We are very pleased to bring you Druces’ first 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
Draft it yourself, at your peril!
There is little point in agreeing to settle a legal dispute if the wording of the deal is so ambiguous that it simply creates further scope for disagreement. In one High Court case that illustrated the need for clear professional drafting, both sides in a building contract dispute put forward their own very different interpretations of a compromise agreement.
A subcontractor claimed that it was owed about £86,000 by a construction company. After the latter refused to pay, the former threatened court proceedings. However, the subcontractor later made a formal offer to settle the matter for £65,000. The offer was made on the basis that, if the company delayed more than 21 days in accepting the same, it would be liable for all the subcontractor’s legal costs in the case.
The offer was turned down and an adjudicator later awarded the subcontractor the £86,000. When threatened with enforcement proceedings, the company finally accepted the £65,000 settlement offer. There was no dispute that, on acceptance of the offer, a binding compromise had been reached. However, by that stage the 21-day deadline had passed and an issue arose as to whether the company was liable to pay the subcontractor’s costs of the adjudication.
In ruling in the company’s favour, the Court found that, on a true reading of the agreement, the legal costs referred to were the costs of the threatened court proceedings, not those of the adjudication. That interpretation was in line with the principle that costs incurred in adjudications are not generally recoverable.
How much margin for error do you think is allowable in a valuation?
The valuation of a property is a normal step in almost all property loans. Recently, the High Court had to decide who was in the firing line when a business failed and the lender stood to take a loss compared with the surveyors’ valuation.
The purchaser financed the acquisition of a care home in 2007 by way of a bank loan of £250,000, which was advanced on the back of a valuation of £350,000 by a firm of surveyors.
When the business failed, the bank concluded that the surveyors had been negligent in their valuation. It sued them, arguing that the true valuation of the care home as a going concern was only £130,000.
The firm of surveyors argued that the valuation was not negligent and, in any event, the renegotiation of the loan between the buyer and the lender meant that it was not liable for the loss as it did not prepare a valuation for the restructured loan.
The valuation by the surveyors was based on the profitability of the business on an EBITDA basis (earnings before interest, taxation, depreciation and amortisation), using a nationwide database of information concerning care homes, none of which was local. Taking account of local factors such as its seafront location, the Court ruled that the valuation had been carried out on an acceptable basis but that the appropriate valuation was £330,000.
The Court did not accept that the valuation could be detached from the renegotiated loan, but held that a 15 per cent variation either side of the correct valuation would be acceptable. Since the valuation was within the acceptable margin of error, it was not negligent.
Recessions / slowdowns in the property market often trigger claims against valuers (when the market is rising, people are too busy cashing in to worry about perceived errors). Are we heading for another period in which there will be time to consider whether historic valuations are not what they should have been?
Can’t agree a commercial rent? Court steps in
Calculation of commercial rents is more of an art than a science and disputes are sadly common. However, as one case involving a Polish-themed bar in Central London showed, judges are always there to promote peace if negotiations fail.
Following the grant of a new lease in respect of the premises, an issue arose as to the appropriate rent payable. After an attempt at arbitration failed, the matter was referred to the High Court. The landlord contended for an annual rent of £35,000, but the tenant argued that it should pay no more than £21,800. It was agreed that the rent should be assessed on the basis of the profit that could be generated by the reasonably efficient operation of the bar.
The tenant pointed out that the premises were invisible from the main road, being tucked away in a dog-legged alleyway, and therefore did not attract passing trade. The bar had been adversely affected by heat generated by air conditioning units installed to serve neighbouring properties and large trolleys left in its access way by a nearby supermarket. The bar’s trade was said to have been improved by its adoption of a Polish theme.
On the other hand, the landlord submitted that the bar could be run more profitably as an English pub, wine bar or microbrewery and the tenant had failed to take steps, including additional advertising, that could improve the bar’s takings.
Whilst acknowledging that the bar’s turnover had declined in recent years, the Court noted that it was not immune from the general downturn in the licensed trade. The tenant was operating it with reasonable efficiency and the Court fixed the rent at £27,000 per annum. That figure was based on 50 per cent of the annual profit that the bar could be expected to generate.
Small drafting error – major consequences
When creating a contract of any kind – especially when the sums involved are large, as is typical in property and development contracts – it is essential to ensure that its terms unequivocally reflect your intentions before it is executed.
A recent case left a supermarket giant looking sheepish after the High Court ruled that its interpretation of a £12 million development contract was not correct.
