Bell & Scott

In this month's issue we comment on a case where a business woman’s decision to sell a property for development backfired on her.

We also provide a Briefing Note on the forthcoming introduction of the Development Management Scheme which can be used in commercial and residential developments.

Lesley Bothwell owned a property in Braid Road, Edinburgh. She ran a children’s nursery business from the property. The business was successful but she decided to explore the possibility of selling the property for residential development and instructed D.M. Hall to consider the sale potential. Their initial advice to her was that the prospects for development were favourable. To back that view up, they wrote to the planners at Edinburgh City Council asking for their assessment of the re-development merits of the property. The written response from the Council did not give the detailed appraisal and comfort that D.M. Hall had been looking for. In particular, the response did not cover the specific question of demolition of the existing property before development. When they asked for clarification, the Council declined to give any further detail or commitment. The Council did suggest that the site would be suitable for, at most, one additional residential unit (that view being expressed on the basis of the retention of the existing buildings as opposed to a complete demolition and redevelopment which was where the value would lie).

D.M. Hall did not send a copy the Council’s letter to Lesley Bothwell, although the gist of it was passed on in a telephone conversation.

Money was then spent on the marketing of the site and a closing date for offers was fixed. Conditional missives were concluded with the preferred bidder. The sale would go through once the buyer had received planning permission.

Once missives were concluded, the buyer sounded out the local authority on a planning application for 20 flats. Given the Council’s initial view, that proposal was not well received. The planning officer charged with the application expressed surprise at the scale of the proposed flatted development in light of the Council’s original view given in the letter to D.M. Hall. Neither the letter nor the gist of the development limitations had been made available to the buyer. Given the strength of the opposition from the local authority, the buyer withdrew its planning application and the sale did not proceed.

Lesley Bothwell raised an action for negligence against D.M. Hall, blaming the subsequent decline in her nursery business on the attempted sale of the property which fell through. Naturally, the buyer had had to notify neighbours of the planning application and Lesley Bothwell had flagged up the planning application to both staff and parents. Her business had suffered because parents withdrew their children and staff sought employment elsewhere. Not only had she lost out on the sale, but her business had declined because she had sought to sell to the highest bidder on the basis of D.M. Hall’s advice. She argued that they should have made the local authority’s restrictive view of the development potential of the site clearer to her.

Following expert surveyor opinions given for both sides, the judge decided that D.M. Hall had not been negligent in omitting to send a copy of the local authority’s letter to Lesley Bothwell. The judge preferred the view put forward by D.M. Hall that the significance of the letter from the Council was a matter of professional judgement and that they had communicated the essentials of that letter to her. A failure to copy the letter to her was not something which indicated a lack of professional skill and care, particularly when considered alongside the information apparently available to her when she decided to proceed with the sale at a later date.

Whilst the case gives a useful discussion of the issues involved in professional negligence claims, the most interesting point that comes out is the status of “preliminary enquiries” to the planning authorities such as D.M. Hall had made on behalf of its client and what impact responses to those enquiries might have on subsequent planning applications.

It will be tempting to some applicants in the planning process to rely on the outcome of pre-application discussions, but this is definitely not sound practice.

It is rather confusing that the planning system is becoming increasingly supportive of pre-application discussions and consultation with both the community and the planning authority, whilst simultaneously failing to give any real status to the opinions expressed by the planning authority in the course of those discussions. It may help to consider the position from a completely neutral position or assume that you are an active member of your local community who takes a keen interest in planning matters. If you found out that a developer had been given anything which even came close to a consent without any consultation with the community and which could not be seen to have gone through the legally required process of consideration by the planning authority, the chances are that you would feel somewhat aggrieved. Thus the position of the planning authority is an invidious one – naturally developers want to get a ‘feel’ for the likelihood of success when they do come to make an application and often put pressure on the authority to give them a clear steer. At the same time, the authority cannot be seen to have pre-judged an application or acted in an otherwise unaccountable manner. Whichever way this is approached, and generally planning authorities manage the balancing act reasonably well, there can be no doubt that any pre-application declarations by the planning authority - where they are made - have no standing when it comes to final determination of the application. It is precisely because of a fear of this type of situation that many planning officers, and sometimes councillors, are perceived as unhelpful when an applicant asks them for guidance and receives little or none.

When an applicant approaches the planning authority, he should do so on the basis of at least a rough understanding of the character of the area and relevant development plan policies. In this case, the planners appear to have been reasonably helpful but what they indicated would be likely to receive positive consideration at the pre-application stage was not what ended up before them in the application. Looked at this way, the proposal would have failed at any stage but errors also appear to have occurred in the communication between various parties.

