Real Estate Bulletin Autumn 2012 Contents Introduction Page 1 Redevelopment and protected leases, a guide for landlords and tenants Page 2 Intention to occupy, a guide for landlords and tenants Page 4 Case Note: Empty Rates Makro Properties Limited v Nuneaton & Bedworth Borough Council Page 5 Offers you just can t afford to refuse! Solicitors negligence A cautionary tale on mitigation of losses Page 6 Welcome to the Autumn edition of Clyde & Co s Real Estate Bulletin prepared by members of our real estate and property litigation team. Our bulletins are aimed at keeping you up to speed with recent key developments in the real estate practice area. In this issue we provide a guide for landlords and tenants in relation to Section 30(1)(f) and Section 30(1)(g) of the Landlord & Tenant Act 1954, which look at grounds for terminating protected leases. We then look at the recent case of Makro Properties Limited v Nuneaton & Bedworth Borough Council for clarification on when empty rates mitigation schemes are lawful. We also examine the findings of another recent case, Hermann v Withers LLP which gives useful guidance on the steps a party should take to mitigate their losses and whether costs of mitigation are recoverable. Finally we provide an update on the new law that came into effect in September that makes residential squatting a criminal offence. If you would like further information on any issue raised in this newsletter please contact one of the people listed on the last page of this newsletter. Update on residential squatting Page 7 Further information Page 8 The merged firm of Clyde & Co and Barlow Lyde & Gilbert
Redevelopment and protected lease, a guide for landlords and tenants Armel Elaudais, Associate Redevelopment is probably the most common ground for a landlord to oppose the grant of a new lease to a tenant protected under the Landlord & Tenant Act 1954 ( the 1954 Act ). But what exactly is the landlord required to prove to resist a new lease, and how should it approach it to maximise its chances of success? Protected leases can only be terminated on one of seven specified grounds under Section 30(1) of the 1954 Act. We focus here on Section 30(1)(f) ( Ground (f) ) which allows a landlord to oppose renewal on the basis that it intends to demolish or reconstruct the whole or a substantial part of the demised premises or to carry out substantial works of construction which cannot be done without the landlord gaining possession; this is known as the redevelopment ground. Serve notice If a landlord has redevelopment plans for its property, we would always recommend a pro-active approach to retain some control over the process. This will start with the service of a notice upon the tenant under Section 25 of the 1954 Act ( the Notice ), opposing the grant of a new lease. The Notice will specify the termination date for the existing tenancy; this cannot be earlier than the end of the term under the lease. At least six months, but no more than 12 months notice must be given to the tenant. If the tenant serves a Section 26 Notice first, a landlord must serve a counter-notice within two months. If the landlord fails to do so, they will be unable to oppose the renewal and will have to grant the tenant a new, protected lease. Compensation Proceedings Once notices have been served the next step will be to issue proceedings. The existing tenancy will only be terminated three months after the court order is made so a landlord should not leave it too late if they want to ensure that the tenant has vacated the property by the time that they are planning to start works. On average it takes nine to fifteen months from issuing proceedings to the hearing taking place and it may take further time as the courts are notoriously busy and this can affect how quickly the proceedings advance. So it is worth bearing this in mind and talking to professional advisers as the timing of the proceedings and evidence is also important when it comes to proving the intention to redevelop (see below). In parallel to the proceedings the landlord should engage in negotiations with its tenant. This is likely to be more cost effective than going through the entire court process. There are a number of things that may make an agreed termination more attractive to the tenant. A landlord may be able to agree some form of financial settlement whereby the tenant will receive its statutory compensation early which will assist it in securing new premises. A landlord could also agree a short reversionary lease (contracted out of the 1954 Act of course!) allowing the tenant to stay in the premises a little longer, which will maximise a landlord s rental income until they are ready to start the works. It is worth bearing in mind that if a Section 25 Notice or a counter-notice specifying Ground (f) is served and the lease is terminated, it automatically triggers the tenant s entitlement to statutory compensation (unless the right to compensation has been contracted out and the property has been occupied for the purpose of the tenant s business for less than five years). 2
