UK: Real Estate Bulletin - Autumn 2015

Welcome to the Autumn edition of the real estate bulletin.

The Courts have been particularly busy in the last few months considering a number of property related matters. In this issue, we look at notable decisions and the impact they have on the property industry:

  • The first right to light case to reach the Courts since Coventry v Lawrence will be welcomed by developers concerned about neighbouring owners applying for injunctions
  • The Supreme Court has refused to re-write service charge provisions despite this leading to a commercially harsh decision
  • In two recent cases, the Court of Appeal confirmed that relief from forfeiture should be granted where the landlord would otherwise obtain a significant windfall
  • Bad news for developers who remain liable for empty rates even when the property is being redeveloped and is unfit for occupation
  • More bad news on the rates front as the Supreme Court held that occupiers will not be able to treat separate premises on different floors as one unit for business rates purposes
  • In a surprising decision, the High Court upheld as valid a notice to complete that contained several errors
  • Finally, we look at further tax changes affecting non-UK residents who own residential property in the UK and may now be caught by Capital Gains Tax and Inheritance Tax

LIGHT AT THE END OF THE TUNNEL FOR DEVELOPERS

By Keith Conway and Armel Elaudais

Scott v Aimiuwu (unreported) is the first Court decision since the Supreme Court's judgment in Coventry v Lawrence (see our Real Estate Bulletin, April 2014) examining whether the Court should grant an injunction preventing development or order damages in lieu of injunction in relation to a rights to light claim.

Background

The grant of an injunction is a discretionary remedy and until the relatively recent Supreme Court's decision in Coventry v Lawrence the position on whether damages should be awarded instead of an injunction was uncertain but had moved somewhat against developers. The test was based on a 19th Century decision (Shelfer test) which established that damages rather than an injunction should only be granted in exceptional circumstances where:

  1. The injury to the claimant's right is small
  2. The injury is capable of being estimated in money
  3. The injury can be adequately compensated for by a small payment
  4. It would be oppressive to the defendant to grant an injunction

At the end of last year, the Supreme Court held in Coventry v Lawrence that the above test should no longer apply. Instead the Court should consider the facts of each case, apply judicial discretion and not award an injunction as of right. It should look to whether the public interests outweigh the breach of the landowner's right and whether the grant of an injunction would be more prejudicial to the developer or others including members of the public who might benefit from the development. The Supreme Court's decision has been regarded as good news for developers. Importantly, the Judge's application of these principles in Scott v Aimiuwu will provide developers with further comfort.

Facts

This was a private residential claim. The Aimiuwus had obtained planning permission to extend their home. Although there were discussions between them and their neighbours, the Scotts, about the interference with rights to light to the Scotts' house, they proceeded with the construction without resolving matters. It was not until the works were almost complete that the Scotts applied for an injunction seeking a cut back of the extension. Experts agreed that the interference was actionable, however, it only affected secondary accommodation (a garage, utility room and bathroom). In turn the Aimiuwus argued that the Scotts were barred from taking action on the ground that the discussions between the parties had created an estoppel.

Decision

The Judge rejected the estoppel argument, but refused to grant an injunction and awarded damages to the Claimants instead. The Judge accepted that the infringement was actionable but noted that it only affected secondary accommodation. Having applied the Shelfer test in the context of Coventry v Lawrence, the Judge considered that in the circumstances it would be oppressive to grant an injunction.

Damages

The decision is also interesting as far as the calculation of damages is concerned. The Judge considered the diminution in value caused by the extension and found that this figure (GBP 11,500) was too low. On the other hand, he found that damages based on a share (in this case a third) of the Aimiuwus' profits (GBP 65,000) would be too high. Instead, the Judge awarded damages based on what he considered would be a reasonable settlement (or release fee) figure if the parties had negotiated a settlement at an early stage.

Conclusion

This pragmatic approach will be welcomed by developers who will be pleased to see that the Courts will look at all the circumstances of the claim and are now prepared to depart from a stricter approach when considering whether to grant an injunction. This approach is in line with the Law Commission's proposed changes to rights to light law, which would prevent neighbours from seeking an injunction if they have not served a statutory notice of their intention to do so at an early stage (see our Real Estate Bulletins, June 2013 and Spring 2015). Each case will be different depending on the circumstances but large commercial developers will also be very pleased that they will not necessarily have to share a large part of their profits.

BE CAREFUL WHAT YOU AGREE TO!

By Rebecca Noble

Judgment was recently handed down by the Supreme Court in the case of Arnold v Britton and Others [2015] UKSC 36. The case provides valuable guidance on how the Court will seek to interpret the unfavourable wording of contracts and leases (in this case, payment of service charge).

Facts

The case concerned leases of chalets in Oxwich Leisure Park in Wales. The leases were granted between 1978 and 1991 for a term of 99 years from 25 December 1974. The service charge provisions within the leases (which all had similar wording), provided for the tenants to make a payment in the first year of the term of GBP 90.00 per annum towards service charge and for each following year, to pay a sum which increased on the previous by 10% (therefore a compounding rate of 10%). Whilst this may have been acceptable to the tenants at an earlier time in the term of the lease, at 2015 (had the lease been granted in 1980) the total service charge would have increased to over GBP 2,500 and would be set to increase to in excess of GBP 550,000 towards the end of the term!

