Bell & Scott's Property Update, February 2008

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

In this month's issue we comment on a case where the actions of a landlord meant that he could not deny that a break notice had been properly served on him by his tenant. Then we comment on a case where a landowner managed to establish a servitude right of access over his neighbour’s land despite the fact that he occupied the same piece of land under a lease which allowed only for parking.

We also update you on (1) a consultation on the proposed Climate Change Bill for Scotland; (2) how the successor to Planning Gain Supplement, the Community Infrastructure Levy, is to work in England; (3) a new Capital Gains Tax relief for entrepreneurs; (4) proposed Stamp Duty Land Tax on high value residential properties held in Special Purpose Vehicles (SPVs); and (5) the timetable for bringing in the provisions of the Planning etc. (Scotland) Act 2006.

Recent Decisions

Enterprise conquers Ben

In our May 2006 edition of Property Update, we reported on a case which had potentially disastrous implications for Scottish Enterprise. The Court of Session ruled that Scottish Enterprise’s notice to terminate a lease of its premises in Dundee had not been served properly by it on the Landlord, Ben Cleuch Estates Limited (“Ben Cleuch”). The result was that Scottish Enterprise was faced with paying rent for a further 10 years amounting to more than £2 million. Not surprisingly, Scottish Enterprise appealed against the Court’s decision. The Appeal Court has now reversed that decision.

The circumstances leading to Scottish Enterprise serving the notice on the wrong company are set out in our May 2006 edition which can be accessed here. In that ruling, the Court decided that the notice was invalid because it had not been addressed to the correct landlord, meaning Scottish Enterprise had failed to validly terminate the lease. In the Court’s view, it was essential that the steps set out in the lease and, in particular, the provision covering the service of notices, were followed to the letter.

The judges in the Inner House of the Court of Session took a different view. They felt that Scottish Enterprise were entitled to rely on the fact that all rent invoices sent to Scottish Enterprise were issued on behalf of Bonnytoun Estates Limited (“Bonnytoun”). Bonnytoun and Ben Cleuch shared the same registered office and the same directors. All management matters relating to the premises such as consents to alterations were issued by the managing director of Ben Cleuch on behalf of Bonnytoun. Neither the managing director nor the managing agents made any attempt to dissuade Scottish Enterprise from thinking that Bonnytoun was the correct landlord. Crucially, the managing director of Ben Cleuch, in giving his evidence, acknowledged that he had received the notice and was aware of what it meant commercially. He did not make any attempt to advise Scottish Enterprise of the technical glitch in the notice because he wanted to take commercial advantage from the error. As a result, Ben Cleuch were not entitled to insist on Scottish Enterprise remaining as tenant under the lease and paying rent after the break date.

Dawn Henderson, Partner in our Retail and Leisure Team, comments:

I am not surprised at this decision. As I indicated in our May 2006 edition, both sides had good and cogent arguments.

This decision reinforces the willingness of the courts in Scotland to take a much more commercial approach when ruling on the incorrect service of notices than has historically been the case. Rather than rely on a ‘technicality’, as the Court in the first instance did, what the Appeal judges did here was to look at what actually happened and how it happened. The steps taken by the parties and their actual behaviour were crucial to the Court’s decision. Ben Cleuch had actively allowed Bonnytoun to appear to Scottish Enterprise as its landlord and Scottish Enterprise had accepted that misrepresentation to its detriment. That being so, Ben Cleuch could not benefit from the commercial advantage that strict adherence to the terms of the lease would have conferred on it.

The Appeal judges’ decision does, however, give rise to uncertainty. What they are saying, effectively, is that a notice can still be valid even if served on the wrong party. I can’t help but wonder if the decision would have been different if the sums involved had been small.

The key to avoiding the scenario here happening again is never to underestimate how important it is to serve notices correctly. It is worthwhile emphasising what good practice in this area is:

If these steps had been followed in Ben Cleuch, a lot of worry and cost would have been avoided.

Ben Cleuch Estates Limited v. Scottish Enterprise [2006] CSOH 35, [2008] CSIH 1 CA38/05

A full text of the first hearing of the case can be accessed here. The text of the decision of the Appeal Court can be accessed here.

