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Property e-bulletin – Issue 4

We are pleased to bring you the fourth edition of Druces’ property e-bulletin.

Aimed at a property professional/adviser readership, our intention is to bring you a regular collection of interesting recent property and planning focused news items.  The topics covered will be broad ranging, with each article a bite-sized consideration of some of the sector’s most topical issues.

We would welcome feedback on the content covered below and any comments you may have on the future focus of this e-bulletin.

I look forward to hearing from you.

Nicholas Brent, partner and head of Druces’ property team


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Sensible Contractors know that Oral Agreements are a Recipe for Doubt

Oral contracts may seem clear at the time when hands are shaken, but all too often certainty is subsequently displaced by doubt as to what exactly was agreed. One High Court case concerning a £300 million council housing renovation project underlined the benefits of professionally drafted agreements.

The main contractor engaged in the project had subcontracted part of the work to a specialist roofing and scaffolding company. The latter claimed that it had been orally agreed that it would carry out all relevant works in part of the council’s area on an exclusive basis for the duration of the main contract.

After the main contractor later dispensed with the subcontractor’s services, the subcontractor went into administration and, ultimately, liquidation. The liquidators assigned the benefit of their potential breach of contract claim against the main contractor to a company that pursued the matter to trial.

After hearing extensive evidence, the Court found that a meeting had taken place at which an oral contract had been concluded on the terms contended for by the subcontractor. In dismissing the claim, however, the Court ruled that that contract had been superseded and rendered inapplicable by a written framework agreement that had been concluded about eight months later.

That agreement contained no promise of exclusivity and expressly permitted the main contractor to purchase the services of other subcontractors.


Subcontractor Left High and Dry by Contractor’s Insolvency Wins £2.7 Million

Complex networks of contractors and subcontractors are commonplace in major building projects, where dozens of contractors can be involved. In such circumstances, significant problems can arise if one of the businesses which forms an important link in the chain becomes insolvent. However, judges have power to help those affected, as was shown by one case in which a subcontractor was awarded over £2.7 million when it was able to enforce a guarantee provided by an insolvent contractor’s guarantor.

The main contractor engaged in the construction of a power station had employed the subcontractor to supply, fabricate and erect structural steelwork. The project was afflicted by severe delays that were due to the main contractor’s failure to control and coordinate the works effectively.

The subcontractor suffered substantial disruption and had to work in an uneconomic manner. It commenced adjudication proceedings against the contractor claiming the sums due on its final account for work done. The adjudicator found in its favour, but the main contractor went into liquidation without paying any of the sums found due. The subcontractor was thus constrained to launch High Court proceedings.

The Court found that the subcontractor’s account of the main contractor’s numerous defaults was palpably honest and it was awarded a total of £2,774,077 before interest. The ruling opened the way for the subcontractor to enforce payment of at least part of that sum by the main contractor’s parent company, which had provided the guarantee.

This case shows the value of negotiating a contract which minimises risk (in this case via a guarantee) and making sure you retain sufficient evidence to demonstrate where the blame lies should it be necessary.


Get it Agreed in Writing or Pay the Consequences

Failing to have the correct paperwork in place is a risk not worth taking, as a dispute over a 9.5-acre parcel of farmland in Cornwall showed.

The land in question was owned by a man after it was gifted to him by his parents. It was let out and the tenants sought a declaration by the court that they should be entitled to a new tenancy. The original tenancy had been granted in 1993 to run for 15 years. The idea behind the lease was that the tenants would look at the possibility of renovating a derelict property on the land for their own use for a worthwhile period. For the landowner, the attraction was to have a modest rent for a period followed by the ability to recover the property and use it, whether the building had been restored or not. The rent was set at a low level and the lease was not formally renewed after it expired.

The tenants claimed firstly that they had a protected agricultural tenancy under the Agricultural Holdings Act 1986 or, if not, a business lease under the Landlord and Tenant Act 1954, both of which give tenants protection from repossession of the let property by the landlord.

The owner disputed the tenants’ application and also claimed that he was unwilling to grant a new tenancy because he wanted use of the land for his own purposes, which is a valid reason for refusing a new tenancy under the Landlord and Tenant Act.

The first problem that arose was that although the tenants had prepared an agreement and sent the signed agreement to the current owner’s father, it could not be demonstrated that he ever signed it.

The tenants also claimed that they had the right to continue their tenancy under the legal doctrine of estoppel, which means that where someone does something to their own detriment in the belief that they are party to a common understanding and the other person involved knows this but allows them to continue to do it, the person who acts to their own detriment has the right to assume that the agreement is binding. In this case, the tenants believed they had a lease and had spent time and money on the property to their detriment, because as well as maintaining the land, over the years they had spent considerable sums improving it. In 2011, after expiry of the original lease term, the rent was increased by agreement from £400 to £1,000 per year.

