Alteration to a Building – VAT Tribunal Takes Strict Approach
The VAT Act zero-rates supplies made ‘in the course of an approved alteration of a protected building’, which means work for which planning permission has been obtained under article 1 of the Planning (Listed Buildings and Conservation Areas) Act 1990. Zero-rating, however, does not apply to ‘any works of repair or maintenance, or any incidental alteration to the fabric of the building which results from the carrying out of repairs, or maintenance work.’
Recently, a company which owned a period (listed) hotel was faced with the need to demolish, as a matter of public safety, an ornate balcony. This was done as an emergency measure as the balcony was unsafe. Having done so, the company went to the council for planning permission to rebuild it. The planning permission was granted and the company rebuilt the balcony. The new balcony was similar, but not identical, to the one which had been demolished. In particular, it was supported from below, which the old, unsafe balcony had not been.
The company claimed that the work was zero-rated for VAT purposes. HM Revenue and Customs disagreed.
The London VAT Tribunal considered that while the rebuilding of the balcony was an alteration to the building for which planning consent was required, it was not a ‘change to the building as a whole which was so fundamental or radical as not to be capable of being repair or maintenance of the building’. The issue was not that the balcony was being rebuilt. It was accepted that the balcony was in effect a new structure, because the previous balcony had been demolished without planning permission being obtained first.
The presence of the new pillars supporting the balcony was also considered to ‘make a significant difference to the southern aspect of the building, but having regard to the building as a whole that difference could not be described as radical’. In the view of the Tribunal, the presence of any part of the work had to be viewed in terms of the whole – in this case the pillars were incidental to the replacement of the balcony.
The Tribunal concluded that the work done was by nature of repair or maintenance and thus did not qualify for zero-rating.
Says <<CONTACT DETAILS>>, “This case has particular implications for owners of listed buildings who commission work on them. It will especially affect people who cannot recover VAT. Unless the alteration affects the building as a whole, it seems that the expenditure will not qualify for zero-rating for VAT.”
Partner Note
Metropole (Folkstone) Ltd. v Revenue & Customs [2006] UKVAT V19917 (04 December 2006). See
Arbitrator’s Test – ‘Was this a Reasonable Conclusion?’
The owner of a property on a Dulwich estate was recently denied planning permission after the court found that permission had not been unreasonably withheld by the managers of the estate.
Mr Baptiste owned a house on the estate, which was managed under an approved management scheme under the Leasehold Reform Act 1967. He wished to put a loft conversion in his property and applied for permission to do so, but this was refused by the estate managers. The management agreement contained an arbitration clause in the event of a dispute arising, so Mr Baptiste appealed to the arbitrator.
The arbitrator agreed with his contention that the construction of the loft conversion would only cause a trivial prejudice to the interests of the estate as a whole and therefore ruled that permission for it should be granted.
The estate appealed that decision. It argued that its original decision had been reasonable. It would only have been unreasonable if it had been taken with the interests of the estate alone in mind, instead of balancing the interests of the estate with those of Mr Baptiste.
The arbitrator had concluded that the estate managers could reasonably have refused the planning application. However, the arbitrator had gone on to consider the relative disadvantages that the estate and Mr Baptiste would have suffered and had taken these into account when reaching his decision.
The court ruled that the arbitrator’s approach was not correct. The arbitrator’s function was to consider whether a reasonable person could have made the original decision. Once that had been established, that decision had to be upheld.
Partner Note
The Dulwich Estate v Baptiste [2007] All ER (D) 194.
The Dulwich Estate v Baptiste [2007] All ER (D) 194.
Beware Reliance on Pre-Contract Negotiations
“Understandings reached during pre-contract negotiations should be clearly written into the subsequent contracts,” says <<CONTACT DETAILS>>,as a case involving residential property developer Persimmon shows.
Persimmon had entered into a development contract with a company called Chartbrook, which later claimed the sum of £4.6m as an ‘additional residential payment’. Persimmon disagreed that that sum was due under the contract, accepting that £900,000 was payable but claiming that most of that sum had already been paid.
