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In the recent case of Avocet Industrial Estates LLP v Merol and another [2011] EWHC 3422(CH) the High Court has decided that a tenant did not validly exercise a break clause in a lease which was conditional on there being no outstanding payments at the break date.  In this case, whilst rent had been paid up to the break date, the tenant had on certain occasions previously paid the rent after the due date provided for in the lease. The lease contained a standard provision entitling the landlord to charge interest on overdue rent. The landlord contended that there was an outstanding payment of the interest at the break date even though the landlord had not issued any demand for the interest. It was held that the condition for exercising the break had therefore not been satisfied. Even the Judge conceded that the outcome was “a harsh one” for the tenant.

In the light of this decision, tenants will need to check carefully through all previous payments due under the lease,  whether rent or other sums, to ascertain whether the landlord could validly charge interest.

The High Court refused permission to appeal. However an application for permission to appeal is due to be heard in the Court of Appeal in March 2012.

Please note that the above is a summary only of the above case and its implications and is not intended to be fully comprehensive. Each matter will depend on its own particular circumstances and we therefore recommend that legal advice is sought on each occasion.

For further information regarding property matters, please contact Pitmans Real Estate team.

Sally Sharp
Partner
T: +44 (0) 118 957 0362
E: ssharp@pitmans.com

This article appeared in the Estates Gazette in 11 July 2011.

One of the starkest, and ongoing, effects of the economic downturn on the property sector has been the creation of a two-tier market. In residential, commercial, leisure or even agricultural space, the flight to quality has seen prime assets rise in value over the past 18 months, while secondary properties have languished stubbornly close to their 2009 lows.

Such a two-tier effect has also established itself within the market for residential development sites. Well-located sites that are suitable for high-end residential development (limited, except in a few cases, to the south-east of England) command values far beyond plots that are suitable for only high-density housing focused towards first-time buyers.

The contracts for such land purchases are usually conditional on planning permission being secured, if not already in place, which typically takes upwards of 18 months. As a result, many developers in 2008 and early 2009 found themselves in a situation where they had entered into contracts that were conditional on obtaining planning permission, having agreed to pay top dollar for a site that was no longer economical to develop.

Delaying tactics

These situations became common, with developers desperately searching for ways to extricate themselves from their agreements. They used a number of delaying tactics, such as arguing that planning permissions obtained were not satisfactory or trying to avoid obtaining planning by invoking extensions to the contract to delay the time at which payment was required in the hope that values would recover. Another tactic was for work on securing planning permission to grind to a virtual halt.

Of course, the converse was true for sellers with option agreements where prices were linked to open market values. In those circumstances, it was the sellers that tried to prevent planning permission being granted, which would have enabled developers to exercise the option at prices below sellers’ expectations.

So how does the situation look in 2011? The experiences of the past two years and the uncertain future while spending cuts take place has made developers nervous about entering into contracts at prices that may drop by the time planning permission has been obtained.

The nature of the ongoing two-tier market in residential development means that the vast majority of secondary locations are unsold, while prime plots are being sold at prices that sometimes reach pre-credit crunch prices.

At the root of this situation lies the time needed to secure planning permission and the subsequent time before any return can be made. With a fresh site, planning approval takes at least 18 months and construction another year. This means that a developer will not be able to sell its property until two-and-a-half years after it first purchased the land.

As a consequence, developers prefer to enter into option agreements, since this gives them absolute control as to whether they proceed. If such an agreement is not acceptable to the seller, developers will want as much “wriggle room” as possible in their conditional contract.

Some developers look to negotiate the inclusion of a right to rescind after planning permission has been obtained, enabling the developer to reassess the viability at that stage and decide whether it wants to proceed. The benefit for the owner is that it is able to use the plans and drawings contained in the planning permission at no cost.

The contract can also be drafted to give the developer as much flexibility as possible. For example, the definition of what is an acceptable planning permission should contain an acceptable minimum square footage so that, if planning can only be obtained for a smaller area, the developer would be able to rescind.

In addition, the definition of an onerous condition should include a maximum limit for section 106 contributions. If the contributions exceed that amount, the developer can decide whether it wants to proceed.

It is, however, essential that such contracts contain the right to waive the conditions so that even if they are onerous, the developer can proceed notwithstanding such conditions are not satisfied.