A new lease of life for access right

A dispute arose between the owner of warehouse premises in Aberdeen and the Council who owned the adjoining site over which the warehouse owner took access to get his vehicles in and out of his warehouse.

The Court had to decide whether or not the warehouse owner had acquired a servitude right of access over the Council’s site by the operation of prescription. Scots Law provides that a servitude may be acquired by prescription where the right is exercised for a period in excess of 20 years without challenge by the owner of the land over which the right is exercised. In this case, the actual exercise of the right of access for more than 20 years was not disputed between the parties. The issue, in this case, was the basis on which the warehouse owner had been exercising the right. Around the same time that the original warehouse owner first took access over the site, the Council granted a lease of the same area to the same owner of the warehouse. That lease was assigned to the current warehouse owner, a Mr. Wanchoo, when he bought the warehouse.

The Council argued that the right of access was not a separate, standalone right but, rather, was attributable to use of the site permitted under the Lease. Consequently, the right of access came to an end when the Lease itself came to an end. The Lease provided that the permitted use of the site was solely for the parking of vehicles and made no mention of access across the site to the warehouse.

When the case was first heard, the Court decided that a servitude right of access had been constituted by prescription. The Judge came to the view that the Council must have agreed to the warehouse owner taking access over the site before the lease was formally entered into. Correspondence between the parties and between Council departments which predated the lease indicated that the original owner of the warehouse undertook expensive redevelopment of his existing buildings in order to access his warehouse from the site. The evidence also suggested that the Council had agreed to him taking access over the site in the interests of better controlling traffic in the area. When the Council had built a new dual carriageway to the south of the warehouse, this had made the normal vehicle access to the warehouse more difficult, from the warehouse owner’s perspective, and caused traffic congestion problems for the Council on the surrounding roads. The Council, at that point, anticipated that the warehouse owner may have sought compensation from it for disruption of his existing access. The Court felt that this evidence indicated that the Council had agreed to the right of access being exercised before the lease was signed up. The Council would have been personally barred from denying the right of access to the original warehouse owner whilst he remained owner of the warehouse. Since he was allowed to use the site for access by the Council for 20 years, prescription operated to ensure that the right “ran with the land” (i.e. would operate in favour of any owner of the warehouse).

The appeal judges reached the same conclusion but for a different reason. They felt that it was not the fact that the Council was personally barred from denying that the right existed following use for 20 years which created the servitude right. In their view, it was the agreement between the parties (i.e. that access across the site could be taken before the date of the lease), followed by 20 years use which gave the right the status of a servitude which ran with the land.

Richard Hart, Associate in our Development and Investment Team, comments:

What strikes you as a major point to take from this case is that, in circumstances such as these, the parties to a contract must always ensure that the documentation finally signed up reflects what the parties had actually agreed. In this case, the original warehouse owner thought he was taking the lease to give him a right of access over the Council’s site and that this right would run with his land. It is clear from the evidence that this was the only reason for him entering into the lease. The Council thought otherwise. The lease itself was silent on the question of the right of access. From the Council’s perspective, the lease ought to have stated clearly that the site was being used for taking pedestrian and vehicular access to the warehouse as well as for parking. Had that been the case, the access right would have fallen away once the lease had ended. From the warehouse owner’s point of view, he should have been looking for a Deed of Servitude over the site instead of a lease.

The case also highlights the ingredients that you need to establish a prescriptive servitude (in addition to exercise of the right for in excess of 20 years without interference). Those ingredients are that the exercise and use of the right must be “as of right” and referable to the servitude right you are seeking to establish and not referable to some other legal basis such as a contract, a lease or mere “tolerance”. Here, the evidence suggested that the access was taken “as of right” due to the volume and frequency of use that the original warehouse owner and, subsequently, Mr Wanchoo had made of the right over the years. In addition, the original owner had spent a lot of money on extensive alterations to the warehouse to connect with the access over the Council’s site and he had closed off his existing access route. These factors suggested that the warehouse owner and the Council understood that what was happening over the 20 year period was the exercise of a servitude right of access as opposed to some more limited concession allowing access for the purposes of parking under the lease. Had the volume and frequency of the use of the access route been less extensive, then the Court may have decided that the right existed by mere “tolerance” on the part of the Council. When use becomes substantial and fairly constant, then that use is more likely to be “as of right”. A mere tolerated use will not be enough to establish a right that runs with the land.