Persimmon based its arguments on the pre-contract negotiations it had undertaken with Chartbrook, arguing that the meaning of terms which appeared in the contract was agreed at that point. The nub of their argument was that the meaning of the terms in the contract was not the same as the meaning of the terms in the pre-contract agreements and that the pre-contract definitions of the terms should apply.
The High Court was unwilling to consider Persimmon’s evidence of the pre-contract negotiations. If contract terms were agreed beforehand, it would only be appropriate to construe the contract in accordance with them if they had not been defined in the contract. In this case, the terms in dispute were defined differently in the contract. Any other approach by the Court would leave the doors wide open for disputes.
One of the considerations of the Court was what effect allowing pre-contract negotiations to determine the meaning of contractual terms might have on third parties to the contract who might have the contract or part of it assigned to them. In the view of the Court, in such circumstances the third party would not know the precise meaning of any contractual terms subject to pre-contract agreement.
Partner Note
Chartbrook Ltd. v Persimmon Homes and others [2007] EWHC 409 (Ch). See
Buildings and Tax Allowances
With the recent announcement of a phased withdrawal of the Industrial Buildings Allowance and the reduction in allowances claimable with regard to ‘items integral to a building’, it may be thought that capital allowances on buildings are no longer significant. This is not the case, however, as the normal allowances available for plant and equipment may well be in point. These should be considered if commercial premises are being bought or constructed.
The availability of tax allowances, in the form of capital allowances, is not normally at the top of the list of priorities when considering purchasing a commercial property. However, not only can these be significant, but they can also be more readily claimable than you might think. These allowances operate to reduce the taxable profits of the business and can reduce its tax bill for several years.
Capital allowances are still claimable on the cost of any part of the building which can be considered to be ‘plant’. This can add up to a considerable sum, in spite of new restrictions on claims. The amount which is claimable depends not only on the value attributable to the items which can be classified as plant, but also on the amount which has been claimed by the previous owner. Only the balance between the cost and the value of any prior claim can be claimed for capital allowances. It is normally sensible, therefore, to ensure that a due diligence process is put in place with regard to the available capital allowances when considering any purchase that involves the acquisition of a building. The allocation of the purchase consideration between ‘fixtures and fittings’ and the land and buildings is not sufficient to justify a capital allowances claim on its own – such apportionments do not bind HM Revenue and Customs and the purchaser must be prepared to provide details of the property’s capital allowances history if required.
If you are considering buying a property for business purposes, make sure you give sufficient consideration to its tax history or you may pay more tax than is necessary.
Partner Note
See SJ, 2 Feb 2007, p150.
Chain of Causation – Knowledge Required
If there is a latent defect in the design of a building or other structure, it may be several years before this becomes evident. The law provides that when such a defect occurs due to negligence, the normal period of limitation for bringing an action runs from the time that the defect is discovered. However, the Limitation Act 1980 does impose a ‘long stop’ period of 15 years, after which a claim cannot be made regardless of when the latent damage came to the claimant’s knowledge.
Recently, architects who designed a building which proved to have an inadequate drainage system attempted to have the legal action against them thrown out on the basis that the claim was brought after the time limit for it had expired. The claim was brought after the building had flooded for the second time.
The claim arose when books stored in the building were damaged due to flooding because the rainwater drainage system designed by the architects could not cope with the volume of rainwater. Eight years earlier, there had been a previous flood in the building, but at that time it was occupied by another company. The loss adjusters acting for the insurers at that time had discovered that the rainwater drainage was inadequate, but they had not informed the company of that fact.
The architects argued that the first flood terminated their liability. It had, they argued, ‘broken the chain of causation’ because it was reasonable to assume that the first flood would lead to the discovery of the defect, so no further damage from that cause should then be reasonably foreseeable. In claims of this type, the claimant must show that the damage follows from an unbroken sequence of actions and consequences. The architects argued that their duty of care should not extend past the first flood and, in any event, any negligent act they had committed which caused the damage for which the claim was made occurred outside the normal limitation period.
The Court of Appeal found that the first flood was the event that resulted in the inspection of the drainage system, which in turn led to the discovery of its design inadequacies. However, the claimant in this case had no knowledge of the first flood and had no reason to carry out an inspection. The chain of causation was not therefore broken and the claim was made within the ‘long stop’ period during which a claim could be brought. Since the damage caused by the flooding was foreseeable, the architects were liable.