In a property market that remains risk-averse, such sites remove a significant amount of the risk faced by developers: housebuilders know exactly where they stand on the planning front, and are also building homes to sell in 12 months’ time. However, as one would expect, these sites command the best prices.

Reasonable endeavours

One final point to note is obligations imposed on developers in contracts outlining one party’s responsibility to secure planning approval. With the deal not becoming unconditional until planning consent has been gained, the term “reasonable endeavours” is often used to describe the extent of the developer’s obligations in obtaining permission. The difficulty, or the benefit as the case may be, in defining “reasonable endeavours” is that there is a significant amount of leeway in determining this obligation.

Two other similar phrases are used. It is usual to resist an obligation to use “best endeavours” as this imposes too strong an obligation. However, care should also be taken to try to avoid an obligation to use “all reasonable endeavours” as some cases have held that this obligation can be close to “best” and implies that every reasonable possibility has been exhausted before this obligation is satisfied.

The lesson is simple: for a party to have wriggle room, or stop the opposite party having too much, it is essential to define what is required. Failure to do so could prove costly.

If you would like to know more information about this article, then please contact either Sue O’Brien or Andrew Davies.

Chapter 1 of the Competition Act 1998 prohibits agreements between parties which may affect trade within the UK and which have as their object the prevention, restriction or distortion of competition with the UK.

Up until 6th April 2011, land agreements benefitted from an exclusion to the Chapter 1 Prohibition.  Since 6th April 2011, the Chapter 1 Prohibition now applies to all agreements including land agreements.  

Whilst it would appear that only agreements entered into following 6th April 2011 could be subject to the Chapter 1 Prohibition, the Office of Fair Trading (OFT) is not able to confirm this is the case. 

Furthermore, the OFT indicates that it is possible for an agreement which did not infringe the Chapter 1 Prohibition at the time it was entered into may, as a result of a change in its economic context, infringe the Chapter 1 Prohibition at a later date.  Companies and individuals are now required to self assess land agreements for compatibility with competition law.

Breaches of the Chapter 1 Prohibition are enforced by the OFT who may initiate proceedings against respective parties.  The OFT has powers to carry out unannounced investigations, impose interim measures to halt anti-competitive behaviour, impose fines of up to 10% of a company’s turnover for each year that the infringement continues or order the parties to an agreement.  As such, it is important to be aware that any land agreement entered into does not breach the Chapter 1 Prohibition.

The OFT guidance indicates that agreements which create, alter, transfer or terminate an interest in land may be affected by the Chapter 1 Prohibition.  ‘Agreements’ in this sense may include Transfers, Leases and Assignments of Leases.  The OFT draws particular attention to exclusivity agreements, leasehold use restrictions and freehold restrictive covenants which may be contained within any land agreement.

Typically, agreements between parties with only small market shares within the relevant geographic market are unlikely to have sufficient impact on market conditions to infringe the Chapter 1 Prohibition.  However, assessing appreciability is a question of fact in each case and the burden lies with the parties to ensure compliance.

The OFT previously took the view that an agreement would not normally be regarded as infringing the Chapter 1 Prohibition if the combined market share of the parties or the relevant market does not exceed 25%, but please note that in view of the European Commission Notice on agreements of minor importance, the 25% threshold has now been abandoned by the OFT.

For further information in respect of the provisions of the Competition Act and land agreements, please do not hesitate to contact Delphine Mehouas.

In these increasingly cost-conscious times, businesses are considering ways to improve revenues. One recent development which has the additional benefit of being “green” in this equally eco-conscious climate is the feed-in-tariff scheme (FITS).

This came into force on 1st April 2010 and requires electricity suppliers to pay small-scale generators (whether businesses, landlords or private house-holders) for electricity they produce from renewable sources whether on commercial or residential property meeting the following criteria:

• generation of no more than 5 mW of electricity from solar photovoltaic cells (solar panels) or wind or hydro power or anaerobic digestion or micro combined heat & power (“the installation”)
• the installation is accredited and registered in the central FITS register
• the FITS generator must “own” the installation

Who Pays?
FITS payments are made by electricity suppliers not the Government. The generator receives a fixed sum for each kilowatt hour (kWh) of electricity generated and either a guaranteed rate per kWh for surplus exported to the national grid or if preferred the open market rate for such exported power. The minimum tariff paid is fixed by the Secretary of State and is currently 3p per kWh  (adjusted in line with the Retail Prices Index) and monies are payable for the tariff life-time which varies according to the type of technology – 25 years for solar panels, 10 years for micro combined heat & power systems and 20 years for the rest.