The court rejected the tenants’ claim under the Agricultural Holdings Act, because the tenancy was clearly not one protected by it, and their claim under the Landlord and Tenant Act failed because it was clear that the landowner wished to occupy the premises for his own business purposes.

The court also rejected the estoppel claim, finding that there was no evidence that the landowner had ever intended to extend the lease or sell the property to the tenants, which was their ultimate hope.

There is no substitute for putting in place the necessary legal agreements to give effect to arrangements such as this. Relying on understandings is a recipe for disaster.


Poor Wording Requires Court to Decide on Roof Repair Costs Split

The quality of the drafting of residential leases is sometimes debatable, but the court will intervene to interpret them if necessary. In a recent case, the Upper Tribunal (UT) found that although the lease of a tenanted building was poorly drafted, its terms were coherent enough to allow the landlord to recover a 75 per cent contribution to the cost of repairs to the roof from one of the tenants.

The tenant in question occupied the ground, first and second floors of a Victorian terraced house. The roof, which it was agreed was in need of repair, is above the second floor. The building also has a basement flat.

The lease showed that the landlord was required to maintain the roof, which was also shown as being part of the premises let to the tenant. It stated that the tenant was required to pay a service charge in respect of any roof repairs equal to 75 per cent of the cost. However, there was also a clause that stated that the roof was part of the common area, along with the foundations of the building, to be maintained at the joint expense of both of the tenants of the building.

The First-tier Tribunal found that the effect of the clause was that the tenant was only under an obligation to cover 50 per cent of the cost of the roof repairs. However, this decision was overturned by the UT. Whilst the roof clearly benefited all four floors of the building, the tenant derived the greater benefit. The lease term entitling the landlord to recover 75 per cent of the costs of the roof repair from the tenant was logical in that regard and was not overridden by the poor drafting.

Had the lease been clearly drafted, the potential for disagreement would have been entirely eliminated. Contact our experts to ensure that your legal documents are not the subject of future disputes.


Tenants Succeed in Avoiding Insurance Charges

When tenants discovered that their landlord had bought insurance over their flats, including the structure of the building, when they had already purchased insurance cover for themselves, the resulting argument ended up in the Upper Tribunal (UT).

The tenants’ leases contained a provision that they were liable for their share of ‘the amount of the premium or premiums payable in respect of any insurance or insurances effected by the Lessor’. They were required to obtain insurance in the joint names of themselves and the landlord, but not all did so. Up until 2014, there were no issues. Agents acting on behalf of the original lessor arranged insurance cover for the common areas of the building, leaving the individual leaseholders to insure their own flats.

In 2014, a new freeholder took over the property. Following a revaluation of the sum insured, the annual premium for the insurance increased by more than £150 per flat and further substantial increases occurred in 2015 and 2016.

The 27 flat owners argued that the landlord was not permitted to charge for insuring more than the communal areas, so did not have the right to buy the insurance for individual flats or to recharge it as a cost to the tenants as a whole. Some, but not all, of the tenants had listed the landlord as an interested party in their insurance policies, which they claimed was sufficient to discharge their responsibilities under the lease.

The UT concluded that the lease terms did give the landlord the right to buy the insurance and recover the cost from tenants if they failed to insure their premises in the manner required by the lease. However, because the insurance taken out by the landlord was not in accordance with the agreed specification, the cost was not recoverable from the tenants. Landlords must be reasonable in their approach to issues such as this and ensure they comply strictly with their own obligations to their tenants.


Lack of Formal Contract Means No Remuneration for Work Done

In order to avoid doing all of the work for none of the reward, it is essential to get your commercial agreements professionally drawn up. The point was powerfully made by one case in which a property company that put much time and effort into easing the path to a £6.81 million land sale made nothing from the deal.

After spotting the land’s potential, the company made contact with its owner with a view to its acquisition for a mixed housing and retail development. It carried out detailed negotiations with the owner and claimed to have entered into a joint venture with a supermarket chain in order to bring the project to fruition.

The company also claimed to have reached an understanding with the chain that, although the latter would be named as the sole purchaser on the sale contract, the land would be acquired for their joint benefit. After an offer for the land was made, a lock-out agreement was negotiated with the owner that described the chain as the buyer and the company as the chain’s ‘delivery partner’.

However, on the day the lock-out agreement expired, the chain went ahead and exchanged contracts with the owner, and the purchase was subsequently completed without any further involvement by the company. The company’s claim to an equitable interest in the land acquired was subsequently rejected by a judge.

In dismissing the company’s challenge to that decision, the Court of Appeal noted the absence of formal contractual documents to support the company’s account of what it had agreed with the chain. Although some of the company’s criticisms of the judge’s ruling were justified, it had ultimately failed to establish the existence of a binding arrangement or understanding that, if the chain acquired the land, the company would be entitled to some interest in it.


