Bell & Scott's Property Update, February 2009

Welcome to the February 2009 issue of Bell & Scott’s Property Update.

In this month's issue we comment on (1) a case where a tenant argued that a landlord’s award of damages, for loss of capital value in its shopping centre when the tenant moved out, meant that the landlord could not require the tenant to repair the premises; and (2) a case where a tenant argued that acceptance of a cheque by a landlord to put a stop to bankruptcy proceedings meant that the landlord lost its right to terminate the lease.

In addition, we update you on a number of other relevant news items.

Recent Decisions

Second bite at the cherry?

Back in April 2007, we commented on the decision in Douglas Shelf Seven Limited v Cooperative Wholesale Society Limited and Kwik Save plc (Property Update April 2007) – the first Scottish decision where a landlord recovered damages for the breach of a “keep open” clause. The long running saga of that dispute continues.

The original dispute centred on the terms of a lease of supermarket premises at Whitfield Shopping Centre in Dundee. The supermarket premises had been let to Cooperative Wholesale Society (“CWS”) in 1977 (on a lease not expiring until 2033), and sublet by CWS to Shoprite in 1993. Shoprite then assigned the sublease to Kwik Save Stores Limited (whose obligations were guaranteed by Kwik Save plc) in 1994. Douglas Shelf Seven (“DSS”) became landlords in 1994, before the store ceased trading in early 1995. The store remained vacant. In 2007, significant damages were awarded against CWS and their subtenant for loss of capital value and loss of income for breach of the keep open clause.

Now, DSS sought an order requiring CWS to carry out repair works as specified in a schedule of dilapidations, and sought payment of costs for security services provided at the premises. CWS disputed their liability on both counts.

CWS argued that the lease did not permit the recovery of security costs. The lease laid down a number of specific costs the tenants had to meet (none being security costs). Beyond that, it permitted the recovery of professional charges of the landlords’ factors in connection with the repairs and insurance of the common parts, and generally in connection with the management and administration of the shopping centre in which the supermarket was located. Lord Menzies decided that the reference to professional charges had to mean the profession of the factors. Although management and administration of the centre could include various activities, it was the charges of the factors that were covered, and not the costs of the various activities themselves, unless covered elsewhere.

More fundamentally, however, CWS sought to argue that they were not liable for the repair costs set out in the schedule. They claimed that, in seeking and receiving damages for the breach of the keep open clause, the landlords had chosen damages as a substitute for the obligation to keep open and trade. The obligation to repair had to be looked at in this light. It had never been suggested that the supermarket might reopen. The damages award had been on the basis of a once and for all payment for the loss of capital value, on the assumption the supermarket would not reopen. Although CWS did not argue that the premises required to be in anything other than good and substantial repair and condition at the end of the lease (in 2033), it was not reasonable to suggest that they were obliged to maintain vacant premises in such a condition that they could be let to an alternative subtenant at very short notice. The damages had reflected the fact that the premises were not being used for trading and were vacant.

DSS argued that the damages sought for breach of one clause did not prevent a separate claim in respect of breach of another clause. The repair clause was separate from the keep open clause. Nothing in the earlier litigation had involved consideration of the repair clause and so the court could oblige CWS to carry out the repairs.

Lord Menzies agreed with DSS. His view was that the previous decision had not been concerned with enforcement of the repair clause. The lease contained many clauses of which the keep open clause was only one. Other clauses remained enforceable – for example, the rent and rent review provisions. Why should the repair clause cease to be enforceable during the lease term as a result of enforcement of the keep open clause, if the rent clause did not? For that reason, he found that DSS were entitled to enforce the repair clause, both during and at the end of the lease.

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

It has to be acknowledged that the argument for CWS here was novel. No part of the earlier litigation involved enforcement of the repair clause, yet CWS’s argument that the valuation of capital loss had assumed the unit would not trade again seems fair. Does this, however, prevent enforcement of the repair clause? The difficulty is, undoubtedly, that if that is true of the repair clause, is that not also true of the rent payment clause? Why did the earlier litigation prevent enforcement of the repair clause but not other clauses? That was always going to be difficult to justify and so it proved. Lord Menzies’ analysis is difficult to fault – it is the logical conclusion.