Another clear lesson we can learn from the case is that purchasers, whether as owners, occupiers, investors or developers, should not, if it can possibly be avoided, acquire sites where the only or main access is by a right acquired by prescription (as opposed to a specific right set out in the title deeds). There is always the possibility that the exercise of a right of access, based on prescription, could be challenged as simply existing due to tolerance by the adjoining proprietor or because of a personal contractual agreement. There may also be a problem in proving that access has been exercised continuously for more than 20 years. This is particularly so, if either property has changed hands a number of times within the 20 year period.

In addition, the actual use to which the right of access has been put over the 20 year prescriptive period sets the bar against which future use of the access will be measured. A right of access based on prescriptive use will offer little, if any, scope for a change of use of the site benefiting from the right of access if such a change of use would result in a change in the volume or character of the access exercised.

We are now seeing a number of cases involving servitudes coming through the courts and the law in this area continues to evolve; this case follows on the back of a recent House of Lords case, Moncrieff v Jamieson, which we commented on in our November 2007 edition (accessible here). In that case, it was decided that a right of access might include a right to park on the area over which the right was exercised. Whilst each case will still require to be considered on its own facts and circumstances, that case indicated a more lenient attitude from the Courts to accepting that a basic servitude of access for vehicles over a route may also include certain other rights which are “reasonably necessary for the proper enjoyment of the servitude” i.e. it may include rights to carry out improvement works to the route of the servitude.

Aberdeen City Council v Alook Wanchoo [2008] CSIH6

A full text of the decision in the first hearing of the case can be accessed here. A full text of the decision of the Appeal Court can be accessed here.

News

Consultation on Climate Change Bill for Scotland

The Scottish Government has issued a consultation on a proposed Climate Change Bill for Scotland. The main proposals are: the setting of a target for reducing carbon emissions by 2050; the setting of interim reduction targets and reporting mechanisms on reaching those targets; providing for a source of independent advice and monitoring; creating mechanisms to help reduce emissions or to adapt to climate change.

Section 8 of the consultation document, Supporting Measures, includes reference to energy efficiency and microgeneration, combined heat and power and reducing carbon emissions from buildings. The consultation document can be accessed here.

The closing date for the Scottish Government consultation on the proposals is 23 April 2008.

The Community Infrastructure Levy

The UK Government chose to give England and Wales a Community Infrastructure Levy (CIL) in preference to a Planning Gain Supplement. The Department of Communities and Local Government has published a guidance document covering the Government’s aspirations for the charge. It covers:-

The Scottish Government has yet to show its hand following the news that a Planning Gain Supplement would not be imposed UK-wide by HM Treasury. It is anticipated that Scottish Ministers will give their views on the future of planning gain by the end of March.

The Guidance document can be accessed here.

Capital Gains Tax relief for entrepreneurs

The Chancellor has made a change to his original CGT reform proposals. He is to introduce an “entrepreneur’s relief”.

The relief is similar to the old retirement relief but without the age restriction.

The relief proposes taxing the first £1 million of a qualifying gain at 10%.  The £1 million level is a lifetime limit and therefore can cover more than one qualifying capital gain.  Relief will be available where relevant conditions are met for one year.

The qualifying gains are:

The relief will be available from 6 April 2008.

Details of the proposal can be accessed here.

Proposed SDLT Charge on residential property SPVs

In the recent Pre-Budget Report, the UK Government announced that it would seek to explore the practicalities of introducing a charge on the use of special purpose vehicles on high value residential property and on extending the SDLT disclosure rules to residential property. The Government proposes to levy the charge on special purpose vehicles worth £1 million or more. It has now published a consultation document seeking views on its proposals.

A new ‘Indirect Charge’ would apply SDLT to the transfer of an interest in the SPV at the same rate as if an interest in the property owned by the SPV had been purchased directly. There would be three tests:

There may be good reason to fear that if HM Revenue & Customs has success with the proposed measures for SDLT on SPVs operating in the high value residential market that its sights may fall on the commercial market.

The consultation can be accessed here.

Updated timetable for Planning etc. ( Scotland ) Act 2006

The new timetable can be accessed here.