Notice Error Proves Expensive for Tenant

A recent case that dealt with the validity of a termination notice given by a tenant illustrates the need to make diligence in such matters a priority.

A ten-year lease on offices in a City of London block was granted in 2013 with an annual rent exceeding £219,000 and periodic rent reviews. There was a break clause which could operate from March 2018 if the tenant gave nine months’ written notice.

The tenant was taken over by another company and in 2017 the existing tenant was given permission to assign the lease. A formal deed of assignment was drawn up in March 2017 and this required the tenant to register the assignment of the lease at the Land Registry within ten working days of the completion of the assignment. However, instead of using Land Registry Form TR1, the assignment was in a form appropriate for an unregistered lease. In any event the tenant did not comply with the requirement that the assignment of the lease should be registered within ten days, only attending to that in July 2017.

Notice of assignment was given to the landlord by the new company in April 2017, then on 3 May 2017 the new tenant served a notice on the landlord to break the lease.

Because the assignment of the lease had not been completed when the notice to terminate it was given, the landlord rejected the notice on the ground that the original tenant was still the registered tenant (the assignment of the lease not having been registered at the Land Registry as required for it to be effective) and the notice had been issued by the new tenant.

In a judgment that was made longer by the procedural irregularity of the assignment, the decision of the court turned on on whose behalf a ‘reasonable recipient’ would have thought the break notice had been issued. The judge concluded that a reasonable recipient would have thought that the notice was served on behalf of the new tenant, not the original tenant who then had legal title to the lease. The break notice was therefore not valid.


One Reasonable Condition is Sufficient for Landlord

When a tenant wishes to assign a lease, it is usual for the landlord’s consent to be required, and that consent can be withheld if there are sufficiently good grounds for so doing.

In a recent case, a landlord was asked by a tenant to agree to the assignment of leases on flats in London’s Docklands. The landlord imposed several conditions on the assignments.

The conditions were that the tenant should cover the landlord’s legal fees for the assignment and the cost of carrying out inspections of the flats, and that the landlord should be provided with a bank reference to give comfort as regards the financial capabilities of the new tenants.

The tenant went to court arguing that the conditions were unreasonably excessive. The lower court agreed that the legal fees requested were extreme and held that the landlord’s refusal to grant consent to assign was therefore unreasonable. The landlord appealed the decision.

The Court of Appeal took the view that the conditions were ‘freestanding’. Just because one of the conditions was not reasonable did not mean that the others were ‘infected’. Each stood alone and the tenant’s failure to meet the reasonable conditions was sufficient reason for the landlord to decline to assign the leases.

The decision will come as a relief to landlords who seek to impose multiple conditions on the assignment of leases.


Faulty Electrics Necessitate Lease Interpretation

Many commercial leases provide that the formal document represents the entirety of the agreement, superseding any prior agreements that may have been reached. An important Court of Appeal ruling has, however, made clear that such clauses do not preclude the implication of such additional provisions as are needed to make the lease ‘make sense’ in business terms.

The case concerned a lease of café premises. Amongst other flaws, it made no provision in respect of where responsibility lay for ensuring the safety of the property’s electrical wiring. It did, however, provide that the lease represented the entire agreement and that the tenant could place no reliance on any statement or representation made by the landlord prior to the document being executed.

After a number of incidents caused by faulty wiring, including a small fire, the tenant accused the landlord of a repudiatory breach of the lease. She closed the café and quit the premises before suing the landlord in respect of her business losses. Her claim was upheld by a judge, who awarded her £22,750 in damages.

In dismissing the landlord’s appeal against that ruling, the Court noted that, in failing to place responsibility for electrical safety on either party, the lease contained a plain and obvious gap. Notwithstanding the entire agreement clause, it was therefore necessary to plug that gap by implying a term into the lease in order to achieve practical coherence and business efficacy.

Taking into account the factual background to the case and the wording of the lease, the Court found that the relevant burden fell upon the landlord. A covenant was implied into the lease that required the landlord to ensure the safety of electrical installations on the premises and to provide a certificate to that effect.


Oral Contract Existed as a Matter of Fact

When a decision is made as to what the facts are in a particular case, the judgment regarding those facts is normally accepted as not being able to be revisited in subsequent proceedings unless it was manifestly unreasonable or unfair, or subsequent evidence is admitted which changes the factual basis.

In a recent case, a building company claimed that an oral contract had been created between it and another company in December 2015 relating to a development of flats and retail premises. It claimed that nearly a quarter of a million pounds was due to it under the contract.

The work was carried out under a standard JCT contract that had been modified by the oral contract. Oral contracts, as well as written ones, are within the ambit of adjudication decisions.