How to show an intention to redevelop To terminate a protected tenancy, the landlord must show that they have a firm and settled intention to carry out substantial demolition and/or construction works and that they have reasonable prospects of achieving this intention. The landlord must be able to prove this intention at the date of the hearing. This means that timing is important and that a landlord should start thinking about putting together the necessary evidence long before the hearing. Things that will help establish an intention include: A board resolution ratifying the project Planning permission, or if this has not been obtained yet at least an application for planning permission, which will need to be supported by evidence that permission is likely to be granted If other consents are required, for example in relation to restrictive covenants or right of light issues, details of steps taken to obtain such consents Plans and drawings for the development scheme A business plan, estimated costs and financing information Building contract or tender for the works The court will not examine the profitability or financial viability of the development. The court will only wish to satisfy itself that the landlord has a genuine and implementable intention to carry out the demolition and/or construction works. An area of concern is where the landlord is not contracting to carry out the demolition and/or construction works itself and wishes to sell to another party who intends to carry out the works. If this is the case the landlord will not satisfy Ground (f) and an early strategy will need to be considered to structure arrangements with a view to the landlord carrying out the demolition and/or construction works. The landlord will also need to show that the works will start within a reasonable time after the termination of the tenancy, as a rule, this is likely to be within three or four months. This means that a landlord will need to have obtained the necessary planning permission by that time. What happens if a landlord is not successful? If a landlord cannot establish a firm and settled intention at trial, the court will order the grant of a new tenancy protected under the 1954 Act. However, the court will not want to stifle development opportunities in the future. If the court is satisfied that there is a real probability that the property will be required for redevelopment during the term of the new lease it is likely to only grant a short term tenancy or insert a redevelop break into the new lease. When deciding on the duration of the new lease, the court will carry out a balancing act between the need to provide a degree of security of tenure to the tenant and the landlord s plans for the property. The term granted will therefore very much depend on the facts of each case taking into account the redevelopment plans. A better way for the court to balance the parties conflicting interests is to insert a redevelopment break in the lease which will give the tenant security of tenure for as long as the premises are not required for redevelopment. It should be noted that, when the time comes to exercising the break, the landlord will still need to prove an intention to redevelop under Ground (f). 3
Intention to occupy, a guide for landlords and tenants Mike Lewis, Senior Associate The recent case of Humber Oil Terminals Trustee Limited v. Associated British Ports [2012] EWHC 1336 (Ch) provides a useful insight on the approach that the Court takes when a landlord seeks to establish grounds under Section 30(1)(g) of the Landlord & Tenant Act 1954) ( Ground (g) ) ie where a landlord has an intention to occupy the premises. The Facts Associated British Ports ( ABP ) was the landlord of an oil terminal and Humber Oil Terminals Trustee Limited ( Humber ) was the tenant. Humber installed a complex system of pipes and equipment at the terminal for its own purposes. Under one of the leases Humber was entitled to remove the pipes and equipment at the end of the lease and was also exempt from paying ship and cargo dues. ABP served Section 25 Notices on Humber opposing renewal of the lease on Ground (g) and a preliminary issue was ordered to determine whether ABP intended to occupy the holdings for the purpose, or partly for the purpose of a business to be carried on at the premises within the meaning of Section 30(1)(g) of the Landlord & Tenant Act 1954, and if so when, and in what circumstances ABP so intends. The Challenge Humber sought to undermine ABP s ground on the basis of the economics of the situation should they not be granted a new lease. They also stated that it would cost them in the region of 19 million to decommission its plant and equipment but it would also have significant financial impacts for ABP. Humber asserted that it would cost ABP around 60 million to replace the equipment and there would be a further loss of revenue for them. They claimed that ABP would not be able to run the operation without their assistance, which they were not prepared to give. The Findings Despite the economic concerns, the Court found that ABP had made out Ground (g) for the following reasons: They had shown a genuine, firm and settled, and unconditional intention to run the terminal themselves They had provided board minutes and memoranda evidencing their decision It was not for the Court to decide whether this was a prudent business decision but simply to be satisfied that the intention had a reasonable prospect of being fulfille Although ABP would be allowing a third party operator to run the terminal, this did not mean that ABP was not occupying it nor that they would be occupying for a business not carried on by them 4
