In this month's issue we comment on the recent House of Lords decision in England on the eviction of travellers, a recent English case on interpretation of the planning provisions in an option agreement and give an update on REITs following the Budget.

Recent Decisions

Is an application for approval of reserved matters a planning application?

Asquith Properties Limited entered into an Option Agreement to buy property in Bradford from Castlebay Limited. The option period was to expire on 22 December 2004 but would be extended to not later than 22 June 2005 if, as at 22 December 2004, a decision was awaited in respect of a planning application.

Outline planning permission for Asquith’s intended development was granted in August 2004. As is usual, the outline planning permission was subject to Asquith obtaining the planning authority’s approval for a number of “reserved matters”. On 17 December 2004, Asquith submitted a reserved matters application in respect of the most important of the reserved matters. Then, over the season of goodwill, a dispute arose between Asquith and Castlebay as to whether the option period had expired on 22 December 2004 or had been extended because a decision was awaited in respect of the reserved matters application.

Eventually, the Court of Appeal upheld the High Court’s decision that the option had expired on 22 December 2004, on the basis that, although a decision was awaited on a reserved matters application, that did not equate to a decision being awaited in respect of a planning application.

Bruce Anderson, a Partner in our Acquisition and Development Team, comments:

It is settled law, both north and south of the border, that an application for approval of reserved matters is not an application for planning permission. So you might think that Asquith’s case was doomed from the start. Why, then, did they pursue it as far as the Court of Appeal?

The reason is that Asquith took the view that, in the context of the detailed option agreement which they had entered with Castlebay, “planning application” had a wider meaning and, in effect, included applications for all the consents they required under planning legislation to carry out their intended development.

There is some precedent for that. In another English case (Hargreaves Transport Limited v Lynch in 1969), the Court of Appeal had decided that, because it was clear in the circumstances of the case that the purchasers required a planning permission which would enable them to start using the site as a transport depot as soon as possible, the provision in the contract that it was conditional on Hargreaves receiving planning permission had not been purified while there were still reserved matters outstanding. That gave Asquith hope. If they could show that, in the context of their option agreement, “planning application” had a wider than normal meaning, the option period would extend into 2005.

Unfortunately for Asquith, the Court of Appeal took the view that, unlike the situation in the Hargreaves case, there was no reason to give the phrase a wider meaning. Lord Justice Chadwick’s words are salutary: “I am left with the firm conclusion that, if these parties had intended some meaning to be given to the phrase, “any application for planning permission” wider than the meaning which that phrase normally bears, they would have made that clear”.

What lessons are to be learnt from Asquith’s experience? Ensure suspensive conditions are drafted very carefully. Tell your solicitor what is important to you. Exactly what do you need before you are prepared to pay the purchase price? Spell that out in the contract. Do not assume you will be able to construe phrases the way you might hope or expect.

Case referred to: Castlebay Limited v Asquith Properties Limited

The full text of the decision is available from the British and Irish Legal Information Institute here.

Moving on

Travellers evicted despite claimed breach of Human Rights

This decision consists of two conjoined appeals in which the local authorities (Lambeth and Leeds Councils) sought possession orders against travellers and homeless people. In both cases the occupiers sought protection from eviction in terms Article 8(1) of the European Convention on Human Rights (the Convention) which provides the right to respect for private and family life and home. The House of Lords granted possession in favour of both Local Authorities.

In the Leeds case, as travellers had occupied the site (a piece of recreational ground) for only two days when the Local Authority began proceedings for removal, they had not established the links with the place they were occupying for it to be considered their home. Even if it had been considered to be their home, the requirement to consider their needs and different lifestyle (in terms of Article 8(2) of the Convention) had been met by requiring the proof by the local authority of its entitlement as the owner of the land to obtain an order for possession in exercise of its property rights.

In the Lambeth case, the Local Authority validly terminated a lease in favour of a housing authority which had allowed the homeless people to occupy the property. The authority then sought possession of the property from the occupiers. Although the premises could be deemed to be the occupiers’ homes, the occupiers’ rights to retain possession of the properties ended on termination of the lease between the local authority and the housing authority. At that point the occupiers became trespassers.

Lord Scott advised "No court, domestic or in Strasbourg, has ever suggested that a person who enters and remains on land as a trespasser can assert an Article 8 right to respect for the home he has unlawfully established on the land as a defence to the owner's eviction proceedings."

Sheila Webster, Partner, and Head of our Property Dispute Resolution Team comments:

Many landowners and developers have faced the difficulty of dealing with travelling people camping on their land, sometimes at a critical point during a development. Over the years, the courts in Scotland have altered rules to allow relatively straightforward applications for removal of such unlawful occupiers without too much delay. However the advent of the Human Rights Act 1998 raised another potential hurdle – was eviction of travelling people a breach of their right to respect for private and family life and home, given their particular form of lifestyle? Now, in two cases, the House of Lords has made it very clear that a trespasser or unlawful occupier will have considerable difficulty in resisting eviction on the grounds of human rights, and that will be equally true in Scotland. Some might say this is a victory for common sense.

Cases referred to: Kay and others and another (FC) v. London Borough of Lambeth and others Leeds City Council v. Price and others and others (FC)

The full text of the decision is available from the House of Lords website here.

