obtain their rent increase altogether. Otherwise, landlords should consider serving a notice on the former tenant on every date rent is payable until the new rent is agreed.
For advice on negotiating any landlord and tenant matter, contact <<CONTACT DETAILS>>.  
Court of Appeal Agrees Floors are Structures
The responsibility of a landlord under a normal short lease includes the upkeep of the fabric of the building that is let. Sometimes, there can be debate as to whether a particular feature of a building which has fallen into disrepair is part of the fabric of the building, and thus the responsibility of the landlord, or not, and therefore the responsibility of the tenant.
In a recent case, this question arose. The tenant of a maisonette suffered a cracked floor due to deflection of the joists supporting the floor. The landlord maintained that this was the tenant’s problem, its responsibility being limited to the parts of the building which were under its ownership and control. The tenant relied on a covenant which bound the landlord to maintain the ‘main structures’ in good repair, arguing that flooring joists are part of the main structure of a building.
In court, the judge accepted the tenant’s submissions and this finding was upheld in the Court of Appeal. To accept the landlord’s submission would have meant the insertion of words of qualification into the lease which were not there and such qualifications could not be inserted unless obvious or necessary.
Says <<CONTACT DETAILS>>,“Where repairing clauses are intended to operate with exclusions, these should be carefully drafted, so that there is minimal room for debate as to what is and what is not included.”
Government Advises Local Authorities to Ensure Planning Aids Development
Recent guidance from the Department for Communities and Local Government (previously the Office of the Deputy Prime Minister) encourages local authorities to ensure that planning obligations are used to improve infrastructure and to support affordable housing where possible.
The guidance recommends that authorities start negotiations with developers early in the planning process (before a planning application is made) and use standard agreements where possible. Also, the authority should consider monitoring the development, to ensure that planning obligations are met, and should involve independent experts where appropriate.
The principal aim behind the guidance is to streamline the planning process and make it more compliant with the timetable applicable to planning applications. As part of this process it is recommended that contribution calculations should be made open and transparent.
Is My Farmhouse a Farmhouse?
Inheritance Tax (IHT) has many reliefs and, for their owners, the availability of IHT ‘Agricultural Property Relief’ (APR) for farmhouses is quite a bonus.
It is commonly assumed that this relief (which is given at 100 per cent or 50 per cent of the agricultural value, depending on circumstances) exempts a farmhouse completely, but this may not be the case. APR is restricted to the value the property would have were it to have an ‘agricultural tie’, whereby the property must be occupied by a person connected with an agricultural enterprise. Where no such tie exists, the market value of the farmhouse will almost certainly be much higher than the agricultural value. Traditionally, the agricultural value has been taken to be 2/3rds of the open market value, but HM Revenue and Customs (HMRC) are now taking a harder line in some cases.
There are other problems with farmhouses and APR. A farmhouse will only qualify for APR if it is ‘of a character appropriate’ to the farmland with which it is associated. In the words of the court, it must be ‘proportionate in size and nature to the requirements of the farming activities conducted on the agricultural land…in question’. This could mean a large farmhouse with a small landholding would be regarded as inappropriate and thus not qualifying for APR. HMRC have brought a number of cases over the years challenging claims for APR where the property was either valuable or large (or both) in relation to the farming enterprise.
In one case, a farmhouse was caught because the elderly parents who owned it gave most of their landholding to their daughter and remained in the house. The Special Commissioner held that APR no longer applied as the house was no longer a farmhouse but a ‘retirement home’, even though it was still used for various agricultural activities.
“One of the main elements in IHT planning where there are business assets is to make sure that the various traps in the legislation are avoided,” says <<CONTACT DETAILS>>and the best way to ensure this is done is to plan ahead.”
Late Payment and Material Breach
Recent guidance has been given by the High Court on what constitutes a ‘material breach’ of a contract and the circumstances necessary for late payment to be regarded as serious enough to justify the termination of a contract.
The dispute arose between two companies, one of which (Dalkia) was contracted to build a combined heat and power plant for a paper mill belonging to the other (Celltech). It was agreed that Celltech would pay 174 monthly instalments under the contract and that in the event of non-payment, Dalkia would be entitled to £3m for the termination of the contract. Celltech failed to pay the last three instalments because of financial problems. Dalkia regarded this as a termination of the contract and went to court to obtain the £3m.
