Bell & Scott's Property Update, December 2007

Welcome to the December 2007 issue of Bell & Scott’s Property Update.

In this month's issue we comment on a case where intentionally misleading statements by a developer’s agent during negotiations to buy out the landowner’s rights to a share of development profit resulted in the High Court in London allowing the landowner to walk away from the buy-out.

By way of a briefing, we discuss the influence of leasing codes on landlord and tenant agreements following the introduction of a Service Charge Code for Commercial Leases in Scotland.

We also update you on (1) the Scottish Government’s spending proposals for the property sector; (2) details of a tax break for property developers; (3) the alternative to PGS for England and Wales; (4) the latest planning regime news; and (5) Homes for Scotland’s response to the OFT enquiry.

Recent Decisions

Misrepresentation allows Football Club to end Agreement

Cambridge City Football Club was short of money. Fortunately the Club’s ground had development potential, although there were a number of hurdles to be overcome before development could proceed including obtaining planning permission, clearing a title condition, securing adequate access and removing a number of tenants. The Club decided to enter a sale and leaseback deal with a Developer to realise some cash in the short term. As part of the arrangement, the Club and the Developer, Ross River Limited, were to co-operate in seeking planning permission and overcoming the other obstacles to development. The value of the ground was to be maximised and there were obligations on the Developer to consult with and obtain the approval of the Club in relation to the development scheme. There was also an obligation on the Developer to obtain best value and/or lowest cost in incurring expenditure in connection with the scheme. That reflected the fact that, as part of the deal, the Club and the Developer were to share the increase in the value of the ground which would arise as a result of planning permission for residential development being obtained (“the Overage”), on a 50:50 basis.

Ross River engaged a Mr Paul Harney of Waveley Project Management Limited as Project Manager for the development. He, in turn, sourced advice from various other professionals. Waveley was to be paid by receiving a share of Ross River’s net profit from the project.

As time went on, the Club, under increasing financial pressure, opened negotiations with Ross River to sell Ross River the Club’s 50% share of the Overage. As part of the negotiations, Mr Lee, the Club’s surveyor, asked Mr Harney for information so he could assess the value of the Club’s share of the Overage. Mr Harney believed planning permission for around 200 units could be obtained. Nevertheless, he suggested to Mr Lee that, taking a “robust view”, 130 units could be built on the site and exaggerated not only the likely numbers of affordable units but also the likely cost of providing sufficient access. He concealed advice which he had received from other professionals and, most blatantly, he informed Mr Lee in writing that “I do not have any reports, either relevant or otherwise, that would assist you further in advising your clients”.

Eventually an Overage Agreement was signed under which the Club agreed to sell its half share of the Overage to Ross River for £900,000.

Shortly afterwards, Ross River gave notice to terminate the Club’s lease of the ground. As part of the ensuing dispute, the Club asked the High Court to set aside the Overage Agreement and the original Sale Agreement on the basis that the Club had been induced to enter into the agreements by Mr Harney’s fraudulent misrepresentations. The Court held that the Club was entitled to walk away from the Overage Agreement, but not the original Sale Agreement.

Bruce Anderson, Head of our Strategic Land Team, comments:

Even at the highest level, many football clubs struggle financially. Cambridge City is a “semi-pro” club which plays in the Conference South League.

Finances were difficult and the Club had little choice but to sell “Milton Road”, the Club’s ground. They lacked the time, funding and expertise to develop it themselves. They entered into a fairly normal type of arrangement to sell it but to share the future uplift in value 50:50. Although that did not create a partnership with the Developer, it did mean that, when, in need of more cash, the Club was negotiating to sell its share of the Overage to the Developer, they were not in the normal position of entirely unrelated parties doing a deal to buy and sell a piece of ground. Because of the “joint venture” nature of the existing agreement between them, the Developer was obliged to act in good faith towards the Club. So, when the Developer’s agent, Mr Harney, was asked to provide information by the Club’s surveyor, he should either have provided it or stated clearly that he was refusing to provide it.

What lessons are to be learned?

Many agreements which provide for profit share between a landowner and a developer create obligations to act in good faith to one another - whether spelt out or not. Where there is an obligation to act in good faith, all statements and information provided to the other party must be carefully considered to ensure that they are not misleading. In this case, it was the Developer’s agent who was deliberately misleading and that is a reminder to anyone engaging an agent to ensure that the agent acts in good faith. It should also be noted that because the existing sale agreement spelt out in some detail the information which had to be provided by the parties to each other in connection with the “joint venture” there was no obligation on the Developer to go so far as to volunteer any further information to the Club in connection with the overage negotiations but, when the Club requested information, the Developer was obliged to answer honestly.