Partner Note
Pearson Education Ltd. v Charter Partnership Ltd. CA (Civ) 21 Feb 2007. Reported in the Gazette, 8 March 2007 p31.
Change of Use Does Not Mean Change of Law
Landlords will breathe a sigh of relief following a recent case which confirmed that when a tenant changes the nature of their use of the premises they occupy, the nature of their legal occupation does not normally change.
The tenant, Mr Sitkowski, had rented a building in 1970. He leased mixed premises and for some time he had used the ground floor for his business whilst he lived on the upper floor. By 1989 he had ceased to run the business but he continued to occupy the premises and carried on paying the rent. The landlord sold the property and in 2003 the new landlords served Mr Sitkowski with a notice to quit . Mr Sitkowski argued that his tenancy was covered by the Rent Act 1977 by virtue of the fact that for many years he had occupied the premises as a residential property only. The tenancy had become, he argued, a statutory tenancy.
Mr Sitkowski claimed that the previous landlord’s acceptance of rent for fourteen years when the property had no business use implied acquiescence to the change of use and therefore acceptance of the nature of the tenancy.
The Court of Appeal could not accept the proposition that a tenant could change the nature of his tenancy at will, simply by changing the use to which the let premises were put. It therefore rejected Mr Sitkowski’s contentions. Interestingly, however, the Court did leave open the possibility that an unspecified longer period of acceptance of rent by a landlord with knowledge of the breach of the lease terms might, in similar circumstances, be sufficient to demonstrate the implied consent of the landlord, in which case the nature of the tenancy might change.
Partner Note
Phaik Seang Tan and another v Julian Sitkowski [2007] EWCA (Civ) 30. See
Consumer Law Gives Protection in Standard Form Contracts
In many commercial situations, businesses are used to dealing with each other by the use of ‘standard form’ contracts. One of the common instances of the use of such contracts is in the building industry, where construction projects are often governed by standard JCT contracts.
In a recent case, a builder who entered into a standard JCT ‘minor works’ contract with a residential occupier sought to enforce the decision of the adjudicator that he should receive interim payments which had been withheld by the customer. The payments were withheld because of disputes about delays in the work and the quality of some of the workmanship. The withholding of the interim payments was not accompanied by the issuing of withholding notices, which are required under the JCT agreement. The adjudicator therefore ruled that the interim payments were due to be made, because the customer had not complied with the terms of the contract as regards the withholding of payments.
This decision was challenged, using EU consumer law, on the grounds that the contract entered into took away normal standard consumer rights and thereby created an imbalance of rights between the builder and his customer. To rely on the provisions of the contract, it would be necessary for the builder to have specifically drawn the attention of the customer to the relevant terms of the contract. Because this was not done, the court ruled thatthe stage payments were not payable.
Says <<CONTACT DETAILS>>, “Any business that relies on standard contracts and whose customers are private individuals must make sure that where the contract contains clauses limiting the usual consumer rights, these are brought to the customer’s attention and agreement to them is specifically evidenced. Failure to do so could result in the relevant clauses being considered to be void by the court.”
Partner Note
Domsalla (T/A Domsalla Building Services) v Dyason [2007] EWHC 1174 (TCC).
In Brief
Energy Performance Certificates
Builders and developers of commercial properties are reminded that theEnergy Performance of Buildings Directive will apply to commercial buildings from 6 April 2008. The Directive will require Energy Performance Certificates (EPCs) to be prepared for all buildings which are to be subject to sale or rent, if they have a floor area of more than 500 square metres.
New buildings will require an EPC before the certificate of completion will be issued. Where buildings are to be sold or let, the EPC must be made available to prospective purchasers or tenants.
Partner Note
Is the JCT Valid?
The House of Lords recently had to consider whether the contractual terms in the JCT standard building contract (1998) are compliant with the provisions of the Construction Act. It was the first case of its kind.
A company called Melville Dundas Ltd. was acting as a contractor to construction giant Wimpey and issued demands for stage payments in the normal way. After making one such demand (in relation to which Wimpey did not issue a withholding notice), Melville Dundas became insolvent and Wimpey terminated the contract and did not make the payment.