In assessing the claim, the High Court considered that the following were of significance in deciding if a breach of contract was material:
·        the impact of the breach on the innocent party compared with the position it would be in had the contract been fully performed;
·        whether the breach was intentional and not due to a misunderstanding or administrative error;
·        whether the amount involved was neither minimal nor trivial; and
·        the circumstances in which the breach occurred.
In the Court’s view, the circumstances were such that Dalkia could terminate the contract on the grounds of material breach and was thus entitled to the £3m. In this case, Dalkia could have terminated the contract on the grounds of ‘repudiation’ by Celltech, but since the contract was specific as to the circumstances under which the £3m would be payable, it could not have sought the whole sum had that course been chosen. The Court also confirmed that where the innocent victim of breach of contract has a choice of approaches, it is entitled to choose the most advantageous one to pursue.
Says <<CONTACT DETAILS>>, “Dalkia’s success here was due to the care with which it dealt with the termination of the contract. Had it got that wrong, it would not have been entitled to the £3m. We can help you to negotiate your way in (or out) of contracts to your best advantage.”
Lessons for Users of Letters of Intent
It is common for construction projects to be commenced before contracts have been formally agreed and signed. Often, the commercial imperatives are such that to delay commencement until all the details are finalised is commercially unviable.
Proceeding on the basis of letters of intent carries significant risks for all parties and a recent case offers lessons in the steps that can be taken to reduce these risks.
The case involved a firm of architects which had been engaged to act as architects for and supervisors of the restoration of a listed building. Letters of intent were exchanged between the owners of the building and the architects and work commenced on the restoration without a formal contract being agreed. Later, when the architects issued a bill for their services, no money was forthcoming. They therefore stopped work and sued for their fees. Their client counterclaimed, making various allegations of negligence.
Two of the more interesting allegations of negligence were: firstly, that the use of the JCT Minor Works form of contract was inappropriate where (as in this case) the cost of the works was expected to exceed £100,000; and secondly, that the architects’ failure to obtain more than three tenders for the work was not adequate.
In respect of the first allegation, the judge decided that the choice of contract form was to be guided by personal preference and past experience, so the use of the JCT Minor Works form was appropriate. The judge also considered that the receipt of three tenders (five applications to tender had been sent) was sufficient.
All of the allegations of negligence against the architects were dismissed. The judge, in his ruling, did offer guidance as to when the use of letters of intent would be most suitable, although care was taken to stress that there are always risks attendant to their use and that the purpose of such letters is to minimise such risks.
In general, letters of intent are most suitable for use when the following are agreed or there is little chance of dispute regarding them:
  • the scope of the works;
  • the price of the works;
  • the date of completion of the works and any ‘milestones’ prior to final completion; and
  • the main contract terms.
The use of letters of intent is also most appropriate when there are good reasons to commence the works prior to the formal contract documents being in place.
Says <<CONTACT DETAILS>>,“Poorly drafted letters of intent are fraught with danger. We can help you ensure that your letters of intent are tightly drafted and that contractual negotiations are conducted with speed and care.”
Listed Buildings Targeted for Enforcement
One of the final acts of the Office of the Deputy Prime Minister, before it became theDepartment for Communities and Local Government, was to issue a guidance document for local authorities on how successfully to pursue prosecutions for unauthorised building works to listed buildings, the aim being to improve the level of enforcement of the planning laws that relate to listed buildings.
The guidance follows an earlier review in which it was concluded that the system as presently operated is an ineffective deterrent to planning breaches in such cases.
Failure to apply for listed building consent or to comply with conditions attaching to a listed building consent are criminal offences, for which the maximum penalty is imprisonment for two years. Being a criminal offence, there is no time limit for the bringing of a prosecution. Furthermore, a subsequent purchaser of a property can be required to remedy any breaches of planning permission by a previous owner.
Listed building consents can specify not only the physical appearance of the building, such as locations of openings, but also the materials which are to be used for the works.
Offences are often only discovered when a planning application is made for new works – at which point the local authority inspector may well notice that earlier works do not comply with the previous conditions, which should be noted on the file. When that occurs, the new owner will be required to rectify any planning breaches unless retrospective listed building consent is obtained.
Says <<CONTACT DETAILS>>, “Planning breaches with regard to listed buildings can have serious consequences and can affect the value of a property considerably. If you are considering buying a listed building or one situated in a conservation area, it is worth taking steps to make sure you do not suffer as a result of breaches of planning regulations by a previous owner.”