Clearly, the existence of the relationship of good faith made the fraudulent misrepresentations in this case all the more serious but it is worth noting that it is not essential for there to be a relationship of good faith for fraudulent misrepresentation to result in an agreement being set aside. Indeed, in certain circumstances in Scotland, simply negligent or even innocent misrepresentations can have similarly serious consequences.

Finally, while the decision has not, by any means, resolved all Cambridge City’s difficulties - they are, after all, still in the original “joint venture” Agreement with Ross River – it has allowed them to reconsider how they wish to deal with their share of the Overage. And, in a season when things are clearly not going their way on the pitch, the court judgement has allowed the Club’s website (referring to the court decision) to proclaim that “Cambridge City have had at least one spectacular result this season…..a fantastic victory for the Club in its centenary season, giving it some stability and the opportunity to plan ahead”.

Case referred to: Ross River Limited and another v Cambridge City Football Club Limited

The full text of the decision is available here

Briefing

Good Leasing Codes

On September 11, the Scottish branch of RICS gave the green light to a Service Charge Code for Commercial Leases in Scotland (“the Service Charge Code”). Following in the slipstream of England and Wales, it must be assumed that further codes for leasing commercial premises and dilapidations are on their way from RICS. Failing that, the codes which are off and running down south are sure to direct future practice in Scotland.

Like the good behaviours encouraged by the Highway Code, there are manoeuvres in the landlord and tenant journey which should become standard for the health and safety of all involved on the road to a leasing agreement. By establishing benchmark good practice to be adopted by all in the business, many hold ups in negotiations and costly accidents can be avoided. The Service Charge Code has as its destination just that. If we have it for service charges then why not for the other core elements of a lease?

Follow codes or be regulated

For service charges the drivers for change were marked. A High Court judge recently remarked that tenants who pay for common costs against a surveyor’s estimate or accountant’s certificate rely too heavily on those professionals proceeding with “scrupulousness, diligence, integrity and independence, and not in a partisan spirit, supposing their only task to be to recover as much money as they can for the landlord”. The landlord and his team, in that case, delayed repairs to the roof of the premises until the period of the tenant’s service charge cap had expired so that they could fully recover the cost of a replacement roof from the tenant. The Court decided for the tenant, largely on the basis that the landlord had agreed to use reasonable endeavours to carry out the repairs to the roof at the lease start and the service charge cap had been agreed precisely because of the tenant’s concerns about the state of the roof.

Though court collisions over service charges are few and far between in Scotland and the Scottish Government does not appear to have the market on its radar, commercial leasing law and practice in Scotland tends to follow developments in the wider UK context. In that wider context, there is genuine fear that the UK Government’s recent threats to regulate the leasing market could become reality. In March this year, the UK Minister said as much on launching the Code for Leasing Business Premises in England and Wales (“the Lease Code”). She considered that progress beyond the principles of that code were necessary to improve flexibility in the market.

Ethos of the Service Charge Code

The central aspiration of the Service Charge Code is that landlords who provide services and recover the costs from their tenants should do so on a ‘not for profit, not for loss’ basis. Landlords who secretly charge excessive management fees or increase the value of their assets by carrying out improvements at the expense of their tenants are not availing themselves of the smooth highway of a modern lease but instead choose the risky, off-road route. In a code-respecting lease, a service charge should be restricted to costs properly incurred in operational management to give landlords their “clear rent”. Leases which allow landlords to recover improvement costs beyond those of normal maintenance, repair or replacement would not be code compatible.

Best practice

For services, the code urges: efficiency of service delivery; value for money; a fair division of responsibility between tenants; timely and regular communication between landlords and tenants; and transparency about management charges. To that end “best practice” going forward will require that: (1) service delivery is professionally managed; (2) service charge costs are kept under review and, where appropriate, competitive quotations for supply are obtained; (3) clear and recognised apportionment methods (which should be kept under review) are used; (4) advance notice of service charge budgets is given with certified accounts following year end ‘in a timely manner’ (and in any event within four months); (5) management charges should be clearly stated and these should no longer be a percentage of expenditure on the services.

Not enough?

Neither the Service Charge Code nor the Lease Code instil the fear of a speed camera nor can they overtake the terms of existing leases. For existing leases, they may serve as signposts to resolving ambiguities and the courts are likely to use them as such. Nevertheless, tenants with a UK-wide presence are already looking to achieve the protections which both Codes give them in their negotiation of leases in Scotland. For landlords in the current climate, gearing leasing styles to fall in line with the Codes would be marketing time well spent with a view to bringing about healthier market norms and even competitive advantage. The finishing line of more agreements completed quickly and safely is the aspiration of all taking part. Voluntary codes that are taken seriously, like the ones used on the roads, must be preferable to legal regulation in the long run. After all, we do not want the government to consider leasing statutes to bring about competition, efficacy and flexibility in the market - this is the fuel it required for the removal of empty property rate relief in England and Wales and regulation of service charges in its residential sector.