The relevant section of the JCT standard form agreement allows a developer to terminate a contract with a contractor in the event of the contractor’s insolvency and to withhold payments. In effect, it limits the developer’s liability to the contractor to the value of work done and is designed to protect the position of the developer should there be additional costs, with regard to the completion of the work, which would otherwise have to be claimed against the insolvent contractor.
Melville Dundas argued that the relevant section of the JCT agreement was invalid under the Construction Act because it took away its right to receive the payment despite a valid withholding notice not having been issued by Wimpey.
The Lords, in a 3-2 split decision, agreed with Wimpey’s contention that the payment was validly withheld.
Says <<CONTACT DETAILS>>, “In the normal run of events, once the date for issuing a withholding notice has passed, the stage payment will be due. Any matter arising after that date would normally be adjusted for in the next payment. If you are having difficulties with payments in a construction contract or fear that a contractor you are paying may be insolvent, contact us for advice.”
Partner Note
Melville Dundas Ltd. (in receivership) and others (Respondents) v George Wimpey UK Ltd. and others (Appellants) [2007] UKHL 18. See
Landlocked Land – Lords Confirm No Right of Access
The House of Lords has confirmed the 2006 decision of the Court of Appeal that when a piece of land is landlocked (i.e. has no right of access over adjoining land so cannot be lawfully accessed by its owner), there is no automatic right to have a right of way ‘of necessity’ over adjoining land.
The case involved land which was bounded to the East and to the West by private land. To the North and South it was bounded by a piece of land and a highway respectively. Both of the latter pieces of land had been sold to the predecessor of the local authority which now owned them. The landlocked land had been retained by the original owner and the conveyance of the adjoining land which was sold did not reserve any right of access over it.
When the landlocked land was subsequently sold, the company that bought it sought to obtain a ruling that it should be granted a right of way to its property over the land to the North, which would be necessary for the land to be developed. The local authority had previously indicated that planning permission for access to the highway would not be granted.
In the view of the Court of Appeal, at the time the land was sold there had been no common intention that there should be a right of access across the land to the North. Accordingly a right of way of necessity should not be granted. The Lords confirmed this decision.
“This case illustrates the importance of not making assumptions – especially over things as critical as access to land,” says <<CONTACT DETAILS>>. “You should always make sure that the essentials are in place before signing on the dotted line – relying on the courts to put things right after the event is a very risky strategy.”
Partner Note
Adealon International property Ltd v Merton London Borough Council [2007] EWCA Civ 362
Leases – New Code of Practice
A new code of practice for commercial leases has been released following a long consultation exercise involving landlords and other interested parties.
The code makes a number of changes to the substance and detail of current practice. These include:
· a simplified approach to the exercising of break clauses by tenants;
· sub-letting of the whole premises to be normally completed without the requirement for financial guarantees by the existing tenant;
· a more flexible approach to rent reviews, rather than just ‘upward only’ reviews;
· the requirement for landlords to provide best estimates of service charges; and
· the requirement that tenants’ repairing obligations should be appropriate considering the terms of the lease.
The Code for Leasing Business Premises in England and Wales 2007 can be found at
Management Time Claim Succeeds Despite No Contemporaneous Record
It has long been part of the received wisdom when dealing with claims for breach of contract that where a claim for the value of lost management time is being added to the sum claimed for loss of profit, there has to be evidence for the time spent (in the form of contemporaneous or near-contemporaneous time records) as well as of the value of that time.
Recently, however, the Technology and Construction Court accepted that a schedule of time spent by a company director in dealing with a construction defect was acceptable as evidence, in spite of the fact that the record was created retrospectively and not as the time was actually being spent.
The case involved a building with a defective foundation, which required the claimant to buy in services which caused loss of profit. The claim for the cost of the outsourced work was reduced to take account of the likely cost of doing that work in house.
The Court accepted the retrospective record but, considering such records to be less reliable than contemporaneous records, applied a 20 per cent reduction to the value of the claim for time lost.
It is always better to have a contemporaneous time record where such costs are being claimed, as well as a clear analysis of any loss of profit.
Partner Note
Bridge UK.Com Ltd. v Abbey Pynford [2007] EWHC 728 TCC.