Mixed Dwelling Restricts Repossession Terms
Landlords who let out properties to tenants for mixed use (commercial and residential) have been dealt a blow by the Court of Appeal. One of the remedies which landlords have in cases in which a commercial tenant does not pay the rent due is to enforce forfeiture of the lease and to take possession of the premises by peaceable re-entry. This method is not available to residential landlords, who must obtain a court order due to the provisions of the Protection from Eviction Act 1977 which apply to property ‘let as a dwelling’.
Recently, a landlord sought to take possession of a shop and flat which were occupied by a tenant who was in arrears with his rent. The tenant lived in the flat above the shop. The landlord argued that he could enforce forfeiture because the premises were not let as a dwelling because of the mixed use.
The tenant claimed that Article 8 of the European Convention on Human Rights, which guarantees respect for the home, required that the interpretation of the relevant law should mean that the definition of ‘let as a dwelling’ should include a mixed use property in order to be compatible with rights guaranteed under the Convention.
The Court of Appeal agreed with the tenant. Landlords with mixed use properties might consider splitting leases so that in the event of non-payment of rent, the commercial premises can be recovered by forfeiture by peaceable re-entry.
New Fire Safety Regulations – A Reminder
Landlords are reminded that new fire safety regulations came into force on 1 October 2006. These apply to all non-domestic premises.
The Regulatory Reform (Fire Safety) Order 2005 introduces a new regime for fire safety which has done away with the old system of fire certificates and given full responsibility to the person responsible for the premises. This person will be required to assess the risks of fire and take steps to reduce or remove them.
Guidance can be found on the website of The Department for Communities and Local Government at
Landlords who have not already done so should act immediately to carry out the necessary fire risk assessments and to make sure preventive and protective measures are taken to minimise all foreseeable risks identified.
Phone Masts – Planning Considerations
The number of phone masts in the UK is currently 47,000 and is expected to reach 50,000 by the end of 2007, according to the Mobile Operators Association. Such an extraordinary rate of growth has been facilitated by a planning regime for mobile phone masts which is predicated on the belief that everyone should have access to a mobile phone service, no matter where they are.
To that end there are a number of planning exemptions which apply for mobile phone masts. For example, a mast of less than 15m in height does not usually require full planning permission. The operator must merely lodge a notice with the relevant planning authority, which then has eight weeks to consider whether the application needs prior approval and, if it does, to approve or refuse the application. Furthermore, mobile phone operators have the power to carry out street works without a specific licence and even to go to court to get permission to carry out works on a land owner’s property if they cannot reach an agreement with the land owner.
If a mobile phone operator wishes to carry out works (i.e. the construction of a new mast) on someone else’s land, it will send the land owner a notice. Normally, the matter will be resolved by negotiation. However, there may be circumstances (for example, where land is held for future development and the presence of a mast will impair the value of the land) in which the land owner will not wish to agree to the siting of the mast. In such circumstances, it is open to the mobile phone operator to go to court to obtain the necessary permission. Unless land owners can show that they will suffer harm or inconvenience which cannot adequately be compensated for by the mobile phone operator, the court is likely to grant the permission.
We can assist land owners and others in negotiations with mobile phone operators regarding proposed masts and can advise on planning issues generally.
Planning Gain Supplement – Possible Pitfalls
Although considerable changes are expected between now and them becoming law, the Government’s Planning Gain Supplement (PGS) proposals are already creating a need to think ahead.
For example, it is proposed that PGS will be payable when a development commences. The charge will be triggered by the service of a ‘Development Start Notice’ on the local planning authority or HM Revenue and Customs. Payment will then have to be made by the now usual means of a self-assessment return.
PGS is intended to be based on the difference in value of the land with and without planning permission. Clearly, the differences in these values could be substantial.
This raises two points. Firstly, the tax on the gain may be considerable (currently it seems likely that the tax will be at the rate of 20 per cent of the increase in value) and this will have to be financed near the beginning of the project of development. Secondly, the gain is self-assessed and backed by the usual penalties and interest charges if the tax paid is insufficient. The ‘with’ and ‘without’ planning permission values are likely to be the matter of some dispute. Is the developer to ‘play it safe’ by paying more tax than may ultimately be due, or will a payment on account prejudice his negotiating position over valuations? On the other hand, if the developer pays PGS based on the anticipated valuations, is there a risk of penalties and interest being charged if the valuations ultimately agreed are different?
The whole position is further complicated where planning permissions and developments are staged. So far, this looks to be a very complicated area and one which has received scant thought.