Case Note: Empty Rates Makro Properties Limited v Nuneaton & Bedworth Borough Council Georgina Redsell, Associate In the recent case of Makro Properties Limited v Nuneaton & Bedworth Borough Council [2012] EWHC 2250 (Admin), the High Court held that empty rates mitigation schemes are lawful. The Court found that the storage of paperwork by an occupier in just 0.2% of the floor space in a 140,000 square foot warehouse was sufficient to amount to rateable occupation so as to entitle the owner to empty rates relief upon vacation by the occupier. Background On 1 April 2008 The Non-Domestic Rating (Unoccupied Property) (England) Regulations 2008/386 ( the Regulations ) came into force. The Regulations provide that full rates must be paid on an empty property after a brief period of exemption has passed (three months for offices or retail units and six months for industrial units). However, where a period of rateable occupation of at least six weeks has taken place after the expiry of the exemption period this will trigger a new six month rate-free period. Numerous rates mitigation schemes are on offer to landowners to take advantage of this provision. Facts Makro Properties Limited ( Makro ) had been the tenant of an industrial property for the purposes of a cash and carry business until 1 June 2009 when the property was cleared and vacated. On 31 December 2009 Makro surrendered its lease. Makro, however, agreed with its former landlord to store pallets of paperwork (which it was bound by law to keep) in the property between 25 November 2009 and 12 January 2010. Between 12 January 2010 and 23 July 2010 the Premises were empty. On 23 July 2010 some 40 pallets of Makro s paperwork were delivered to the Premises and stored there. The landlord sought to argue that the storage of paperwork amounted to rateable occupation which triggered an exemption from rates in accordance with the Regulations. The District Judge sitting at Rugby and Leamington Magistrates Court decided that this was not the case as: (i) the use of such a small part of the building was insufficient to qualify for rates relief; and (ii) the purpose of the use was of no commercial benefit to the parties other than the avoidance of liability for rates. The landlord appealed to the High Court. The Decision His Honour Judge Jarman QC in the High Court disagreed with the first instance Judge, concluding that Makro s use of 0.2% of the floor space did amount to rateable occupation. This was on the basis of the following four essential characteristics: (i) there must be actual occupation; (ii) the occupation must be exclusive for the particular purpose of the occupier (this is a question of fact which will depend on the level of control the occupier has over the property in order to use if for a particular purpose); (iii) the occupation must be of some benefit or value to the occupier; and (iv) the occupation must not be too transient a period of time 5
The Court concluded that: The storage of 16 pallets of documents which Makro were required by law to store could not be said to be trifling and, therefore, there was actual occupation by Makro The occupation was of value to Makro because Makro was bound by law to store the documentation somewhere; The fact that the outcome meant that a rates mitigation scheme thereby succeeded was irrelevant. The Judge stated that it had been recognised for some time that ratepayers can organise their affairs to avoid paying rates and that if the outcome was unacceptable it was for the legislature to determine whether reform of the law was needed. What next? The decision will give landlords the benefit of knowing that they can legitimately take part in rates mitigation schemes as long as they can show that the occupation is genuinely for the benefit of the ratepayer. The Judge was swayed by the fact that the storage of the documentation by Makro was required by law. The decision comes hot on the heels of the Government s announcement that it will review the legislation. Julian Sturdy MP, a vocal opponent of the current empty rates legislation, has been tasked by Government with forming a working group to propose changes. Offers you just can t afford to refuse! Solicitors negligence A cautionary tale on mitigation of losses Neil Jamieson, Partner The recent case of Hermann v Withers LLP [2012] EWHC 1492 (Ch) provides a cautionary tale to property lawyers giving useful guidance on the steps a party should take to mitigate their losses and whether costs of mitigation are recoverable. The facts In this case, Mr and Mrs Hermann ( the Hermanns ) purchased a property in London valued at 6.8 million. In the course of pre-exchange enquiries, it became apparent that it was ambiguous whether ownership of the property also included a statutory right to use a communal garden that was situated opposite the property. Whilst the original estate agent s advertisement for the property