Accreditation
For several reasons it is financially advantageous to obtain accreditation for a FITS installation sooner rather than later. The longer left, the lower the starting rate for the generation tariff, particularly for technologies (including solar panels and wind technology) where the installation and operating cost are likely to reduce in the future. Also if the up-take of the scheme is wider than predicted we may see a reduction by the Government in the overall tariff scale. The scheme permits periodic tariff reviews with the next due in April 2013 but the Government has already announced an intention to “rebalance” the scheme in favour of more cost-effective lower-carbon technologies and could easily bring forward the review date. Indeed the Renewable Energy Association announced on 30th November 2010 that the Government has decided to “cap” FITS payments for 2014/5 at £360m (down from £400m) Any reduction in tariffs will only affect new projects; those already accredited will continue to receive payments at the originally assessed rate subject to annual RPI adjustment.

Sub-letting

Increasingly there are companies offering to pay for the capital cost of installation of the technology (usually solar panels or a wind turbine) who will then receive the FITS payment in return for either rent or access to low-cost electricity. Any surplus sold to the Grid attracts payments which again could be retained by the generating company or shared with the landowner, depending on the terms of their arrangement. With power costs rising, the lure of cheaper electricity will be attractive to a homeowner.

However there are hurdles to be overcome. If the property is mortgaged, lender’s consent will usually be required. Lenders, particularly of highly-geared residential properties, may not want to comprise the re-sale value of the property in case they need to repossess and sell in a hurry and some buyers may be put off by the idea of the lease arrangement either because of the access rights which will need to be included or concerns about ongoing repairs during the lease term or perhaps most importantly the requirement for removal of the equipment and reinstate of the premises at the end of the term. For any lease of commercial premises, contracting out of the Landlord & Tenant Act 1954 provisions are a must for any owner.

Insurers too will need to be informed and the question of who bears any additional premium addressed.

Where to site the equipment?
Not all sites will be suitable for a FITS installation. Rooftops in urban areas often generate too erratic a wind pattern for a turbine whilst a south-facing property in the South of England stands the best chance of sufficient sun for a solar panel to be effective. However overhanging trees may also render a site unsuitable, as may development of an adjacent property. The latter could occur during the life of the lease and the only solution may be to permit the FIT generator to terminate the lease and remove the equipment. In commercial leases a Landlord may not want to permit such a break right, e.g. where they receive rent rather than cheap power. In such a case the right to break could be triggered by the income stream for the generator say falling below a specified level.

Drafting Thoughts
It is early days and currently there is no industry standard precedent FITS lease.

Any drafting will need to consider:
• access requirements
• the type of technology involved and its specific requirements
• the exact area to be leased (which may need to include specified airspace and particularly a plan if the installation is on a sloping-roof)
• planning and any other third party consents needed
• that equipment fixed in a sufficiently permanent way is presumed by common law (which cannot be overridden in a lease) to be a fixture, owned by the landowner. If not demised then it may be that the installation is “owned” by the landlord rather than the generator. However suppliers seem more inclined currently to pay the registered generator ignoring such legal technicalities.

Please note that the above is a summary only of the scheme. Pitmans accept no liability for any reliance on this article.

Katharine Marshall
Director - Real Estate
+44 (0) 118 957 0206
kmarshall@pitmans.com

New SDLT relief (effective for transactions on, or after, the date on which the Finance Bill 2011 receives Royal Assent) for bulk (6+) purchases such as site assemblies. Buyer can choose to claim relief and pay SDLT (@ 1% +) on the mean consideration i.e. the aggregate consideration divided by the number of dwellings. The dwellings will be treated as residential property no matter how many dwellings are involved. The aim of this relief is to reduce the barrier to investment in residential property, and promote the supply of private rented housing.