It is hoped that there will be more information on PGS in the Chancellor’s forthcoming Autumn Statement, so watch this space!
Contact us for advice on all property development and taxation matters.
Property Brings Responsibility
It is not always appreciated by property owners that they owe a general duty of care to make sure that their property does not present a hazard to passers by. Trees in particular often cause problems as they can present a considerable hazard, especially if near a road.
Recently, the court considered the extent of landowners’ responsibility when a tree on their land fell into the road. The tree had a structural defect and was further weakened by a fungal condition. A motorcyclist ran into the fallen tree and was injured. He sued the landowners for compensation for his injuries and for the resultant loss of earnings.
The defence was based on the fact that the landowners, who owned a farm, had employed a forestry contractor to undertake inspections by driving by the property. The debate turned on whether the forestry contractor was well enough qualified and whether the tree had received a proper inspection. The claimant’s expert witness gave evidence that the structural defect was visible and, having been noted, should have led to a more detailed inspection. Had that been carried out, the fungal problem, which was not obvious, would have been discovered.
The court agreed with this analysis and found that the owners of the property should have used a better qualified forestry inspector. As a result, they were in breach of their duty of care to the claimant.
Owners of property which is adjacent to public places are reminded that they should make sure it is safe for passers by and visitors. This responsibility is one which must be exercised carefully and thought should be given to the appropriate level of expertise of any third parties contracted to give advice.
RICS Offers Service Charge Guidance
The Royal Institution of Chartered Surveyors has published a new code of practice for landlords and tenants, aimed at reducing the number of disputes between them over service charges. The code of practice, entitled ‘Service Charges in Commercial Property’, is scheduled to be introduced on 1 April 2007, so should be borne in mind for all leases which will be renewed on or after that date.
The code aims to make the basis of charging transparent and to allow maintenance costs to be dealt with on a ‘no-profit, no-loss’ basis. The 51-page document encourages the use of ‘sinking funds’ to provide for major capital expenditure, such as the replacement of heating plant in a building or of communal car parking on a trading estate. It makes the telling point that one of the main causes of disputes between the management of estates and their tenants is poor communication.
For more information, see
Secure Tenancy – Survivor Not a Successor
A recent case involving succession to a secure tenancy may have implications for local authorities and housing associations, especially those with properties housing elderly tenants.
The case involved the son of a couple who had held a secure tenancy for many years. Prior to the coming into force of the Housing Act 1980, the father died, leaving his wife as the sole tenant by virtue of survivorship. When the Housing Act 1980 was enacted, her tenancy became a secure tenancy and subsequently came under the 1985 Housing Act. The mother later died and the local authority served a notice to quit on the son, who had lived with the couple in the three-bedroom property. Its claim to possession was made on the basis that the son could not have succeeded to the tenancy because his mother had been a successor under the 1985 Act. Accordingly, argued the authority, the son had no right to succeed to the tenancy.
The case went as far as the Court of Appeal. The Court’s decision was that the mother had not become a successor to the tenancy because she had become a secure tenant only when the 1980 Act came into force. Accordingly, she could not have succeeded to a secure tenancy before then. As his mother was not a successor under the 1980 Act, the son was therefore the successor to the tenancy.
This decision will apply in situations in which a widow or widower whose spouse died before 1980 lives with one or more of their children, which, with an ageing population, can be expected to be a not uncommon occurrence.
Suspended Possession Clarified
Landlords and tenants who are the parties in suspended possession proceedings have had their rights clarified in a recent decision by the Court of Appeal.
The case involved an application by Bristol City Council for a possession order against a secured tenant under s.85 of the Housing Act 1985. A suspended possession order was made but the order was not to be enforced solong as the tenant satisfied specific conditions, namely the repayment of arrears of rent.  Although there were procedural arguments, the main arguments centred on the basis of the tenancy after a suspended possession order and the procedures necessary for the landlord to obtain possession in such circumstances.
The problem which arises is that, in the words of Lord Justice Brooke, “When a court decides that a local authority landlord has established that statutory grounds for making a possession order exist and that it is reasonable to make such an order, the standard form (known as N28) currently in use in the County Courts has the effect of terminating the tenant's secure tenancy on the date set out on the face of the order. If the court also directs that the possession order is not to be enforced so long as the tenant complies with requirements set out in the order, the tenant enjoys the status of a ‘tolerated trespasser’, and not of a secure tenant, so long as he remains in possession of the premises after the date for giving possession has passed.”
