Bell & Scott's Property Update, December 2008

Welcome to the December 2008 issue of Bell & Scott’s Property Update.

In this month's issue we comment on (1) a case where a landlord contested a tenant’s right to break in a lease because his tenant had breached obligations in the lease in the past; (2) a case where a developer secured a good uplift in value following a CPO valuation; and (3) a case that sounds a word of warning about VAT and SDLT on exchange transactions.

We also remind you that D-Day for energy performance certificates in existing buildings is fast approaching.

In addition, we update you on (1) the Pre Budget Report in Scotland; (2) Scottish Planning Series Circular on Strategic Development Plan Areas; (3) a new PAN on Electronic Planning Service Delivery; (4) PAN 45: Spatial Frameworks and Supplementary Planning Guidance for Wind Farms; (5) proposed definitions for retail planning in England.

Recent Decisions

The perfect break

Trygort (Number 2) Limited (“Trygort”) was the landlord and UK Home Finance Limited (“UK”) the tenant of a property at 110 West George Street, Glasgow. The lease was for a three year term running from 28 May 2004. The lease contained a mutual break option allowing either party to bring the lease to an end at any date after 31 March 2005. Each party had to give the other six month’s prior notice and UK was not to be in breach of its obligations as tenant under the lease in order to exercise the break. UK gave Trygort the requisite notice and left the premises on Christmas Eve in 2005. However, Trygort refused to accept that UK was entitled to terminate the lease and went to court to recover the rent due up to 28 May 2007.

Trygort argued that the “no breach of obligations requirement” applied to breaches occurring at any time during the term of the lease. It claimed that UK had been in breach of its obligations under the lease on a number of occasions. Though not in breach at the time of serving its break notice, UK had been persistently late with its rent payments. Trygort’s stance was that if UK had been in breach of its obligations at any time, its break right fell away. UK’s position was that the prohibition on exercising the break only applied if it was in breach of its obligation at the time the break notice was served.

The court looked closely at the words used in the break clause and thought that there was a degree of uncertainty as to how the relevant words chosen by the parties for their contract should be read. The clause provided that UK would “….not be entitled to issue any notice determining [the lease] if [UK] has been in breach of its obligations to [Trygort under the Lease].” Indeed, the court came to the view that, on a literal reading, both Trygort’s and UK’s interpretations made sense. In the end, opting for the position which made commercial sense, the court favoured UK’s view and decided that spent breaches did not destroy UK’s right to exercise its break.

Fiona Bell, Solicitor in our Development and Investment Team comments:

A key consideration for a tenant is that any break option should be readily exercisable, particularly in the current market, where the economic downturn is affecting many tenants and ultimately their ability to continue trading from leased premises. The right to get out of a lease or to be able to market a lease to a new tenant (whose plans may also be short term or constrained) are sound reasons for having a watertight break clause. Even in better times, where a break option has been negotiated to coincide with a rent review date, the inability of the tenant to exercise the break could leave the tenant at a significant disadvantage in rent negotiations.

Given the centrality of a break clause to a tenant’s position, the court’s decision in this case is a sound one from a commercial perspective. It is hard to imagine any circumstances which would justify a landlord refusing a right to break where there are no subsisting breaches of the lease but simply breaches which occurred in the past and which have been remedied. However, the court did not rule out that very possibility if there was a suitably and precisely drafted clause in the lease to provide for this.

The normal FRI lease imposes a vast array of absolute obligations on the tenant (repair, maintenance, re-decoration etc.) and it almost goes without saying that strict and rigorous compliance by the tenant with every single condition throughout the entire lease period is well-nigh impossible. If the court had favoured the landlord’s view in this case, the break option would have been like a pot of gold to a tenant constantly at the mercy of the landlord and that did not make business sense in this commercial lease.

The case begs the question: “What conditions should landlords and tenants reasonably impose on the exercise of a break option? The Code for Leasing Business Premises in England and Wales suggests that the only pre-condition to a tenant exercising a break option should be that the basic rent is paid to date and the tenant gives up vacant possession of the property. The rationale behind this view is that any other breach should not prevent the tenant from exercising the break as both parties will have the usual contractual rights to claim damages against the defaulting party. The Code is, of course, not binding in England and no equivalent has been published for use in Scotland. The Code is, however, finding favour both north and south of the border in lease negotiations. That makes sense and had its guidance been around when the lease in this case was negotiated, then the dispute could have been avoided. Where it is agreed between the parties for good commercial reasons that other conditions should attach to a break option, those conditions must be stated clearly and understandably.

Case referred to Trygort (Number 2) Limited v UK Home Finance Limited and another [2008] CSIH 56.

The full text of the decision is available on the British and Irish Legal Institute website accessible here

Landowner schemes its way to fat cheque

In 1993 a proposed compulsory purchase order covering a site owned by Spirerose was notified as part of a railway line extension project. Confirmation of the order was granted by the Minister in January 1997. Transport for London (“TfL”) opted to follow the Notice to Treat procedure which enabled it to take possession of the land following a negotiation of the compensation payment due. Notice to Treat was served on 24 August 2001 and possession was taken by TfL on 3 December of the same year. In November 2003, Spirerose lodged what looked like an application for a Certificate of Appropriate Alternative Development but which was, in fact, a straightforward planning application for a mixed-use scheme. Planning permission was granted but was subsequently quashed following a judicial review. Nevertheless, Spirerose took the issue of valuation to the Land Tribunal in England.