stated that it has access to a communal garden this right was not provided for in the draft conveyance or title documents. The Hermanns lawyers researched the issue and concluded that the owners of the property were entitled to access under the Kensington Improvement Act 1851. Following the purchase of the property, the Hermanns were advised by the committee who ran the communal garden (the Committee ) that they were not entitled to access. The Hermanns therefore instructed solicitors in October 2008 and a series of correspondence followed between the Hermanns and the Committee in relation to the access rights. On 13 May 2009, the Committee offered to grant the Hermanns a 50 year licence for garden access for a price of 25,000. The Hermanns rejected this offer and commenced legal action in an attempt to mitigate their losses. The matter went to court in 2010 and the court found against the Hermanns. After an expensive court battle, the Hermanns still had no access rights, and commenced a professional negligence claim against their conveyancing solicitors. The court s decision The court held that their conveyancing solicitors had been negligent. The Judge emphasised that the conveyancing solicitors should not have given definitive advice to the Hermanns when there was considerable doubt as to whether this advice was correct. The interesting aspect of the Judgment relates to the court s ruling in relation to mitigation of loss. The conveyancing solicitors successfully argued that the Hermanns had failed to mitigate their losses by not accepting the Committee s offer of a licence. As a result, the Hermanns were only entitled to recover their legal costs up to the end of May 2009, i.e. shortly after the offer of 13 May 2009 was made and not after that. Impact of the case Whilst claimants have an obligation to mitigate their losses and will be entitled to recover the reasonable costs of pursuing this process, these costs will not include taking unnecessary/risky litigation when a reasonable offer has been made. 6
Update on residential squatting Keith Conway, Consultant Gabriella Coombe, Trainee Solicitor On 1 September 2012, a new law came into force to make residential squatting a criminal offence. What constitutes residential squatting? For someone to fall under this definition, they must: Be in a residential building Be a trespasser (having entered as a trespasser) Knows or ought to know that they are a trespasser Live in that building or intend to live there for any period However, the above will not catch a person who is holding over after a license or lease has expired, even if they leave the building and then re-enter. It is, though, irrelevant whether the person began their trespass before or after the law came into force. Powers of the police The powers of the police include the right to enter the premises and arrest someone suspected of residential squatting. Any person found guilty of residential squatting is to be liable for either a fine of up to 5,000 or a prison term not exceeding 51 weeks (or both). Practical considerations There are concerns that the police force, which is already heavily burdened, will not be as effective in responding to calls relating to these residential squatters as many members of the public will hope. It may be, that in some/ many cases, property owners will still obtain possession using civil remedies. Already, there have been challenges to the new legislation. A woman in Wales is claiming that it violates her right to personal and family life under Article 8 of the European Convention of Human Rights. It remains to be seen whether this argument will still be successful in this test case. 7
Further information If you would like further information on any issue raised in this newsletter please contact: Tim Foley Partner, Property Litigation T: +44 (0)20 7876 5542 E: tim.foley@clydeco.com Neil Jamieson Partner, Property Litigation T: +44 (0)20 7876 6514 E: neil.jamieson@clydeco.com Keith Conway Consultant, Property Litigation T: +44 (0)20 7876 4298 E: keith.conway@clydeco.com Tom White Legal Director, Property Litigation T: +44 (0)20 7876 6568 E: tom.white@clydeco.com Mike Lewis Senior Associate, Property Litigation T: +44 (0)20 7876 5389 E: mike.lewis@clydeco.com Robert Pilcher T: +44 (0)20 7876 4255 E: robert.pilcher@clydeco.com Martin Quick T: +44 (0)20 7876 5578 E: martin.quicke@clydeco.com David Wyatt & Retail T: +44 (0)20 7876 5385 E: david.wyatt@clydeco.com Ian Ginbey Partner, Planning T: +44 (0)20 7876 4229 E: ian.ginbey@clydeco.com Malcolm Rogerson T: +44 (0)20 7876 6141 E: malcolm.rogerson@clydeco.com Graeme Taylor T: +44 (0)20 7876 4266 E: graeme.taylor@clydeco.com Adam Taylor-Smith T: +44 (0)20 7876 5573 E: adam.taylor-smith@clydeco.com Clyde & Co LLP The St Botolph Building 138 Houndsditch London EC3A 7AR T: +44 (0)20 7876 5000 F: +44 (0)20 7876 5111 Further advice should be taken before relying on the contents of this summary. Clyde & Co LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Clyde & Co LLP. Clyde & Co LLP is a limited liability partnership registered in England and Wales. Authorised and regulated by the Solicitors Regulation Authority. Clyde & Co LLP 2012 www.clydeco.com CC001928 - October 2012