The change in the tenant’s status to that of ‘tolerated trespasser’ has undesirable consequences for both the landlord and the tenant. The landlord loses some rights in these circumstances – for example, the right to enforce the tenant’s covenants and to obtain rent increases using the statutory framework. The tenant who becomes a tolerated trespasser also faces difficulties. For example, he cannot enforce performance of the landlord’s covenants and the statutory right to succession to the tenancy in the event of his death is lost.
Another problem that this creates is that a landlord who obtains a possession order against a tolerated trespasser who is a former tenant does not necessarily get immediate possession. The Court has the power, if it chooses, to fix a later date for possession, thereby postponing the effect of the order, which can delay possession for up to six weeks.
In Court, the argument was advanced that the use of an order which did not set out on the face of the document the date from which the landlord was granted possession of the premises could not be valid. This argument was rejected. The Court ruled that there was no requirement to specify a date for possession, so the tenancy could continue indefinitely provided the tenant complied with the terms of the order.
A second argument was advanced to the effect that for possession to be obtained, the landlord must apply again to the Court to set a date for possession to be granted.
In the Court’s view, there was no reason why the standard form N28 needed to be used and by not using it, the adverse consequences it creates could be avoided. It suggested using a different form of agreement which would set out the basis of the terms agreed between the landlord and tenant with regard to the arrears, failure to comply with which would allow the landlord to obtain possession of the property, but compliance with which would preserve the tenant’s secure tenancy.
Under the revised procedure, where an order postponing the date for possession on conditions is made and the tenant defaults on the terms, the landlord should give the tenant 14 days’ notice of the intention to apply to fix a date for possession. If no response is forthcoming from the tenant, the landlord must apply to the Court, enclosing a copy of the letter to the tenant, and request that possession be granted without further notice being given. A copy of the rent account must also be forwarded to the court. If, on the other hand, the tenant adheres to the terms of the suspended possession order (e.g. by repaying arrears of rent), then the tenancy would continue so long as the conditions set out in the order continued to be satisfied.
In the case in point, the order for possession and arrears payable was confirmed but the case was remitted to the County Court to determine what, if any, terms of postponement of possession would be appropriate.
Contact us for advice on all landlord and tenant matters.
Vehicular Rights – the New Law
Following a victory for ‘drivers’ rights’ in the House of Lords last year, the Government has given consideration to the problems caused by off road driving generally and has introduced legislation designed to curb some of the perceived excesses.
The legislation provides:
·        for the establishment of ‘restricted byways’, which will consist of every road shown on the definitive map as a road used as a public path. It will be an offence to drive a mechanically-propelled vehicle (other then an electrically-assisted pedal cycle) on such roads. This change will prohibit driving over approximately 5,000 miles of roadway. The exception to this rule (in England) is that vehicular access is allowed for a person with an interest in the land or who is a visitor to it if the road was formerly used by them to obtain access to the land;
·        that new public rights of way for motor vehicles will not be able to be created unless either expressly provided for in legislation or by use of statutory powers; and
·        a great number of additional restrictions on vehicular rights outside London. These extinguish existing rights of vehicular access over land which is not shown to be a roadway or which is shown as a footpath, bridleway or restricted roadway. Where such a right is extinguished, the landowner may still have a private right of way in order to access the land.
The changes to the law should act as a curb on the activities of ‘off roaders’, although the effectiveness of the legislation will inevitably depend on the degree to which it is enforced.
Work After Contract Expiry – What’s the Rate?
It is very common, especially with building contracts, for work to be needed to be done by contractors after the expiry of the original contract. Recently, a case came to court in which a company that had obtained work under tender for Brunel University continued to carry out work for the University after the expiry of the original contract. The original work had been carried out under a standard JCT contract and the contractor had refused to sign a further contract although heads of agreement had been agreed which included a section outlining how work done was to be valued.
The two parties disputed the valuation basis outlined in the heads of agreement and the basis of payment for the work done subsequent to the original contract.
The court took the view that the heads of agreement were intended to create contractual relations and thus constituted a contract. It therefore decided that since the work was not materially different from that done under the preceding contract, the subsequent work should be valued by reference to the rates and prices contained in it and the payment terms should be on the same basis.
Says<<CONTACT DETAILS>>,“It is not uncommon for contractors to tender for work at low rates in the hope of picking up ‘extras’, which can be charged out more profitably. In such cases, it is important for both parties to take particular care over the terms of contract which will apply.”
Contact us if you would like advice on any commercial property matter.

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