The Service Charge Code can be accessed here.

The Code for Leasing Business Premises in England and Wales 2007 can be accessed here.

News

Scottish Government's spending proposals for property

On planning: the funding available for the new planning regime is to rise from its current £1.2 million to £9.4 million in 2008. The increase will fund the introduction of e-planning, the encouragement of increased community engagement in the planning process and the implementation of Strategic Planning Authorities. For the following two years, less funding will be available - £2.7 million in 2009 and £2.9 million in 2010.

On greener buildings: for 2008, the Scottish Building Standards Agency will receive £2.4 million. The aim of the increase from the current spend of £1 million is to achieve significant reductions in the carbon footprint of Scotland’s buildings.

On the environment: SEPA will receive £129 million over the next three years. An additional sum of £154 million will be spent on a new ‘Zero Waste’ fund over that period. £45 million is to go on (1) the spread of new woodlands with the aim of improving absorption of CO2 emissions and (2) a new Sustainable Development and Climate Change fund worth a total of over £30 million.

On water infrastructure: Scottish Water will receive an annual investment of £182 million to provide connections to new developments and improve the quality of water and the water environment throughout Scotland. In addition, £34 million will be given to the Pathfinder Urban Regeneration Companies (five of which are set up in Scotland).

On transport infrastructure: the road network will receive £1.2 billion of investment over the next three years - a rise of 34 per cent over that period. The railways will receive £2.1 billion - £700 million per annum over the next three years. In addition, £57.2 million has been earmarked for bus services, £11 million for sustainable and active travel initiatives and £75 million for the design and development of a replacement Forth crossing.

On small business rates: a Small Business Bonus Scheme will be created. The scheme aims to increase small business rate relief on commercial properties via the introduction of a sliding scale for properties worth up to £15,000 in RV. The scheme is to be phased in over the next three years culminating in 100 per cent relief for properties of under £8,000 RV. Properties with an RV of between £8,001 and £10,000 will benefit from up to 50% relief and those properties with an RV of between £10,001 and £15,000 will receive up to 25% relief. The Scheme is expected to benefit 150,000 businesses.

On affordable housing: for affordable housing, the budget figures show a decrease from £387 million in 2007 to £373 million in 2008-09. The budget then rises to £446 million and £472 million in the following years.

A full text of the Government’s Budget Spending Review is accessible here

Tax break for business property renovation

A tax break has been introduced to encourage conversion and renovation of empty business properties in designated areas. The Business Premises Renovation Allowance (BPRA) provides a 100 per cent tax relief to property owners for qualifying capital expenditure incurred on conversion or renovation works on or after 11 April 2007. The relief will only be available until 11 April 2012.

The designated areas in which the relief is available are those specified as “development areas” by the UK Government in the Assisted Areas Order 2007.

Given the current property market and declining margins, developers, promoters and investors are looking at BPRA to restore viability to projects. 

Details of the scheme can be found on HM Revenue & Customs website accessible here.

The areas in Scotland in which the relief may be available are set out in the schedules to the Assisted Areas Order 2007 which is accessible here.

Out with PGS in with CIL

A Community Infrastructure Levy (“CIL”) has been chosen to replace the ill-judged PGS in England and Wales. With the aim of increasing investment in infrastructure, mitigating the impact of developments and making growing communities sustainable, the UK Government believes that a CIL will help to harness the value of an increased range of planning permissions to generate additional infrastructure funding and thereby unlock housing growth.

The details of the proposal are subject to consultation with stakeholders and will be set out in secondary legislation. A further fully costed impact assessment will be carried out as the details are settled.

It remains to be seen if the Scottish Government follows suit.

Details of CIL can be accessed here.

Planning news

The Scottish Government has issued its consultation and draft regulations on the categories of developments which are to be considered “National”, “Major” and “Local” for the purposes of the new planning regime. Detail of the consultation can be accessed here.

An updated timetable for consultations and dates for implementing the new planning regime has been published. The timetable is accessible here.

The Planning Directorate has decided, in consultation with Historic Scotland, SEPA and SNH, that the revised Scottish Planning Policy 3: Land for Housing (SPP3) is likely to have significant environmental effects. A Strategic Environmental Assessment is required. An environmental report will be prepared alongside the Consultation Draft of SPP 3 to be published shortly.

Homes for Scotland respond to OFT

Homes for Scotland has issued its response to the OFT’s enquiry into the house building sector throughout the UK . You can access the response here.