Planning Inspector Must Give Reasons
A planning inspector who fails to give sufficient reasons for a decision risks having that decision overturned.
The Court of Appeal recently heard an appeal against a refusal to grant planning permission for a first-floor extension to a property in a conservation area.
The appeal was brought by a company which had its preliminary application for planning permission refused. The original planning inspector had reported that the proposed extension, with which he had no objection in principle, would be a discordant feature in the area and unduly dominant.
The company had subsequently prepared a revised, but quite similar, plan and submitted this to the local authority. A new inspector considered that the proposed extension would adversely affect the ambience of the street and would obscure the view of certain features of the area. He failed to explain why his opinion of the extension differed from that of the first inspector and so the company appealed against the decision, arguing that the inspector had not fulfilled his obligation to give reasons why his view was different. Since the two applications were similar, the first decision was material to the second decision and should be taken into account. The lower court held that it was sufficient that the second inspector did refuse permission. The company appealed.
The Court of Appeal took a different view. The second inspector had clearly disagreed with the view taken by the first inspector, but had failed to make clear the reasons why. By failing to comment on the original decision, it could not be demonstrated that the earlier report had been a material consideration in forming his opinion. His action had made it less likely that the company would be successful when it revised its plans, in the light of the earlier decision, and made a new application. Accordingly, the appeal was allowed.
Says <<CONTACT DETAILS>>, “When decisions regarding planning applications are made, if all material matters have not been given proper consideration, an appeal against the decision may be warranted. For advice on planning law, contact us.”
Partner Note
Dunster Properties Ltd. v First Secretary of State CA Civ 28 Feb 2007.
Possession Orders and ASBOs – Recent Developments
The Court of Appeal has confirmed that for a possession order to be granted, the standard of proof which is required is the civil standard (‘balance of probabilities’), not the criminal one (‘beyond a reasonable doubt’).
In the case in question, Brent London Borough Council sought a possession order against a tenant who was a classic ‘noisy neighbour’ who became loud and rowdy when drunk. It claimed he had breached an Anti-Social Behaviour Injunction (ASBI), which had resulted because of his behaviour towards one of his neighbours. The authority concurrently made an application to commit the tenant to prison (for contempt of court) for breaching the ASBI, which is a criminal matter.
There had been three breaches of the ASBI in the preceding 18 months. However, the man was on good terms with all his other neighbours. In the circumstances, the Court declined to grant the application for a repossession order, even though on the civil burden of proof his breach of the ASBI was demonstrated, and it considered that it could not in the circumstances entertain the application for an order to commit the man to prison.
Social housing providers now have the benefit of a substantial body of precedent which illustrates that the courts are taking a robust attitude to tenants who repeatedly breach ASBOs. Where breaches are few, however, the courts are less willing to enforce possession orders.
Partner Note
Brent London Borough Council v Doughan [2007] EWCA Civ 135.
Sheffield CC v Shaw [2007] EWCA Civ 42.
Professional Responsibility – the Boundaries May be Wider than You Think!
An engineer who failed to advise a firm he was contracted to was recently found by the court to be liable for the collapse of part of a building, even though his contract did not cover the work in question.
This surprising result came about when the engineer entered into a contract with regard to works being done on a building. Prior to his work being carried out, temporary works were put in hand, with another firm, which involved a deep excavation. The engineer visited the site several times. The temporary works were clearly inadequate and the result was that the collapse occurred. In the view of the court, whilst the primary responsibility for what happened was clearly that of the contractor who had carried out the excavation work, the engineer owed a duty of care to bring the problems to the notice of the property owner so that they could undertake emergency remedial works.
The reasoning was that it is the responsibility of a professional person acting in a professional capacity to bring to the attention of the responsible persons anything that they become aware of that represents a danger. In this instance, the engineer failed to appreciate that the excavations were inadequate and did not appreciate that they were dangerous, but the problem was so obvious that the court considered him to be to blame.
Says <<CONTACT DETAILS>>, “Where work is defective, but not dangerous, it is unlikely that the engineer’s brief could be stretched far enough to give rise to a liability, but this case is a reminder to professionals that where they become aware of a danger, the fact that their brief does not cover that particular matter may not relieve them of liability if something does go wrong.”