The proceedings first came to Court by way of the landlord issuing declarative proceedings (in particular, claiming that the sum payable was not a service charge within the meaning of Section 18(1) of the Landlord and Tenant Act 1985). The Judge at first instance found in favour of the tenants.

The decision was later overturned by Mr Justice Morgan, whose decision in turn was upheld by the Court of Appeal and the Supreme Court.

In the Supreme Court, the tenants asserted that the provision was not what had been intended by the parties. Instead they argued that the sums acted as an overall cap on the amount the landlord could recover (in effect, that the words "up to" should be read into the clauses). The tenants argued that the landlord should instead only be entitled to a fair proportion of the cost of the total services incurred.

Decision

The Supreme Court dismissed the tenants' appeal and found that the wording of the leases, albeit commercially harsh on the tenants, was to stand as the correct interpretation.

Lord Neuberger, with whom Lord Hughes and Lord Sumption agreed, reasoned that the wording of the clauses was sufficiently clear and that it was not appropriate for the Court to depart from that wording when it was clear. The tenants would therefore be liable to pay to the landlord a fixed sum (rather than a proportion of what the landlord had incurred in providing the services) as the wording of the clauses had intended.

The Court noted that the leases had been entered into at a time when inflation was high (and therefore the wording had made sense to the parties at the time it was entered into). The risk of the wording fell onto both parties: it was the bad luck of the tenants that in the last fifteen years, inflation had been rarely above 4%, but, had inflation been higher, the landlord would have been required to pay for the shortfall. Lord Neuberger noted that: "The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language."

Lord Neuberger noted what he thought to be relevant factors (which are summarised below):

  1. Commercial common sense and surrounding circumstances should not take precedence over the importance of the language of a provision. The meaning of what was intended by the parties is most likely to be found by reading the provision
  2. The clearer the wording of a provision, the more difficult it is for the Court to depart from it
  3. Commercial common sense cannot be invoked with hindsight. If the wording of a provision results in a bad outcome for one or both parties, it does not mean that the wording does not have the intended meaning
  4. Courts should be slow to reject the meaning of a provision because it appears to be imprudent and the purpose of interpretation is to identify what the parties agreed and not what, with hindsight, should have been agreed
  5. The Court can only take into account facts which existed at the time the contract was made
  6. In some cases, an event later occurs which was not intended or contemplated by the parties, looking at the wording. In such case, if it is clear what the parties would have intended, then the Court will give effect to that intention
  7. Service charge clauses are not subject to any particular rule of interpretation

Lord Carnwarth, in disagreement with the majority, gave an interesting judgment. He stated that he would have found for the tenants and allowed for a limited addition to the wording, allowing for a commercially better result: "...the limited addition proposed by the lessees does not do such violence to the contractual language as to justify a result which is commercial nonsense."

Conclusion

Whilst the decision results in a commercially harsh decision for the tenants, it shows the Court is reluctant to depart from wording which, although has uncommercial consequences as at the present day, was intended by the parties as at the date of the contract and is sufficiently clear in its meaning. The Court is not able to assist parties by amending or interpreting wording in a different manner solely because the wording has resulted in an unjust outcome or bad bargain for one party (or perhaps both) and will only interfere where the meaning of the wording is so uncertain that a different commercial approach is demanded.

The Court did note that there may be a case for extending the existing statutory provisions which protect tenants against unreasonable service charges to circumstances such as these (although this would be a matter for the legislature).

The case shows that the meaning of particular wording, once tested, can often come as a surprise to parties (for example, if a tenant is required to pay a penalty payment on the exercise of a break clause, when it did not intend to do so when it entered into the lease). It emphasises that parties (together with their solicitors or surveyors) should consider the long term effects of particular wording and in the case of service charge and other financial provisions, calculations should be carried out to assess what the liability will be in five, ten years and so on.

FORFEITURE IS NOT THE WAY TO GET A WINDFALL

By Armel Elaudais

In two recent cases, the Court of Appeal has looked at the factors to be taken into account when considering whether to grant relief from forfeiture to a tenant who has breached the covenants in its lease. In both cases, the Court of Appeal found that relief should be granted where forfeiture would otherwise result in the landlord gaining a windfall.

Background

The Courts have a discretionary power to grant relief from forfeiture for breaches of covenants other than the non-payment of rent. Although the Courts have historically refused to lay down rigid rules setting out when relief should be granted or not, relief will generally be granted where:

  • The tenant remedies the breach or, if the breach cannot be remedied, pays adequate compensation to the landlord, and
  • The Court is satisfied that the tenant will comply with its obligations under the lease in the future

But the Court will also consider other factors such as the conduct of the tenant and whether the breach was deliberate. The Court has to carry out a balancing exercise between the advantage that the landlord may gain as a result of forfeiture, the disadvantage caused to the tenant by forfeiture and the damage suffered by the landlord as a result of the tenant's breach. All these factors were weighed by the Court of Appeal in Magnic Ltd v Ul-Hassan and Friefeld v West Kensington Court Ltd. In both cases, avoiding the landlord receiving a disproportionate windfall was considered to be a deciding factor in favour of granting relief from forfeiture to the tenant.