For CWS, the closure of this supermarket (by a subtenant and not by themselves) is proving to be a very expensive exercise, which, in the current market, should perhaps be a concern for all tenants. Keep open clauses do have teeth in Scotland, unlike in England and Wales, in particular where the unit in question is a large or anchor unit in a retail development. Breach of them may lead to enforcement action, including damages, but that does not limit the tenants’ obligations to keep the premises properly repaired, even though vacant. Many landlords, in the present climate, may not wish to push too hard for repairs to be carried out mid lease, provided rental income is maintained, but tenants should not assume that the only liability, if the shop is closed, is for rent. That would be a dangerous assumption.

The more minor point about security costs is also worth bearing in mind. Modern leases generally have very wide provisions about what service charges can include, and in most cases, security costs would be included. There are, however, still some older leases around and the importance of checking carefully what service charge provisions cover is a point for both landlords and tenants in financially difficult times.

When the banjo’s music stops

Osibanjo was a solicitor on Camberwell Church Street in London. Seahive was his landlord under a lease of premises which could only be used as a pub or restaurant. Osibanjo got behind with the rent and Seahive served a statutory demand for payment so that it could establish that Osibanjo was bankrupt and trigger a right to forfeit (terminate) the lease. In January 2006, Seahive applied to court to make Osibanjo bankrupt. In June 2006, Seahive discovered that Osibanjo had made unauthorised alterations, changed the use of the premises, stopped trading and had allowed someone else to occupy without consent. In October 2006, Osibanjo sent a letter to Seahive's solicitors enclosing a cheque for £10,000. The letter stated that the cheque was "to discharge the outstanding bankruptcy sum and the remainder as part payment for arrears of rent". Seahive's solicitors banked the cheque. They wrote to Osibanjo telling him that they had retained the sum of £3,414.80, representing the bankruptcy debt and they returned the balance of the £10,000. The letter stated clearly that ".. the clearance of your cheque... should not be regarded as a waiver by our client of his right to forfeit the lease".

In the High Court in England, the judge rejected Osibanjo’s argument that Seahive had waived its right to forfeit the lease by (1) accepting the cheque and banking it at a time when it knew of the breaches of other obligations in the lease; (2) instigating bankruptcy proceedings; and (3) accepting part of the £10,000 to discharge the bankruptcy debt.

The court decided that it was impossible for Seahive, without first processing the cheque, to separate the two liabilities owed by Osibanjo, being the payment to avoid a bankruptcy order and the payment to discharge part of the arrears of rent. The basis for division of the amount for which the cheque was drawn was made clear in correspondence. To establish waiver of a right to forfeit the lease, Osibanjo had to show that the payment was not just accepted but accepted as rent by Seahive. Only part of the sum realised by the processing of the cheque was accepted, and that sum related to the bankruptcy debt, which Osibanjo had paid to secure the dismissal of the bankruptcy petition. In addition, the bankruptcy proceedings were not in themselves a waiver of a right to forfeit. They were taken before Seahive knew of the other breaches of the lease and their purpose was to show that Osibanjo was unable to pay his debts. The arrears on which the bankruptcy petition was based related to a rent period before Seahive became aware of the other breaches of the lease.

Keith Rawlinson, Solicitor in our Retail and Leisure Team, comments:

A sensible outcome! Although decided in the High Court in England, the case serves as a timely reminder to landlords in Scotland of the need to proceed carefully where irritancy of a lease becomes an option.

In England, a landlord can lose its right to forfeit (irritate) a lease where it accepts rent from a tenant in circumstances where the landlord knows that the tenant has breached or is breaching an obligation in the lease. Even the acceptance of rent by the landlord by mistake, or on a “without prejudice” basis, will normally mean that the landlord loses its right to terminate the lease.

When Seahive banked Osibanjo’s cheque and returned the balance not needed to clear the bankruptcy debt, it made it abundantly clear that it was not accepting the balance of the £10,000 as payment of rent.