Pre-application discussions should be seen as a potentially useful guide away from refusal. On no account should they be seen as a guarantee of planning permission – especially if the proposal changes between pre-application and formal application!

A full text of the decision is available on the Scottish Court’s website accessible here

After a five year wait, the regulations providing for a DMS promised in the Title Conditions (Scotland) Act in 2003 have been laid before the UK Parliament. A DMS can be applied to developments from 1 June 2009 onwards.

Put simply, a DMS is a statutory set of rules which can be applied to a development to provide for the management and maintenance of shared facilities and commonly owned areas, be they on a residential or a commercial development. To all intents and purposes, a DMS functions like the traditional deed of conditions with which developers are familiar. Though deeds of conditions may continue to be used, the DMS provides a basic scheme of rules which can be applied to any development if the developer so wishes. It is, however, due to its very simplicity and skeletal nature, more likely to be of use for smaller residential or commercial developments.

One of the main benefits of the DMS is that it sets up a form of residents’ association that can own shared or common areas (“scheme property”) and can enter into contracts in its own name. Up to now, owners’ associations have always been unincorporated bodies because the red tape involved in incorporating an association as a company under the Companies Acts is out of scale with the straightforward functions which the association performs. The DMS provides that the owners' association for a development is a special type of body corporate and is established on the date on which the DMS takes effect for that development.

Any plot or unit owner on a development which has a DMS in place will be bound to observe the rules of the scheme and pay the necessary service charges for maintenance of shared areas from the moment he or she becomes owner. Membership of the residents’ association is automatic on becoming an owner of the unit in the development and membership ends when the owner sells on.

The manager, who can be a unit owner or an outside property management company, is the executive arm of the association. The members will appoint their manager for a period of their choosing at the association’s mandatory AGM. As in a deed of conditions, the developer of the site can appoint the manager and that appointment will last until the first AGM is held within 12 months of the association being set up. At the AGM, it will be up to the members to decide if the manager is to be kept on.

The manager will exercise the powers given to the owners’ association in the DMS but, in so doing, he will have to observe specific statutory duties. Those duties cover the financial administration of the association and arranging for the carrying out of maintenance of scheme property. Either he or a nominated member of the association can sign documents on behalf of the association. Additionally, one of his key duties is to provide an incoming buyer of a unit with a certificate showing any amount of outstanding service charge on that unit and his certificate will limit the liability for service charge of the new owner.

The DMS rules can be either the ones set out in Schedule 1 to the Title Conditions (Scotland) Act 2003 (Development Management Scheme) Order 2009 or those that are tailor made to fit the particular development. The Order has 22 rules most of which can be varied to suit the particular circumstances of a development. The rules that cannot be varied are those which provide for the status of the owners’ association and its membership. The rules look and work like title conditions. The developer ensures that each owner of a unit in the development must observe the rules by registering a deed of application against the development before he sells his first unit. However, it is possible to apply a DMS to a development at a later date but the deed of application, in this case, would need to be signed by any owner of a unit on the development who has already bought.

The key value of a DMS lies in its creation of an owners’ association with teeth to manage the development for the benefit of its members. To that end, specific powers are given to the association to:

buy and own any part of the development;
maintain, repair and alter scheme property;
insure the development or any part of it;
levy a service charge and an additional service charge amounting to not more than 25% of the annual service charge agreed at the AGM; and
engage employees and agents.

A useful power is the one that enables any member to carry out emergency work to a common or shared item and to be able to recover the costs from the other members.

The powers do not go too far. There are specific constraints on the type of assets that an owners’ association can buy and the businesses that it can engage in. The association cannot buy property outside the development or carry on a trade and can only make rules about the use of shared recreational facilities at its AGM.

The rules are enforceable by the owners' association through its members or its manager. Where any member wishes or needs to enforce a rule against a neighbour or other member, he has to be able to show that any failure of another member to comply with an existing rule is causing or will cause material detriment to the value or enjoyment of his property – just as he would have to do with a normal title condition.

Decisions at the AGM are taken on the basis of simple majority rule - 51% of the votes cast by those present at the AGM. An AGM needs to have a quorum of members present and what amounts to a quorum depends on the size of the development. For developments with no more than 30 voting units, a quorum is 50%; for a development of more than 30 units, a quorum is 35%. Each unit has one vote no matter how many owners of the unit there are. Where the decision required involves money coming out of any sinking fund or expenditure on improvements, alterations or demolition of scheme property which goes beyond normal repair and maintenance, the decision requires an absolute majority of all the members on the development. Members disgruntled by any decision taken have a period of 8 weeks from the date that they became aware of the decision in which to raise the issue before a Sheriff.