Magnic Ltd v Ul-Hassan [2015] EWCA Civ 224

Mr Ul-Hassan had a 125 year long lease of commercial premises. His son had acquired the sub-lease of the premises and together they operated a takeaway pizza business from those premises. Both the lease and the sub-lease contained covenants to comply with planning legislation. Ul-Hassan and his son had obtained planning permission to use the premises as a takeaway restaurant but this permission was subject to the installation of a fume-extraction system. The demised premises did not include the exterior of the building so that Ul-Hassan needed the landlord's permission to install the extraction system. Ul-Hassan sought landlord's consent but this was refused by the landlord. As the planning condition was not satisfied the planning permission eventually lapsed leaving Ul-Hassan in breach of his lease.

There was a series of proceedings between the parties where the landlord sought possession which eventually resulted in the lease being forfeited unless Ul-Hassan ceased business by a required date. Ul-Hassan appealed and continued trading pending his appeal in the mistaken belief that his appeal gave him a stay of execution. When Ul-Hassan's appeal was dismissed, the landlord sought a declaration that the lease was forfeited and Ul-Hassan applied for relief from forfeiture. Both the District Judge and the County Court dismissed the application for relief so Ul- Hassan appealed to the Court of Appeal.

The Court of Appeal focussed on the way the Court of first instance had exercised its discretion and found that:

  1. The District Judge had incorrectly characterised Ul-Hassan's continuation of business as "a deliberate decision" when this was in fact a genuine misunderstanding about whether the stay of execution following the first appeal had also extended the deadline for him to cease trading
  2. This had in turn impacted upon the weight given by the District Judge to the windfall that the landlord would obtain from forfeiture. In other words, the fact that the lease was worth about GBP 150,000 should have weighed quite heavily in favour of granting relief but the District Judge had given this less weight because he wrongly considered that there had been persistent failures by Ul- Hassan to satisfy conditions imposed by the Court
  3. Finally, the District Judge was wrong to state that there had been no significant changes in Ul-Hassan's position, when he had in fact ceased trading as soon as the first appeal had been dismissed
  4. The District Judge had failed to take into account all the circumstances. The Court must carry out a balancing exercise and give proper weight to the reason for non-compliance. In this instance, it was disproportionate to deprive Ul-Hassan of his property (and the valuable asset that the lease represented) because of a legal error when his extra few months' trading had not caused the landlord any additional damage

Mr Ul-Hassan's appeal was allowed and he was granted relief.

Freifeld v West Kensington Court Ltd [2015] EWCA Civ 806

Mr Freifeld was the tenant of seven commercial units, one of which was sub-let to a Chinese restaurant business without the landlord's consent and in breach of the lease. The restaurant was causing issues with other occupiers on the landlord's estate so the landlord applied for forfeiture. Freifeld made a first application for relief on such terms as the Court saw fit but relief was refused. By then Freifeld had procured the surrender of the infringing sub-lease. It therefore re-applied for relief, this time on the condition that it had to assign the lease within six months, failing which it would surrender the lease. Once again, the Court refused the application so Freifeld appealed.

The appeal focussed on the fact that the lease was worth GBP 1-2 million so that forfeiture would result in the landlord gaining a significant windfall. While the Judge at first instance had considered this windfall, he had considered that this should make the tenant more scrupulous in complying with his obligations under the lease and, because the breach had been deliberate, relief should be refused. The Court of Appeal rejected this approach:

  1. While the wilfulness of the breach is a relevant factor to be taken into account, the fact that the breach is deliberate does not mean that relief cannot be granted. The Court of Appeal reiterated the well-established principle that the Court is not required to find exceptional circumstances to grant relief in such a case
  2. It repeated the points made in Magnic v Ul-Hassan that when considering whether to grant relief the Court should have regard to the value of the leasehold interest. By obtaining forfeiture the landlord should not be able to gain a disproportionate windfall for a breach that has not caused him irreparable damage
  3. Taking these factors into account, the Court must carry out a balancing exercise. The question of the landlord's windfall must be considered on its own and then weighed against the tenant's conduct

The Court of Appeal therefore granted relief on the condition that Freifeld would sell the lease within six months.

Conclusion

These decisions reinforce the principle that forfeiture provisions in a lease are intended to ensure compliance by the tenant with its lease obligations but are not intended to have excessively penal consequences by depriving the tenant of a valuable asset in favour of the landlord. While this may provide some comfort to tenants, the Court of Appeal has made it clear that these decisions should not be misinterpreted as giving tenants carte blanche to disregard their obligations, as the Court will have regard to all the circumstances in each case and could still refuse relief if forfeiture is the only way to ensure the tenant's performance of its covenants. In addition obtaining relief from forfeiture is usually a costly remedy for a tenant who is normally required to indemnify its landlord for all legal and other costs incurred.

To read this article in full please click here.

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
Armel Elaudais
 
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.