Threshold for first time buyer relief from SDLT to be reviewed this Autumn

Disadvantaged area relief from SDLT to be abolished after 2012

Two new anti avoidance measures effective from 24/03/2011 – (i) to catch relief available for sub sales utilising “alternative property finance” (commonly known as “Islamic mortgages”) and by ensuring it will no longer be possible to qualify as a “financial institution” under those sections of the FA 2003, merely by holding a consumer credit licence and (ii) applying SDLT to exchanges of land – you will now have to pay on the greater of: the market value of the interest acquired OR what the chargeable consideration would be under the normal SDLT rules for consideration.

For further information relating to Residential Property, please contact:

Katharine Marshall
Director
+44 (0)118 957 0206
kmarshall@pitmans.com

This is intended to be a summary of the Budget and is not intended as comprehensive legal advice and should not be relied upon as such. Pitmans accepts no liability for any such reliance on this article.

What impact will the Bribery Act 2010 have on your business? What are the penalties connected with the Equality Act 2011? How do you achieve compliance and best practice for your property?

Are you up to date with current legislation? Looking for a swift update on key areas? Read the rest of this entry »

Introduction

The new Bribery Act, passed by parliament in 2010, was due to be implemented in April 2011.  However, at the end of January, a government spokesman said that the act would not come into force until three months after guidance to the act had been made available, which will be published “in due course”.

The Act is intended as a wholesale reform of the old bribery laws which were a complicated and confusing combination of statutory and common law offences from more than 100 years development of law in this area. The need for reform was widely acknowledged, however, the final result may have alarming consequences for corporate entities operating in the UK as many law abiding businesses could inadvertently break the new law if they are not careful.

Offences Under the Act

The Act re-classifies the basic bribery offences of bribing another person and receiving a bribe whilst also introducing two new offences. The first of these is in respect of bribery of a foreign public official. Additionally the Act also creates an offence for corporate entities of failing to prevent bribery occurring within their organisation. The only defence to this is if the corporate entity has put in place “adequate procedures” designed to stop incidences of corruption. This offence applies to any corporate entity that carries on its business, or even part of its business, within the U.K.

The penalties can be extremely severe.  Individuals could face a maximum penalty of ten years imprisonment and/or an unlimited fine if found guilty. Corporate entities may face an unlimited fine in respect of an offence under the Act.

Facilitation Payments and Corporate Hospitality

A facilitation payment is usually a payment to a government official to speed up a routine bureaucratic action. These are illegal under the Act. However the decision to prosecute will be at the prosecutor’s discretion and he/she will consider various factors including whether it is in the public interest to prosecute.

Most concerning however is that prosecutorial discretion will also have to be relied on in respect of corporate hospitality, which may fall foul of the Act. It has at present been stated that “routine and inexpensive hospitality” will be permitted however “lavish or extraordinary hospitality” will not. What remains unclear is where this distinction will be drawn. Will a box of chocolates and a bottle of wine be acceptable? Will tickets to a football match? The result is that corporate entities in the UK find themselves in the awkward position of having to guess what level of advantage provided by way of corporate hospitality is reasonable and what may result in prosecution.

Conclusion

In light of the Act, the need is now more urgent than ever for corporate entities to either commit to implementing systems to counter bribery or review their current anti- bribery procedures to ensure they will be effective in preventing bribery being committed on their behalf and to be able to rely on the “adequate procedures” defence in appropriate circumstances.

All corporate entities may wish to put in place staff training programmes and ensure they have written procedures that are readily available. It may additionally be worthwhile to incorporate such policies into employment contracts and allow the employer to terminate employment in the case of breach.

With such severe penalties under the Act, it has become crucial that the action that is taken does not merely have the effect of prohibiting bribery but that it actively seeks to prevent it where it might arise. For some businesses this will involve nothing more radical than an assessment of their existing policies however for others it could mean a complete overhaul.

If you would like further information on the Bribery Act 2010 from Pitmans please visit the Pitmans Corporate website, or contact our team direct.

Adam Dowdney
adowdney@pitmans.com
+44 (0) 118 957 0574

It seems that regrettably the Government has no intention of bringing relief to many in the business community with a re-think of the former Labour Government’s planned rise in the threshold for empty rates relief.

In Parliament on 17th January 2011 Robert Neill, the Secretary of State for Communities and Local Government, was asked what assessment his Department has made of the likely effect of the reduction of the empty property rates threshold on the business sector?