In Scotland, the terms of the lease itself hold sway as to what a landlord can and cannot do. However, the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 controls the irritancy procedure in Scotland and its terms on irritancy of a lease are mandatory. The Act requires a landlord to issue a Notice of Intention to Irritate on its tenant before the lease can be terminated. Where the breach is of a monetary obligation, such as the obligation to pay rent or service charge, the tenant must be told, in the Notice, that it has at least 14 days to pay the outstanding money. For breaches of a lease which are not monetary, such as a failure to maintain or repair the premises, then the tenant must be told what the problem is and what reasonable period it has to put those matters right. What is reasonable will depend on what needs to be put right and how long that should take. If the tenant fails to pay the money due within the period allowed, then the lease is at an end.

With breaches of non-monetary obligations, the latitude given is different. Here, the landlord can only terminate the lease if, in all the circumstances, a “fair and reasonable” landlord would do so. That rules out landlords irritating leases for trivial breaches by tenants. Where the tenant does what is asked in the time given, the landlord cannot irritate the lease. Where the irritancy trigger is non payment of rent and the tenant makes either full or part payment of the arrears during the period given, the landlord can, and must, accept these payments. However, by accepting part payment, the landlord does not lose its right to irritate the lease should the tenant fail to settle the arrears in full within the time allowed.

Where non-monetary breaches are concerned, the landlord can continue to accept a reasonable rent if the tenant continues to occupy the premises throughout the period provided for in the Notice of Intention to Irritate. Again, by doing this, it does not lose its right to irritate should the tenant fail to put things completely right within the timeframe given. However, the landlord needs to spell out to its tenant the basis on which it is accepting the rent because if it continues to accept rent without qualification or behaves in a way that suggests the lease contract is not terminated then it may lose its right to irritate. When the period provided for in the Notice of Intention to Irritate has passed with the tenant failing to remedy the breach, the landlord must ensure that no further payments from the tenant are accepted. If it did accept rent at this point, it may be implied that a new lease on the same terms and conditions as the previous one had been set up.

Case referred to Osibanjo & Anor v Seahive Investments Limited [2008] ECWA Civ 1282

A full text of the case is available on the British and Irish Legal Institute website accessible here

News

More action on housing

In August last year, the Scottish Government announced a series of new housing initiatives in response to the changing economic climate. In January, the Government published “Responding to the Changed Economic Climate - More Action on Housing” setting out the progress to date, as well as the further housing measures to be taken as part of its economic recovery programme.

“Responding to the Changed Economic Climate - More Action on Housing” is available on the Scottish Government’s website accessible here

Housing Supply Task Force

The Scottish Government backed expert group has published a blueprint to help increase housing supply to satisfy need and demand in the Scottish housing market. In its report, the Housing Supply Task Force presented recommendations to help establish the conditions for house building to recover once market conditions improve.

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

SDLT: Guidance on group relief clawback

HMRC has published guidance on the meaning of change of control of the buyer for the purposes of the clawback of stamp duty land tax group company relief.

The guidance is available on HMRC’s website accessible here

HMRC Notice 742/3 Scottish land law terms

HMRC has published a revised notice providing a glossary of Scottish land law terms. The information aims to help customers with the interpretation of its guidance on land and property in Scotland. The glossary is not exhaustive and is not intended as a guide to Scottish land law. The main change in this latest notice is the reference to ownership of land.

Notice 742/3 is available on HMRC’s website accessible here

HMRC: Brief 62/08 changes to Land Remediation Relief

HMRC has published a brief of interest to bodies liable to corporation tax, which carry out decontamination work on land in the UK. This brief sets out HMRC’s revised guidance following the announcement made at the Pre-budget report (24 November 2008) that it has changed its view on whether or not a plant is a substance for the purposes of Land Remediation Relief.

The brief is available on HMRC’s website accessible here

HMRC guidance on goodwill on sale of trade related properties

HMRC has published a practice note on how to apportion the price paid for a business as a going concern between goodwill and other assets involved in the sale, including land. The guidance focuses on the sale of trade related properties, such as public houses, hotels, petrol stations, cinemas, restaurants and care homes. HMRC now accepts that goodwill is an asset separate from the land in these circumstances. Buyers, in particular, should ensure that an appropriate part of the purchase price is attributed to goodwill as this will reduce the SDLT cost and, for companies, corporation tax relief will be available for the cost of acquiring the goodwill in line with accounting practices.

The guidance is available on HMRC’s website accessible here