The tribunal had to consider the ‘Pointe Gourde’ principle, which requires the assessment of compensation for land compulsorily acquired to be carried out as if the ‘scheme’ for which the acquisition is taking place had never been proposed. Together with the provisions of the Land Compensation Act 1961 (“the 1961 Act”), the principle was to form the basis for the Tribunal’s valuation decision.

Spirerose argued that the Pointe Gourde principle allowed for a valuation based on the assumption that, but for the scheme, planning permission would have been in place for a mixed-use development. TfL countered by saying that because there was no planning permission in place and the terms of the 1961 Act did not allow an assumption that there was one for a mixed-use development in place to be made, the valuation could only be made on the basis of hope value for the site. The 1961 Act required the valuation to take place on the date of the Notice to Treat and, at the point where the tribunal had to consider the valuation issue, eight years had passed and a new development plan had been introduced in the area. On that basis TfL believed that only the potential of hope value existed on the date of the Notice to Treat and not, therefore, the reasonable prospect that consent for a mixed-use development would be granted. The difference in value between the two positions was in excess of £200,000. Spirerose sought £608,000 for its site and TfL wanted to settle on £400,000.

The Court of Appeal had to rule on whether the tribunal had decided correctly to carry out the valuation on the basis that the hypothetical permission was a certainty and therefore at full value or whether it should have valued on the basis of market analysis and “hope value”.

The court decided that there was a reasonable prospect of planning permission being obtained for a mixed-use development at the valuation date. It took the view that whether planning permission would have been granted in the “no-scheme world” is to be determined by reference to the decision that a reasonable planning authority would have made at the time of the Notice to Treat. By contrast, hope value is to be assessed by reference to the view that the market would have taken on the prospects of achieving planning permission. The former view made sense of what the legislation was trying to achieve – to give proper compensation to a landowner who had been deprived of his property compulsorily.

Jamie Hunter, Planning Solicitor in our Strategic Land Team comments:

This judgement is one in a fairly long run of cases which have sought to deal with the lack of clarity in the legislative provisions dealing with the assessment of compensation and is, certainly, a good example of judges taking a pragmatic and commercially sensible approach. It is likely that similar problems in Scotland would be dealt with in a similar manner, though this issue does not appear to have caused as many problems north of the border as it has down south.

Put succinctly, the problems of conflict and complexity in this area identified by the courts and the Compulsory Purchase Policy Review Advisory Group, which reported in 2000, have still to be fully ironed out but, as the judges state quite clearly in this case, Government inaction is potentially extremely costly to those involved.

For those who are in the position of having land compulsorily acquired, this judgement is reassuring in as much as it shows that the judiciary are prepared to read common sense meaning into statutory provisions that are otherwise lacking, to ensure that a fair valuation is carried out.

Valuation of a piece of land which is going to be acquired compulsorily is an extremely detailed issue. With the prospect of the Scottish Government and local authorities striving to stimulate the economy via investment in public infrastructure projects such as the new Forth Crossing, roads and railways, it makes good commercial sense for a property owner faced with a CPO to seek, at an early stage, both legal and valuation advice.

Case referred to Transport for London V Spirerose Limited (In administration) [2008] EWCA Civ 1230.

The full text of the decision is available on the British and Irish Legal Institute website accessible here.

Watch out for exchange transactions involving property!

A VAT Tribunal has decided that a lease over a sports field, granted by a school for a “peppercorn” rent, which entitled the school to use the facilities in a sports and leisure centre built on the field and operated by the tenant, was an exchange transaction. It may have been anticipated that the school's ability to use the fields and centre should simply be considered as a reserved right by the school, as landlord, from the premises let under the lease.

The tribunal's view meant that, for VAT purposes, the school granted the lease as consideration for the tenant's supply of the leisure and sports facilities. This was a standard-rated supply of services for VAT purposes to the school and the tenant therefore had to account for output tax on the value of those services.

This decision is a useful reminder, as exchange transactions where there is no cash changing hands, can be misleading. The school’s oversight is also likely to have a knock-on effect for SDLT purposes, in relation to establishing the chargeable consideration for a land transaction.

Case referred to: Riverside Sports & Leisure Ltd v Revenue & Customs [2008] UKVAT V20848 (28 October 2008).

The full text of the decision is available on the British and Irish legal Institute website accessible here.

Briefing

D-Day for EPCs

In our March 2008 edition of Property Update we provided a briefing on energy performance certificates. The briefing can be accessed here.

Property businesses will now be accustomed to obtaining EPCs for their newly constructed buildings, both residential and commercial. That requirement became law on 1 May 2007. However, we are fast approaching D-Day for the remainder of our building stock. From and after 4 January 2009, the obligation to have an EPC will apply to virtually all domestic and non-domestic buildings, if, after that date, they are sold or rented out.