In a written answer Mr Neill replied that although the Government recognises the problems caused by the previous Government’s reforms of empty property rates, any action would need to be balanced against the costs involved (estimated at £400 million to continue with the temporary empty rates measure) particularly in the light of the current fragile economic climate. The Coalition has no immediate plans to reverse the reforms and the empty property rate threshold will revert to £2,600 (from £2,200) from 1 April 2011.

For further information please visit Pitmans Real Estate website or contact our team direct.

Katharine Marshall
Director – Commercial Property
T: +44 (0)118 957 0206
E: kmarshall@pitmans.com

Please note that the above is a summary only and is not intended to be fully comprehensive. Pitmans accepts no liability for any reliance placed on this article.

Restrictive covenants in favour of and in the name of a previous owner (the ‘Vendor’, now deceased) of land were held by the High Court in Churchill v Temple [2010] All ER (D) 170 (Dec) not to be enforceable by the current owners of the land.  The death of the Vendor meant that the covenant could not be enforced by a subsequent owner.

In this case, Churchill purchased property which was subject to restrictive covenants in favour of the Vendor contained in a 1967 conveyance of the property to Churchill’s predecessor in title.  The covenants included an obligation to obtain the consent of the Vendor to the construction of a dwelling or any structural alteration or addition.

The Vendor subsequently sold its property, which was later acquired by Temple.  The Vendor is now deceased.  Churchill wished to demolish the house currently on his property and replace it and so sought directions from the Court as to the validity of the restrictive covenants.

The Court held that the term “Vendor” in the restrictive covenant only included the original vendor and not his successors in title.  Further, the original parties to the conveyance containing the covenants were assumed to have taken into account any reasonably foreseeable contingencies, having considered the position of the parties. 

In this case the Court took into account the amount of time that had passed and the fact that neither party to this dispute was a party to the original conveyance containing the restrictive covenants.

The Court held that the Vendor would have wished to preserve the value of his property but would not have intended an indefinite restriction.  The restrictive covenant was therefore discharged by the death of the Vendor.

Each decision relating to covenants of this kind will depend on its own facts, but this case provides a welcome indication for owners of property subject to this type of covenant.

For further information please visit Pitmans Real Estate website or contact our team direct.

Mark Holloway
Solicitor – Commercial Property
T: +44 (0)118 957 0352
E: mholloway@pitmans.com

Yes, really.  In Nicholas Prestige Homes v Neal (2010) the Court of Appeal has confirmed that a contract concluded by email was binding. How did such a seemingly obvious point come to be taken and what can we learn from this case? There appear to be three key messages.

First, the Court upheld the rule that the claimant firm of estate agents were not entitled to a commission on a sale of a property which had been arranged by another firm of agents. The claimant firm had not introduced the purchaser to the purchase. However, because they were sole agents at the time they were entitled to damages equivalent to their commission because they lost the “certain” chance of earning it. 

Secondly, the seller represented herself in the County Court and the Court of Appeal. Whilst they bent over backwards to give her the benefit of the doubt, she could not avoid the almost inevitable conclusion that she was bound by the terms of the contract she had made.

The third key message, therefore, is that it is easy to bind yourself into an agreement by email. This is how it happened. After a site visit the claimant estate agents sent Mrs Neal an email which said they would be joint agents until 31 December 2006 and that from 1 January 2007 they would have sole selling rights. Two sets of terms for the different agency arrangements were attached. The claimant chased up with a phone call and Mrs Neal replied by email saying: “That’s fine, look forward to some viewings.” The Court of Appeal highlighted two issues that were crucial to the outcome: 

(i) whether it mattered that Mrs Neal had not fully read the email or the attachments (it did not) and;

(ii) that her acceptance was a reply to the original email such that there was no possibility of arguing that her message “that’s fine” related to anything different.

Conclusion:

The case would have been remarkable had the Court not found that a contract existed. It does highlight the ease with which contracts can be formed by email and the danger of not reading things properly. It was no defence to say that the emails or attachments had not been read or did not reflect what was intended.  Once accepted, the terms were binding. Oh, and we would say this, had Mrs Neal taken advice and not acted in person she might well have avoided two court hearings, adverse costs orders and have had a good chance of reaching a more favourable negotiated settlement.

Tim Clark
Partner
+44 (0)118 957 0264
tclark@pitmans.com
http://www.pitmans.com/dispute-resolution/