News

This time the Chancellor gets it 'REIT'

James Aitken, Property Tax Associate gives an update on Real Estate Investment Trusts following the budget

After years of delay the UK Government has finally confirmed that from January 2007 the UK will have its own form of Real Estate Investment Trusts (“REITs”).

The introduction of REITs has been universally welcomed. It is in fact hard to find someone who has argued against the introduction of REITs. The Chancellor has received yet more praise from the various property industry bodies now that he has made major concessions on the structure of these tax exempt vehicles.

What are Real Estate Investment Trusts?

In simple terms REITs provide the chance to indirectly invest in property. An investor does not own the bricks and mortar outright. There is therefore no need for investors to find a tenant, collect a rent, organise repairs, deal with insurance or even employ a letting agent. REITs will pool investors’ assets to buy a portfolio of properties which will be let to companies or individuals. Shares in REITs will be bought and sold like any other shares.

A REIT has tax free status or more accurately at least 75% of a REITs income will be tax free. That is the crucial point here. The UK Government receives its pound of flesh from the investors in the REIT and not the REIT itself. The REIT does not pay tax on any income or capital profit earned from property investment. At least 75% of a REITs income must come from property rents. That is the part of the business that is tax free. The remainder of the business will be taxed in the normal way.

There are also clear benefits for the investor. Dividends from property firms are presently treated as though they have had basic rate tax deducted. This cannot be reclaimed even if you hold shares in an ISA or a pension. Dividends on REITs will be treated differently. Basic rate income tax of 22% will be deducted at source and higher rate taxpayers will have to pay a further 18% but investors will be able to reclaim the tax if they invest in an Individual Savings Account or a pension.

So how does a company qualify for tax exempt REIT status?

• The REIT must be a property letting business.
• The REIT must be UK resident.
• The REIT must be listed on a recognised stock exchange (this includes the London Stock Exchange and Channel Islands Stock Exchange but not AIM or OFEX).
• More than 75% of the REITs income must come from property rents.
• The remaining percentage is likely to come from “development or services”. More detail on what this covers is expected to be published in the near future.
• 90% of a REITs net taxable profit must be paid out to investors by the usual tax return filing date (currently 12 months after the end of the accounting period). These are concessions by the UK Government as figures of 95% and 6 months were originally mooted.
• The REIT must operate at least three properties during each accounting period.
• No single property can represent more than 40% of the total value of the properties held in the property letting business.
• The REIT is not allowed to sell any building that it has developed for at least three years after completion.
• The Chancellor also confirmed in the Budget a reduction of the interest cover test or gearing to 1.25 on a pre-capital allowances basis. The original figure given was 2.5 times and again is a major concession by the UK Government.

What happens if the conditions are breached?

Most breaches of the REIT regime will not result in automatic withdrawal of REIT status but instead will attract a tax charge in the REIT. REITs will be able to remain within the regime provided that the breach is rectified by the end of the next accounting period.

The Conversion charge

The Treasury’s line on REITs has been as consistent as it has been straightforward. REITs were only to be introduced into the UK if there was no cost to the taxpayer. At present property companies pay tax twice - once within the company and once again on dividend payments. It is easy to see why property companies will wish to obtain REIT status. On achieving tax free REIT status millions of pounds of capital gains tax liability disappears.

To prevent another hole appearing in the UK Government’s finances the Government will impose a “conversion charge” on any company converting to REIT status. The Budget confirmed this to be 2% of the gross market value of the investment properties. The 2% figure has been welcomed and it is likely that this will result in the majority of listed property companies seeking REIT status. The conversion change can be paid in full immediately or can be spread over the first four years in annual installments of 0.5%, 0.53%, 0.56% and 0.6%. This includes an interest payment of approximately 6%.

It had been thought that the conversion charge would be based on a company’s capital gains tax liabilities. Basing the conversion charge on a company’s capital gains tax liabilities would have resulted in a much higher charge for the property companies that wished to convert.

However, this will adversely affect offshore property companies who do not pay UK Capital Gains Tax and therefore would not have had a conversion charge to pay if it had been based on Capital Gains Tax.

The Treasury has clearly concluded that the millions of pounds it will receive from companies converting to REIT status will sufficiently compensate it for the loss of revenue from non-REIT property companies. The fact that it has been predicted that Britain’s listed property market will treble to £100 billion over the next five to ten years will also ensure a steady flow of revenue, much of it new revenue, to the Treasury. The fact that a REIT will pay Stamp Duty Land Tax in the same way as any other company should also mean that the UK Government receives an increase in Stamp Duty Land Tax revenue.

Maximum 10% shareholding

The Treasury had said that a single shareholder should not own more than 10% or more of a REIT. It has though now decided not to make this a condition of converting.

Compliance costs

One area that will be looked at closely by companies seeking REIT status is the cost of compliance. For example a REIT will require separate financial statements for the exempt and taxable parts of its business. A REIT may also have to regularly value each of its properties if it is to retain REIT status. As noted above no single property can represent 40% of the total value of the properties held. Also a minimum of 75% of the REITs income must come from property rents. These percentages will have to be checked regularly if a company is to retain its REIT status.

Conclusion