What buildings will require EPCs?

Only those buildings which use fuel or power to control the internal temperature come under a legal obligation to have an EPC. In addition, an EPC will not be required for:

(a) stand-alone buildings of less than 50 sq. m;
(b) conversions, alterations and extensions to those stand-alone buildings (unless they would increase the area of the building to 50 sq. m or over);
(c) places of worship; and
(d) short-life buildings (of less than two years)

It is worth noting that there is no exception applicable to listed buildings.

Where can you get them?

Scottish Building Standards has accredited a number of organizations who can provide EPCs on a commercial basis. Protocol arrangements have been put in place with the following:

(a) BRE;
(b) Royal Institution of Chartered Surveyors (RICS);
(c) The Chartered Institute of Building Services Engineers (CIBSE);
(d) The Association of Building Engineers (ABE);
(e) The Energy Institute (EI); and
(f) The Heating and Ventilation Contractors’ Association (HVCA)

Who is liable to produce the EPC?

The obligation falls on the owner to produce the EPC and, therefore, the cost of obtaining an EPC would be borne by the owner of the building. It is a requirement to both affix an EPC to the building when it is sold or rented out and to make a copy available to the prospective buyer or tenant on request.

Consequences for non compliance

Failure to obtain an EPC will be governed by the enforcement powers of local authorities contained in sections 25 and 27 of the Building (Scotland) Act 2003. Section 25 will be used for a failure to provide an EPC for an existing building and section 27 for a failure to provide in respect of newly constructed buildings. The local authority will be entitled to serve notice on the owner of the building requiring it to comply with the requirement to have an EPC and the owner must do so within 28 days. If the owner fails to comply with the local authority notice, it commits an offence which will carry a penalty of £1000 for commercial buildings. The local authority also has power to carry out the requirements under the notice and recover all its costs from the owner. The Scottish Government has, however, introduced a moratorium on enforcement of penalties for non compliance. It will not levy any penalty for non compliance between 4 January 2009 and 31 March 2009

Time to prepare

Owners and landlords proposing to sell or let on or after 4 January should obtain EPCs at the earliest opportunity.

Guidance on EPCs is available on Scottish Building Standards website accessible here.

News

The Pre Budget Report in Scotland

The Pre Budget Report, delivered on 24 November 2008, set out the next steps the UK Government is taking to support the economy, business and households through the current downturn and to maintain economic stability in the long-term.

As part of the Pre Budget Report, the UK Government announced a major fiscal stimulus package worth £20bn in 2008-09 and 2009-10, a proportion of which will support businesses in Scotland.

The Scottish Government can, if it decides to do so, bring forward up to £260m of capital spending on infrastructure as a fiscal stimulus. Scotland will also receive consequential Barnett Formula-based contributions from other Pre Budget Report spending decisions.

The HM Treasury Press Notice for Scotland is accessible here.

Scottish Planning Series Planning Circular 3 2008: Strategic Development Plan Areas

The Scottish Government has published a Planning Circular which sets out its determination of the boundaries of the strategic development plan areas for (1) Glasgow and the Clyde Valley; (2) Aberdeen City and Shire; (3) Dundee, Perth, Angus and North Fife; and (4) Edinburgh and South East Scotland.

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

PAN 70: Electronic Planning Service Delivery

The Scottish Government has published PAN 70 with a view to identifying how new technology can improve the delivery of the planning service.

PAN 70 sets out the online information and services that need to be provided by the Scottish Government, planning authorities and other organisations responsible for the efficient operation of the planning system.

PAN 70 is available on the Scottish Government’s website accessible here

PAN 45: Spatial Frameworks and Supplementary Planning Guidance for Wind Farms

The Scottish Government has published PAN 45 to give advice to planning authorities on supplementary planning guidance for wind farms, particularly on the process of preparing spatial frameworks for wind farms of over 20 megawatts capacity.

Scottish Planning Policy (SPP) 6, Renewable Energy, expects planning authorities to make positive provision for renewable energy developments in an environmentally acceptable way. Planning authorities are strongly encouraged to have up-to-date policies for wind farm developments which reflect SPP6, in advance of preparing policies for other large-scale renewable technologies.

This is important for guiding the preparation of wind farm applications and their determination, whether under the Electricity Act or the Planning Act.

PAN 45 is available on the Scottish Government’s website accessible here.

Draft definitions for retail planning

The National Retail Planning Forum in England & Wales has initiated a consultation process to put in place a set of basic definitions for retail planning. The draft definitions - the output of a working group from industry experts - focus on the principal variables which are used by retail planners in preparing quantitative forecasts of the need for, and impact of, new retail floorspace.

The Department of Communities and Local Government may include the final definitions adopted by the NRPF as the recommended English national standard for retail planning in the forthcoming guidance on retail need and impact assessments to be published with the next version of PPS6 in England.

It remains to be seen what influence any definitions adopted following consultation will have on retail planning policy in Scotland.

The Consultation can be accessed on the Retail Planning Forum website accessible here.