It involved an agreement between Asda and a second firm. This required the second firm to obtain planning permission and consent for highway works in connection with a proposed development and to obtain additional land.
The contract stated that it could be rescinded if four conditions had not been satisfied. When it considered that these had not all been met, Asda used its purported right to rescind the contract.
The legal argument between the two companies was based on whether the contract meant it could be rescinded only if all the four conditions were not met by the ‘longstop’ date or whether it could be rescinded if any one of the conditions was unmet by the longstop date. The contract wording read that rescission was possible ‘if all of the Conditions have not been discharged in accordance with this Schedule by the Longstop Date’.
On appeal, the Court ruled that this meant that all four conditions had to have not been met for Asda to rescind the contract.
On the face of it, it would seem odd to agree a conditional contract which was written in such terms as, presumably, failure to meet any of the conditions would imperil the entire development.
However, the wording of the contract was clear – ‘all’ means ‘all’, not ‘any’. Only if none of the four conditions were met by the longstop date could the contract be rescinded. The question of whether that is the case will now be argued in court.
Consultation on Housing White Paper: Fixing our broken housing market
On 7 February 2017, the Department for Communities and Local Government published the long-awaited Housing White Paper: Fixing our broken housing market, which sets out how the government intends to fix the broken housing market.
The White Paper is divided into four sections, which cover:
- Planning for the right homes in the right places
- Building homes faster
- Diversifying the housing market
- How the government intends to help people now
The White Paper also launched a consultation on changes to planning policy and legislation needed to implement certain proposals. This consultation closed on 2 May 2017.
High Court rules on copyright infringement in architects drawings used for planning permission (High Court)
The High Court has found that copyright in an architect’s drawings was infringed in a case where the claimant property developer who obtained the planning permission was not the developer who built the building.
The case demonstrates the tricky line between the benefiting from a planning permission attached to land and avoiding infringing copyright in the drawings that form the basis for that permission where the development is not carried out by the party who obtained the planning permission. (Signature Realty Ltd v Fortis Developments Ltd and another  EWHC 3583 (Ch).)
The consequences of breaching planning control
A landlord who decided to go ahead with a property development after the planners had turned it down ended up significantly worse off after he was successfully prosecuted.
Having had his application to turn his existing property into nine flats rejected, the landlord decided to let the property out as multiple occupancy units in breach of planning permission. He was eventually served with an enforcement notice by the local council, which he ignored. As well as the letting being a breach of planning law, some of the rooms let were illegally substandard in size.
Eight years later, he was found guilty of various planning offences, with the result that his criminal profits were the subject of a confiscation order for more than £550,000 and he was ordered to pay a fine of £65,000 and £80,000 in costs. If the confiscation order is not satisfied within three months, the landlord faces a jail term of more than five years.
The temptation to ignore planning decisions and proceed regardless is not one which normally has anything to recommend it. It can lead, as in this case, to dire consequences. Generally, property owners who engage on a reasonable basis with the local planning authorities have the best chance of being successful.
Planning decisions based on out-of-date policies are vulnerable
Planning decisions made by local authorities that fail to keep their policies up to date are acutely vulnerable to legal attack. In one case exactly on point, the High Court opened the way for construction of hundreds of new homes on land adjoining the historic grounds of a stately home.
Planning consent for development of 290 homes was refused by the local authority on the basis that it would adversely affect the grounds of the stately home. It was also said that the project would represent an unacceptable encroachment into the open countryside and result in the loss of a large expanse of high quality agricultural land.
However, in subsequently upholding the developer’s challenge to that decision and granting consent, a government planning inspector found that the impact on the grounds would be less than substantial. He also expressed doubts that the council had a five-year supply of deliverable housing land in place and underlined the public benefits of the sustainable development, which includes 73 affordable homes.
One of the decisive factors in the inspector’s decision was his conclusion that certain of the council’s policies, relating to housing land supply and settlement boundaries, were out of date and did not conform to the National Planning Policy Framework (NPPF).
In rejecting the council’s judicial review challenge to the inspector’s ruling, the Court could detect no irrationality or unlawfulness in his conclusions.
“A sound knowledge of the NPPF is a powerful tool when planning new developments, and the refusal of planning permission by a council may be capable of being overturned with expert legal argument”.
The content of this bulletin does not constitute legal advice but is intended as general guidance only.
This bulletin was posted on 4 May 2017.