Partner Note
Hart Investments Ltd. v Fidler [2007] EWHC 1058 (TCC).
Rent Review Not Limited to Fixed Date
The House of Lords, reversing the decision of the Court of Appeal, has confirmed that a rent review need not be carried out on a fixed date.
The case arose because Riverside Housing Association Ltd. created a tenancy agreement which stipulated that the rent review for its tenants would take place at the beginning of June each year. It granted an assured tenancy to a Mr White which contained a clause stating that the rent could be increased subject to four weeks’ notice in writing and would be increased annually ‘from the first Monday of June each year’. This procedure was followed for several years until 2000, when the rent was not increased. In February 2001, Riverside informed their tenants that their rent would be increased from April 2001. For subsequent years, rent increase notices were served annually by Riverside in late January or early February.
Mr White went to court, claiming that these notices were invalid on the ground that they were issued long after the rent variation date. The Lords ruled that the increases were valid. Riverside had the right to increase rents annually, that right being stated specifically in the leases. Furthermore, the clause which specified that four weeks’ notice would be given did not specify a particular date by which the notice had to be given. It would be unjust, therefore, to deny Riverside the rent increase sought.
“In this instance the lease terms were not as tightly drafted as is normal in such situations, so similar cases are likely to be relatively uncommon,” says <<CONTACT DETAILS>>. “However, when setting up any agreement, it is sensible to consider carefully the wording of the clauses which cover the procedural aspects of the arrangement as well as the purely legal ones.”
Partner Note
Riverside Housing Association Ltd. v White and another [2007] UKHL 20.
Secure Tenancy – House of Lords Confirms Judgment
The House of Lords has confirmed a recent decision of the Court of Appeal, which concluded that a previous tenancy which became a secure tenancy under the 1980 and 1985 Housing Acts can pass to the successor of a successor in certain circumstances.
The circumstances involved the son of a couple who had held a 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 couple’s son, who had lived with them 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, since the Act only permits a tenancy to be passed once to a successor.
The man’s late mother had become a sole tenant in 1969, long before the passage of the 1980 Act. The question at issue was whether the part of the legislation which states that it applies to a person who ‘has become the sole tenant’ means someone who has become a sole tenant at any time or only after the Act came into force. The House of Lords confirmed that the legislation could not refer to the history of the tenancy and had no retrospective effect.
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. With an ageing population, this is likely to be a not uncommon occurrence.
Partner Note
Birmingham City Council v Walker [2007] UKHL 22.
Service Charge – Landlords Take Note
It is common for buildings to be of mixed residential and commercial use and for the different parts to have separate management arrangements. In a recent case involving the reasonableness of service charges, a mixed use building was owned by a property company called Oakfern Properties Ltd., which managed the commercial premises on the ground floor. Above these were 24 flats which had been let to Publicshield Property Management Ltd. (PPM), which in turn leased them to the tenants.
Under the main lease, Oakfern was obliged to keep the building in ‘good and substantial repair’. 90 per cent of its costs of so doing were recoverable from PPM by way of a maintenance charge. Each lessee of a flat paid 1/24th of that cost to PPM by way of the usual service charge arrangement.
One of the tenants decided to challenge the reasonableness of the maintenance charge and did this by directly challenging the service charge levied by the freeholder (Oakfern) on the head-tenant (PPM).
One important matter of principle to be decided was whether PPM could be the ‘tenant of a dwelling’ as required for the protection offered by the Landlord and Tenant Act against excessive service charges to apply.
In the view of the Court, there was no impediment to the tenant’s challenge to the service charge made by Oakfern on PPM, from whom he rented his flat. Furthermore, a commercial head-lessee is able to challenge service charges levied by the freeholder, using the statutory provisions relating to residential tenants, if the leased premises include a separate dwelling or premises intended to be used as a dwelling.
The case raises the prospect that landlords whose buildings include residential premises held by a head-lessee could face challenges to service charges by sub-tenants.
Contact us for advice on any landlord and tenant matter.
Partner Note
Oakfern Properties Ltd. v Ruddy [2006] EWCA Civ 1389.