Once a DMS is registered against a development, it is not set in stone. The scheme can be varied or discharged by the owners in line with the rules laid down in any particular DMS or those contained in the statutory rules. The statutory rules allow for variation by the association, an owner of any affected unit and at least one other owner of an adjacent unit. Additionally, owners of 25% of the units in a development can apply to the Lands Tribunal to vary or discharge the DMS. Once an application has been received and notified to all interested parties, the Lands Tribunal has to consider applications for variation, discharge or preservation on their merits.

A contractor or service provider to the owners’ association is entitled to assume that the manager has authority to contract and instruct work to be carried out to scheme property on the development. Following his appointment at the AGM, the manager and one of the members will sign a certificate showing the appointment of the manager and the period for which his appointment will last. The manager can sign all contracts and can make payments on behalf of the association. In the event of the association being unable to pay any debt owed by it, its creditors can recover directly from the members of the association. The manager is required to keep a list of the names and addresses of the members. The members themselves can recover from any non paying member!

It remains to be seen if there will be a sea change in practice after the long wait for the DMS. Though developers know and understand their stock deeds of conditions, the DMS may, in time, become the preferred method of regulating the ownership, maintenance and management of shared or common areas.

Developers do need to be aware that, unlike the Tenement Management Scheme which was introduced for tenement buildings in the Tenements (Scotland) Act 2004, the DMS does not fill in the gaps where the legal title to any part of a development is unclear. The DMS does not operate as a set of default rules which can be relied on to decide who owns what and who is responsible for what on a development – it needs to be specifically applied to a development.

The timing of the introduction of the DMS is interesting. Recent Lands Tribunal decisions have cast doubt on Registers of Scotland’s practice regarding buyers’ shared ownership rights to amenity areas which are not precisely fixed by reference to an OS based plan at the time they purchase their property. In line with the Keeper’s practice, developers have been able to retain flexibility over the extent of amenity areas in the course of development by not specifically showing those areas on plans attached to dispositions of individual units. The practice has been necessary in order to avoid future problems of encroachment on to areas sold to the first buyers where the positioning of a particular unit sold later in the development process is, even in some minor way, different from that shown on the original development plan. One of the practical problems that developers face when dealing with common or amenity areas is that it is difficult for the developer to retain control of amenity areas until the last unit is sold and subsequently to transfer it to a body that could effectively hold and manage those areas following completion. The DMS, in providing for a body corporate that can take title to the open amenity areas, will be of help in this respect. A developer can simply give a buyer title to his unit and retain title to the amenity area until the end of the development. At that stage, the developer can transfer title to those areas to an owner’s association and put in place a DMS or a specific deed of conditions. It remains to be seen whether this benefit will lead to greater use of tailor made DMSs to particular developments.

We can provide particular advice on whether or not a DMS would be suitable for any current or future developments.

The Small Business Bonus Scheme came into full operation on 1 April 2009 and the Scottish Government hopes that it will make a crucial difference to high streets up and down the country during difficult times for retailers. The full roll-out means tens of thousands of small businesses pay no rates at all. Many more will see their rates reduced further.

Additionally, businesses in Scotland will be able to spread this year's annual increase in business rates over three years to help companies' cash flow and provide a boost for the Scottish economy. Business rates are adjusted every April normally in line with the rate of inflation (specifically RPI) in the previous September. As a result, the increase for 2009-10 is five per cent.

Details of the Small Business Bonus Scheme are available on the Scottish Government's website accessible here

This consultative draft sets out the Scottish Government’s planning policy on different types of development and on environmental issues. The new, shorter SPP will replace seventeen existing policy documents, making policy easier to understand and interpret.

A new circular explains the Scottish Government's role on the limited occasions that it becomes involved in the planning application process.

The circular is available on the Scottish Government’s website accessible here

The Royal Institution of Chartered Surveyors (RICS) has written to the Chancellor outlining its recommendations for the Budget due on 22 April 2009. A significant suggestion is that Stamp Duty Land Tax should be converted from a slab structure to a marginal system to help the housing market become more efficient as well as to avoid any adverse effect at the end of the current holiday for residential purchases up to £175,000. Also, RICS believes that the Government must increase the ceiling to at least £250,000 if it wishes to produce an impact on transactions through its temporary SDLT holiday.

Additionally, the Scottish Government is supporting the Federation of Master Builders’ call for the UK Government to reduce VAT to five per cent for property repair work to support the construction industry and keep the Scottish economy moving.

Details of the RICS submission to the Chancellor can be found on its website accessible here

From 31 March 2009, the Open Market Shared Equity Pilot scheme has been rolled out to the whole of Scotland. This was originally a £24 million programme in 2008-09 covering only 10 local authorities. The extended scheme will have an increased budget of £60 million.

Details of the Scheme are available on the Scottish Government's website accessible here