So, when the dispute went to adjudication and the adjudicator ruled that, on the evidence presented, an oral contract had as a matter of fact been created between the two companies, the Technology and Construction Court would not set that decision aside in the absence of compelling evidence that it was flawed.

Oral contracts are fraught with danger. To avoid disputes, it is always better to put any significant contractual terms in writing. Variations to contracts can normally be arranged quickly and easily and provide certainty as to the terms agreed.


In Principle Planning Permission

One of the bugbears of UK planning law has always been that a lot of work has to be done before a planning application can be considered because an outline planning application must be made, except for certain proposed brownfield developments. The process can also involve considerable expense.

However, that is set to change. From 1 June 2018, it will be possible to submit an ‘in principle’ planning application for small developments (ten or fewer dwellings on a site of one hectare or less and involving 1,000 square metres or less of floor space) which consist mainly of housing, with only a limited amount of detail (such as the maximum and minimum number of housing units) being required to be supplied.

On clearing that hurdle, an application for technical details consent must be made. This must be granted before the development can proceed. 

It is not clear what the requirement that the application has to be mainly for housing means and no doubt the courts will, over time, provide guidance. The planning authority will be required to give a decision within five weeks, which should also help speed up the process.

There are, however, certain limitations on when the new procedure may be used.


Flawed Planning Permission, Not Application

Local planning authorities are required to give coherent reasons for their decisions, and that is particularly so when their decisions differ from the recommendations of their own officers. In one case on point, the High Court sent plans for a holiday village in an area of outstanding natural beauty back to the drawing board.

Contrary to a planning officer’s advice, a council’s planning committee had voted by a majority to grant consent for the development. The plan provided for 12 holiday lodges, a reception building, a fishing lake, a car park, tennis courts, a play area and a putting green. The committee decided that the project would conserve the area’s scenic beauty and provide significant employment and tourism benefits.

In overturning the permission at the behest of a local objector, however, the Court found that the committee had given inadequate reasons for its decision. Having rejected the officer’s recommendations, councillors could not rely on his report as supporting their conclusions. The minutes of the relevant meeting were by themselves insufficient to dispel a substantial doubt as to whether the committee had applied local and national planning policies correctly.


Planning Law – Council Must Follow Procedures For its Own Developments

One of the oddities of the planning system is that local authorities frequently have to sit in judgment on their own applications. However, as one case concerning plans for a crematorium on council-owned land in the Green Belt showed, the requirement for careful consideration can be rigorously enforced.

In reliance on the advice of one of its planning officers, the council had granted itself consent to demolish existing buildings on the 4.24-hectare site and to construct a chapel, crematory and car park. However, a company that ran a commercial crematorium about ten miles away sought judicial review of the council’s decision.

In upholding the company’s challenge, the High Court noted that, before granting permission for its own project, the council had to satisfy itself that there was a real need for the development in the Green Belt. The company’s crematorium had only recently opened. It had capacity for about 1,200 cremations annually, but the council had failed to take that factor into account when considering the issue of need. The officer’s advice was in that respect misleading and the planning permission was quashed.

If your local council is planning to carry out developments which negatively impact on your business, we can advise you on the appropriate steps to take.


Openness of the Green Belt Lies in the Eye of the Beholder

The National Planning Policy Framework states that one of the essential characteristics of Green Belt land is its openness, and the impact of any proposed development on this quality is therefore a key issue when an application for permission to build on the Green Belt is being decided.

When assessing whether a development harms the openness of the Green Belt, it is the ‘eye of the beholder’ that counts. The Court of Appeal resoundingly made that point in quashing planning permission for a quarry extension that would have permanently transformed the appearance of a stretch of open countryside.

High-quality magnesium limestone had been extracted from the 25-hectare quarry since the 1940s. Its owner was granted planning consent to extend the quarry over a further six hectares. The extension was expected to yield about two million more tonnes of crushed rock over a seven-year period.

Two affected landowners challenged the permission but had their case dismissed by the High Court.

In upholding the landowners’ appeal against that decision, the Court of Appeal found that a local authority planning officer had misunderstood the national policies designed to protect the openness of the Green Belt and had given defective advice to the council’s planning committee.

The visual impact of the proposed extension was an important factor in the planning decision and the planning officer had erred in advising the committee that, because construction of new buildings would not be involved, the area’s openness would not be harmed. The project would result in a permanent change to the character of the landscape and long distance views would be cut off by earth bunds put in place and trees planted to screen the site.

The visual appearance of the extension was quite obviously relevant and, due to her erroneous understanding of the relevant policies, the officer had given no consideration as to whether very special circumstances existed to justify what was an inappropriate development in the Green Belt.

 

This e-bulletin was first published on 24 May 2018