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 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.

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