Welcome
Keith Flavell Managing Partner Introduction and Welcome
Sarah Paul Partner & Head of Commercial Property Landlord & Tenant 2009 The Year of Keeping Going
What can Landlords do? Be proactive and be flexible Keep on top of arrears Landlord & Tenant (Covenants) Act 1995
What can Landlords do? Tenants Re-Gearing Pre-empt tenant exercising break Consider regular break clauses or a rolling break
What can Landlords do? Draft variations carefully Can accidentally release a guarantor Use personal side letters for monthly payment of rent Take leases outside L&T Act 1954
What can Tenants do? Seek to negotiate favourable lease terms Involve us at Heads of Terms stage Shopping list of things to ask for Tailor to commercial needs your business Understand the commitment you are making not box ticking exercise Money
What can Tenants do? Read the Lease Code and read the Tips for Tenants in the Occupier Guide Government report - general opinion that the Code was unnecessary market could achieve its own balance and leases now flexible and fair The Lease Code tells you what to do and the current market gives you the opportunity to do it
Traps for Tenants Upwards only rent reviews Rent Year 1 0 Rent Year 2 50,000 Rent Year 3 100,000 Rent Year 4 150,000 Rent Year 5 200,000 Real yearly rent 100,000 (not 200,000) Not legally possible to bin a break notice
Traps for Landlords Inclusive Technology v Williamson [2009] EWCA CIV 718 Redevelopment Section 25 notice served Landlord changes mind didn t tell tenant Tenant moved out Successful claim for misrepresentation against the landlord
Tenancies at Will An invaluable tool especially in current economic climate Quick, safe and cheap But - a tenancy at will means what it says It can be terminated by either party at will - which means without notice - Not for 3 months - Not terminate on 4 weeks notice
Administrations Continued throughout 2009 Statutory moratorium landlord needs consent of administrator or court to sue for rent, distrain or forfeit by peaceable re-entry Landlords can still pursue a guarantor or former tenant
Administrations Rent and deposits trust or charge? R (Cukurova Finance) v HM Treasury [2008] EWHC 2567 Financial Collateral Arrangement (No.2) Regs 2003 Dis-apply moratorium To any Financial Collateral Arrangement Includes rent deposits
Administrations Landord can take money from rent deposit during an administration if: - neither the landlord nor the tenant is an individual - the rent deposit is in the form of a charge; and - the rent deposit is in the possession or control of the landlord
Administrations Somerfield Stores Limited v Spring (Sutton Coldfield) Limited [2009] EWHC 2384 Ch Held that a tenant cannot proceed with an application for a new lease against a landlord in administration without consent of administrator or High Court
Warning Bells Clarence House Ltd v National Westminster Bank Plc [2009] EWCA Civ 1311, [2009] All ER (D) 70 (Dec) SDLT (Stamp Duty) and Holding over under Landlord & Tenant Act 1954 Update registered office at Land Registry
Dilapidations Name given for a landlord s claim for breach by a tenant of its covenant to repair, decorate and often reinstate when a lease comes to an end Strategy True nature and reality of dilapidations Impact of current state of economy and property market
Dilapidations Both landlords and tenants often leave dilapidations too late this can impact on costs Lease Code says landlords should notify tenants at least 6 months before end of lease Consider who other than tenant might be liable
Dilapidations Tenants carry out the work or negotiate a money settlement? Landlord cannot make tenant carry out dilapidation works Once lease has ended landlord s only remedy is money claim in damages at common law Some landlords will use damages to do works but some will have no intention of doing works Damages compensation not punishment
Dilapidations Only actual loss recoverable Amount of damages not always the same as the cost of the works Number of factors and limitations including individual facts and state of market Starting point will be:- - the reasonable cost of the works to comply with tenant s obligations - less any betterment - plus fees - plus irrecoverable VAT - possibly plus loss of rent whilst works carried out (tricky in this market, evidence is crucial)
Dilapidations Landlord should ask itself:- Would a reasonable landlord who had the money in this market carry out the work? If yes should recover cost subject to supersession and statutory limitation
Dilapidations Supersession is items of work that would be genuinely required to remedy the breach of a tenant s repairing covenant but would be superseded by any works likely to be carried out by the landlord at or shortly after the end of the lease E.g. if landlord intends to install air-con
Dilapidations Section 18 of the Landlord and Tenant Act 1927 imposes statutory limitation on amount of damages Damages cannot exceed the amount by which the value of the reversion in the premises is diminished because of the breach and in addition that no damages can be recovered if it is shown that the premises would at or shortly after the end of the term have been or be pulled down or structural alterations made so as to render valueless the repairs covered by the covenant
