UK: Real Estate Update - May 2011

Last Updated: 13 May 2011
Article by Simon Davies

Service Charge Recovery – Repair v Improvement

The recently reported case of Craighead v Homes for Islington Ltd & Anor [2010] is a useful reminder to Landlords to check the cost of works is recoverable through the service charge.

This case involved an estate comprising three blocks of flats let on long leases, in three different forms. One form of lease allowed the recovery of service charge expenses incurred in the 'repair, maintenance and renewal' of the premises. The other two forms of leases went further – also including 'improvements'.

The flats were originally built with single glazed windows. The landlord replaced the windows with modern double glazing and sought to recover the expenses from all tenants. The tenants with the form of lease not including recovery for 'improvements' sought direction from the Leasehold Valuation Tribunal (LVT) as to whether the works amounted to an 'improvement' and were therefore irrecoverable.

The LVT (and later the Lands Chamber of the Upper Tribunal (LCUT) on appeal) held that circumstances can exist, as in the present case, where works can be both repairs and an improvement.

When deciding whether works constitute a 'repair', the overall effect of the works on the building are considered. Thought is also given to the comparative cost of alternative works, compliance with law, current building practice, the nature and value of the building and whether the works create a 'new thing' rather than a mere replacement. The Leases required the Landlord to repair the windows where necessary. The works could only legally be done by way of double glazing, which did not significantly alter the premises even though it was more expensive. As a result, the works were both repairs and an improvement and the costs were fully recoverable.

Reviewing Rent – can late be too late?

When to review?

Most commercial leases require the tenant to pay a market rent for the property. There will generally be an upwards only rent review on a given date. Time is not usually of the essence on a rent review. This means that unless there is a fixed deadline, or the wording of the lease implies a deadline, it is likely the landlord will still be able to review the rent if the date is missed.

The case of Idealview Ltd v Bello [2009] EWHC 2808 (QB) allowed a rent review to go ahead 13 years late. Mr Bello purchased a 50 year lease in 2005. The review due in the middle of the lease, in 1994, had not been carried out. Idealview bought the freehold in 2006 and started the rent review process, referring it to arbitration. The arbitrator determined the rent. Mr Bello refused to pay the increased rent. He said the landlord was too late to trigger the rent review and was too late to require the top up rent to be paid.

Was the Landlord too late?

The Court found that in the absence of a specific time limit, a delay on its own cannot stop a landlord from implementing a rent review. However if a landlord's actions show that it does not intend to carry out the review and the tenant relies on this, the landlord may be prevented from carrying out the review late.

How to proceed?

This case gives comfort to a landlord that misses a rent review date where no deadline is imposed. However in order to avoid receiving a large bill for back rent following a delayed review, tenants may want to check the lease to see if it allows them to instigate the review themselves. If the lease doesn't, they may be able to serve notice on the landlord imposing a deadline for review and making time of the essence.

Localism Bill – Impact on the planning system

Significant changes are being promoted at almost every level of our planning system. The main aim is to reduce "top down" targets and controls and advance a locally-driven system, which is set to gain clear benefits from development.

At the top, a National Planning Policy Framework is proposed, replacing all current policy statements and guidance with a single, concise and less bureaucratic document. The presumption in favour of sustainable development runs throughout and all local plans would have to conform. The Coalition Government hopes to advance it quickly, with the final Framework due by April 2012.

The decentralisation agenda continues at regional level. Regional strategies would be abolished, hopefully effectively this time, under the Localism Bill. However, in London the London Plan would remain. The Government considers that any policy-vacuum would be filled by a duty to co-operate in respect of sustainable development and by the increased importance of local planning.

Significant changes are being promoted at almost every level of our planning system. The main aim is to reduce "top down" targets and controls and advance a locally driven system, which is set to gain clear benefits from development.

Local Councils will continue to produce Local Development Plans. These would however become more strategic.

Neighbourhood Development Plans are proposed at the lowest level, which may be produced by a self selected neighbourhood forum or a Town/Parish Council. These would have to comply with Local Plans, be permissive in nature and be approved with 50% of votes in a referendum. "Neighbourhood Development Orders" would allow small-scale development to advance without planning permission.

Local Enterprise Partnerships - formed by public and private bodies - are being set up, partly to plug the gap made by the removal of Regional Development Agencies and partly to encourage local development.

Question corner

There is currently uncertainty, as the Government aims to reduce what some developers see as useful controls or aids in some areas of planning, whilst promoting localism. Will the new reward-driven system be powerful enough to ensure development happens or will NIMBYism prevent growth?

Chapter 1 of the Competition Act 1998 and Land Agreements

From 6 April 2011 the exemption which excluded Land Agreements from the provisions of Chapter 1 of the Competition Act 1998 was revoked. Failure to understand and comply with these requirements could have serious consequences for property owners and occupiers.