Dilapidations Note - exception statutory limitation does not apply to most decorating or reinstatement Whether statutory limit or not landlord can only recover actual loss E.g. obligation to reinstate the partitioning
Dilapidations Calculation of actual loss is where it can go wrong Schedule of dilapidations is not the end of the story landlord has to prove loss Tenants never take a landlord s schedule of dilapidations at face value
Dilapidations Property Litigation Association pre-action protocol for dilapidations claims states:- A formal quantification of the landlord s loss based on either a formal diminution valuation or an account of the actual expenditure or a combination of both must be provided by the landlord to the tenant prior to issuing proceedings Landlord can prove diminution by doing works and letting building Landlord may need diminution valuation If neither can stumble
Dilapidations Costs are crucial factor in dilapidations litigation Nature of dilapidations is such that any litigation is unlikely to be settled entirely in favour of landlord or tenant Invariably tenant in some breach so some damages are awarded Tenant may not realise is paying both parties costs Conclusion
Sarah Paul Partner & Head of Commercial Property Landlord & Tenant 2009 The Year of Keeping Going
Dilapidations claims: a) Why are they simple in principle? b) Why are they expensive in practice? Peter Beckett FRICS
In your pack A set of these slides Misconceptions in dilapidations * Uncertainty in dilapidations * A simplified Shortlands-type valuation The valuation in Shortlands Summary of the most complex valuation * Half as long as Marx s Das Kapital, and only twice as funny, I m afraid
General advice to landlords 1. Don t let the tail wag the dog. 2. Don t bank on the money. 3. If considering taking over a dilapidations claim, lie down until the feeling passes. 4. Do the works, assuming they satisfy rule 1. 5.... and I do mean theworks! 6. Be reasonable.
General advice to tenants 1. Think well in advance of termination, and take advice. 2. Don t assume the landlord has no claim. 3. Unless there are strong reasons not to, do the works. 4. Be reasonable.
General advice Did I mention be reasonable? A common situation is: L says Full cost of works ; T says No diminution. Beware: the combined costs of a fully-fought claim usually exceed the award and the cost of works.
Type 1 case: cost of works The normal measure: logical, and the law Cost of works some indication of loss The first port of call in every case In a simple case (ie. most cases), cost = diminution In such a case, no need for a valuation The building surveyor can make a good first assessment.
Type 2 case: straightforward Target value: same in valuations A and B 1 Estimated rental value ("ERV") 29,500 2 Years' purchase in perpetuity at: 8.00% 12.5000 3 Inves tment value 368,750 4 Investor's acquisition costs at: 4.75% 16,721 5 Gross development value ("GDV") 352,029 6 Sale costs at: 2.75% 9,681 7 Net sale proceeds 342,348
Type 2 case: straightforward Valuation A (in compliance): 50-week project 7 Net s ale proc eeds 342,348 8 Scott schedule work 0 9 Less supersession 0 10 Net cost of work attributable to the outgoing tenant 0 17+ Total cost of work plus interest on it 109,625 21 Profit to purchaser at: 20.00% of GDV 70,406 22 Total deductions unrelated to purchase price 180,031 23+ Value in compliance, adjusted for interest and acq costs 148,011
Type 2 case: straightforward Valuation B (actual): 54-week project 7 Net sale proceeds 342,348 8 Scott schedule work 100,000 9 Less supersession 32,507 10 Net cost of work attributable to the outgoing tenant 67,493 17+ Total cost of work plus interest on it 193,033 21 Profit to purchaser at: 20.00% of GDV 70,406 22 Total deductions unrelated to purchase price 272,597 23+ Value in actual condition, adjusted for interest and acq costs 63,284
Type 2 case: straightforward Diminution Valuation A: value in c omplianc e with c ovenants on expiry 148,011 Valuation B: value in actual condition 63,284 D iminution in the value of the landlord's revers ion 84,727 But say 85,000
Type 3 case: deeper analysis Not conventional valuation, but valuation analysis What does value mean? The logical relationship between diminution and the schedule The parallel worlds Probability; deferment; beneficial breaches.
Type 4 case: multiple futures 1 Portland Street, Manchester: before
Type 4 case: multiple futures 1 Portland Street, Manchester: after
Dilapidations claims: a) Why are they simple in principle? Because they are analytically linked to the schedule: you just need a clear head. b) Why are they expensive in practice? Because everyone strikes a pose. From then on, it s litigation, in mind-numbing detail.
Final step (for the valuer): stand back. First step (for the client): It s probably straightforward. Settle it now. It s all about costs if you don t.
Peter Beckett FRICS Beckett and Kay LLP 16 Savile Row London W1S 3PL (020) 7439 6667 www.beckettandkay.co.uk
Chris Batty Partner & Head of Property Development Development Land Acquisition
General Headings A. LAND B. ACCESS C. NATURE AND WILDLIFE D. SERVICES E. PLANNING
Access
Peter Bill London Evening Standard and Estates Gazette Columist
Keith Flavell Managing Partner Q & A
Thank You for Attending We look forward to seeing you next time