Chapter 1 will apply to existing Land Agreements and those entered into after 6 April.

Chapter 1 of the Competition Act 1998 ("Chapter 1") prohibits agreements between Undertakings which

  • have as their object or effect to prevent restrict or distort competition within the UK or part of it; and which
  • may effect trade within the UK or part of it.

Chapter 1 will apply to both existing Land Agreements and those entered into after 6 April. A Land Agreement includes a lease, licence, transfer or deed of easement (but not a planning agreement such as a Section 106 Agreement).

Undertakings are generally commercial entities operating a business rather than private individuals.

There is only a breach of the restriction in Chapter 1 of the Competition Act 1998 if a relevant restriction has the object or effect to prevent, distort or restrict competition .

In property transactions restrictions likely to be considered as potential breaches include:

  • Restrictive covenants;
  • Exclusivity agreements e.g. a shopping centre lease preventing competitors from operating in the centre;
  • Transactions where a party secures control over a substantial proportion of a site which can be used for a particular type of business.

However, the potential breach will only actually constitute a breach of Chapter 1 if it has an appreciable effect on competition. In order to establish whether there has been an "appreciable effect on competition" there needs to be an assessment of the product and geographical market of the commercial organisation and activity concerned.

An exemption based on four cumulative criteria may apply even if there is a breach of Chapter 1.

Minor infringements will not usually constitute a breach. Generally, if the agreement is between competitors and their aggregate market share does not exceed 10%, or if the parties are not competitors and their aggregate market share does not exceed 15% of the relevant market it is not thought that there is a breach. This is not however conclusive and it will be assessed on a case by case basis.

All land owners and occupiers must have regard to these requirements relating to existing and new agreements. They should constantly review their agreements as the restrictions may apply as circumstances change. An exemption based on four cumulative criteria may apply even if there is a breach of Chapter 1. The conditions of the exemption are:

The agreement:

  1. contributes to improving production or distribution or to promoting technical or economic progress;
  2. allows consumers a fair share of the resulting benefits;
  3. does not impose restrictions beyond those indispensible to achieving those objectives; and
  4. does not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question.

The exemption criteria may, for example, apply to an anchor store tenant going into a new shopping centre who agrees to a limited duration exclusivity agreement (say 5 years) to enable them to build up sufficient goodwill and interest in the property and to attract other tenants in to the centre.

The OFT report

The OFT have published final guidance on the application of Chapter 1 to Land Agreements which is available on their website www.oft.gov.uk. This guidance says:

  1. The OFT considers that only a minority of restrictions in Land Agreements will infringe the Chapter 1 prohibition;
  2. The OFT considers that assessment of market share should usually be based according to value of sales in the relevant market and that where the parties have a market share which does not exceed a 30% threshold (unless there appears to be significant negative effects on competition) it is unlikely that there will be a breach;
  3. In terms of examples of restrictions, the OFT do not think there will be a breach of the Chapter 1 prohibition relating to:
  • Service charge covenants and meeting certain financial criteria;
  • Restrictions imposed on a tenant regarding alterations, repairs, obstructions, applications for planning permission advertisements or relating to hours of use;
  • Provisions relating to the use of the premises which is intended to achieve the desired retail mix and ensure the attractiveness of any shopping centre to consumers. However, if this is extended so that the products sold by that party are limited to restrict competition in the shopping centre it may appreciably restrict competition;
  • An owner of a property benefiting from a freehold covenant which restricts activities carried out at an adjacent property which could block access or interfere with the site unless it limits access or competition in a given market.

Failure to comply with the Chapter 1 requirement can result in an investigation by the OFT, liability to third parties (by way of damages or an injunction), fines of up to 10% of worldwide turnover, and could make the offending provisions, or at worst, the entire agreement, void and unenforceable.

Using charity property as collateral

Charities may consider using their property as collateral for loans but need to establish whether they can and should do this, and then consider the practical steps that need to be taken to comply with the Charities Act 1993 (as amended).

A charity must check its governing documentation to ensure that appropriate powers are granted and that there are no restrictions that would apply.

Section 38(1) of the Charities Act 1993 provides "no mortgage of land held by or in trust for a charity shall be granted without an order of the Court or the Commission"

In respect of unincorporated charities the powers or restrictions may be contained in a charter, will, trust deed, scheme or a combination of these or other documents. Trustees also have statutory powers to enable them to deal properly with land in terms of management and investment, including borrowing in certain circumstances (including using permanent endowment).

In respect of incorporated charities, the articles of association may not include an express power to borrow, but a charitable company has an implied power to borrow unless it is expressly prohibited from doing so in the articles or by the terms of a particular gift.

When considering borrowing, trustees or directors of charitable companies have to have regard to their duties including the duty to act in the best interest of the charity, and comply with the law. They must not put the asset at risk and must not put the charity in danger of insolvency.

Generally there are no statutory restrictions on using assets of a charity as security but the exception is land and this applies to all charities ( with limited exceptions).

Section 38(1) of the Charities Act 1993 provides "no mortgage of land held by or in trust for a charity shall be granted without an order of the Court or the Commission".

However, exemptions do apply and a charity is not obliged to obtain an order where the correct steps have been taken.

Sections 38(2) and (3) of the Charities Act 1993 provide that a charity must take advice on whether the loan is necessary, the terms are reasonable and they can repay on the terms offered. That advice must be "proper" and given by an independent third party who is a qualified person but can (if suitably qualified) be an officer or an employee of the relevant charity.

Case Watch

The following recent cases are of particular note to landlord and tenant specialists.

Landlords may not recover service charges for major works if they fail to consult properly with tenants

Landlords, agents and companies managing residential properties need to be aware that the integrity of the consultation procedure is sacrosanct and dispensation will only be granted where there is good excuse for failing to follow it.

In the latest instalment of Daejan Investments Ltd v Bensons & Ors the Appeal Court upheld the Lands Tribunal ruling that it was unreasonable to dispense with consultation requirements under section 20 of the Landlord and Tenant Act 1985 ("the Act").

Daejan had failed to comply with the consultation requirements under the Act and charged five leaseholders £270,000 in service charges. In dismissing the landlord's appeal in the earlier decision, the court noted that "context is everything" in deciding whether dispensation of the consultation requirements should be allowed on a case by case basis. Unless the provisions of the Act in relation to service charges have been dispensed with by an appeal from the Leasehold Valuation Tribunal, they will continue to stand good in limiting the liability of residential leaseholders with regard to their contribution to pay for qualifying works. The Tribunal concluded that not to follow the consultation process was a serious failing and, as a result, Daejan could not recover more than £250 from each tenant – ouch!

Lost the right to break

It was stated in Aviva Life and Pensions UK Limited v Linpac Mouldings Limited and Others that the right to exercise a break clause contained in a licence to assign was exercisable only when the assignee was still in possession.

The Court of Appeal held in a reserved Judgment that Linpac's right to break their leases was irretrievably lost once it had assigned the leases. It would be very odd for a former tenant to bring a lease to an end when the lease was not actually vested in him, even if technically possible.

There was no case in which the Court had previously interpreted a contractual provision as conferring on a person a right to break a lease at any time when that person was neither landlord nor tenant. If it had been intended that a person should be entitled to break a lease even after assignment of the lease, one would expect there to be a clear unambiguous provision in the lease to this effect

Rights of light – get your site in order

Developers be warned. The appeal of the 2010 Judgment in the case of HKRUK II (CHC) was recently due to be heard at the Court of Appeal. However, an out of court settlement (not revealed) was agreed between the parties so the original Judgment stands.

The lack of a clear decision on appeal is a blow to developers as the original Judgment now reinforces that the starting point for a genuine rights to light claim by a neighbour is an injunction and not damages.

Although developers' attitudes to risks differ, the case serves as a warning to all. Clearly benefit is to be had by developers who gather as much information as possible on neighbouring owners at the site acquisition stage so that a sensible strategy can be put in place to avoid the risk of costly legal proceedings.

Nuisance caused by residential building works

It was held by the Technology and Construction Court ("TCC") in the case of Jones and another v Ruth and another that a builder who had taken more than four years to renovate a terraced house, had caused a private nuisance to the adjoining neighbours as he had taken too long to finalise the works. Damages of £75,000 were awarded to the neighbours for the nuisance aspect of the claim, but the total award of damages which included damages for harassment, personal injury and repairs amounted to £96,800.

This case illustrates the very topical and emotive subject of nuisance emanating from major renovations of a residential property.

The TCC stated that although the law recognises private needs and commercial necessity, such construction activity cannot be at any cost to neighbouring properties.

The complaints received were that the builder had unreasonably prolonged the building works causing noise and dust pollution. It was eventually concluded that the works should have been completed within a year and that the continued works constituted a degree of nuisance that caused a loss of amenity to the neighbours that was incompatible with their reasonable enjoyment of their property.

Key points to take away

  • Landlords unlikely to recover service charges for major works if they fail to consult properly with tenants.
  • Developers must gather as much information as possible from neighbouring sites in relation to rights of light claims at an early stage in the development process. l
  • Builders must ensure that works to residential properties do not continue beyond a year, failing which they run the risk of having to pay substantial damages to neighbouring properties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.