Bell & Scott's Property Update, February 2010

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

In this month's issue we comment on a case where a developer’s cunning plan to build without planning permission backfired on him and a “victory for common sense” case concerning the service of a tenant’s break notice.

We also update you on a number of other relevant news items.

Recent decisions

Hey presto a house!

In a recent English case, a cunning landowner, aptly named Mr Fidler, built a house without obtaining planning permission and concealed it behind bales of straw covered with a tarpaulin. After four years, the landowner pulled away the straw bales and the tarpaulin to reveal the house. Within a year of the bales being removed, the local planning authority issued an enforcement notice requiring the landowner to demolish the house.

The landowner claimed that the property was immune from planning enforcement action because more than four years had passed since the building operations were substantially completed.

The High Court in England decided that the erection and removal of the bales and tarpaulin were not building operations in their own right. However, the landowner had always intended to remove the bales and tarpaulin so, as a matter of fact, their removal was part of the building operations when the whole project as originally planned and carried through was considered. The property was not immune from planning enforcement action.

It would be safe to assume that the same approach would be taken to the facts of this case by any Scottish court considering the issue under the Town and Country Planning (Scotland) Act 1997.

Case referred to Fidler v The Secretary of State for Communities and Local Government [2010] EWHC 143 (Admin)

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

What’s in a name?

AWD Chase de Vere Wealth Management Ltd (“AWD”) took a lease of Cornerstone House, 2 Melville Street, Edinburgh from Melville Street Properties Limited at the end of 2004 for a term of 10 years. The lease contained a break option which AWD could exercise on the fifth anniversary of the date of entry, on giving to the landlords not less than six months’ prior written notice.

AWD sent a break notice to the landlords by recorded delivery on 29 September 2008 – as the lease required. However, the notice said that the tenants were “Thomsons Wealth Management Limited” in the heading and then “AWD Group Services Limited”, in the middle of the letter. The lease ran in the name of “Thomsons Wealth Management Limited”. However, the tenants, as stated in the lease, had changed their name to AWD Wealth Management Ltd before the date the lease was signed and, subsequently, to AWD Chase de Vere Wealth Management Ltd.

The landlords said that the break notice was not effective. AWD disagreed and took the matter to the Commercial Court for a decision. There, the question was whether a “reasonable landlord”, in the position of Melville Street Properties at the time, would have understood the letter as being one which was sent by the actual tenants with a view to breaking the lease.

The court had no difficulty deciding that the notice was effective. The judge considered both Scottish and English cases on the service of break notices. He felt that the important thing to look at was how a reasonable recipient of a notice, in the same position as the actual recipient of the notice under consideration, would have understood the one received. This meant that a notice had to be looked at assuming that the recipient would have made use of all of the information available about the party sending the notice and the fact that they, as landlords, had not consented to any assignation of the tenant’s interest in the lease.

Keith Rawlinson, Solicitor in our Retail & Leisure, Development & Investment Team comments:

A victory for common sense! Following the successful appeal by the tenants in Ben Cleuch Estates Limited v Scottish Enterprise (“Ben Cleuch”) (which we commented on in our “Enterprise conquers Ben” piece in the February 2008 edition of Property Update), the court has again seen sense and made a commercial decision, one with which I am in full agreement.

The facts in the present case differ slightly from those encountered in Ben Cleuch. The break notice in Ben Cleuch was not served on the correct party. The notice in the present case was served on the correct party, but it so happened that the party, on whose behalf the notice was served, had changed its name.

The landlords in Ben Cleuch had allowed the tenants to believe that another party was actually the landlord under the lease, having issued rental demands in the wrong landlord’s name. Ben Cleuch, who were the landlords under the lease, did nothing to dispel the tenants’ belief that the other company was their landlord. Therefore, Ben Cleuch had, by its conduct, justified the tenants in believing that other party was landlord. Ben Cleuch was personally barred from arguing the break notice had been ineffective as it had been served upon the incorrect party.

In the present case, the landlords argued that service of the break notice on behalf of an entity other than the actual tenants was enough to invalidate the break notice. The incorrect designation of the tenants would have brought enough uncertainty into the mind of “a reasonable landlord” that they would have felt that they could not safely rely on the break notice. The question asked by the court was, therefore, whether the recipient of the break notice was misled or whether the break notice clearly and explicitly conveyed the necessary information.

The court treated the break notice as having been received, not only by a reasonable landlord, but by a reasonable landlord in the position of the landlord under this lease. The landlords would have been familiar with the terms of the lease. They would have been familiar with the identity of the tenants. They would have been aware that there had been no assignation and no application for consent to an assignation of the tenant’s interest. The court went even further and decided that “the reasonable landlord” would have been likely to assume that AWD Chase de Vere Wealth Management (the actual tenant company) was in the same group of companies as AWD Group Services Limited (the party on whose behalf the notice had actually been served).

This is a victory for common sense and a good sign for tenants that the courts are now taking a more commercial view. However, has uncertainty now crept into the service of break notices? When can you be sure a break notice is actually effective? Should you act upon a break notice that you believe has been served incorrectly?

In serving break notices, the utmost care should still be taken and details checked and checked again prior to service (see the checklist in our Enterprise conquers Ben article).

Where a break notice is received and where there is doubt over its efficacy, the AWD and Ben Cleuch cases should be kept in mind. Are the circumstances of your own situation similar? Time will tell whether these cases will bring more uncertainty, or simply a more commercial, common sense approach from the courts.

A note of caution to our tenant clients who have properties south of the border - in England, an assignment of a tenancy without consent from the landlords can be effective, even where consent to an assignment is a contractual term of the lease. Accordingly, receipt by the landlords of a notice served on behalf of an entity other than the known tenants may well give rise to real uncertainty over whether there has, in fact, been an effective assignment of the tenancy, albeit without consent (potentially invalidating the notice).

Case referred to AWD Chase de Vere Wealth Management Ltd v Melville Street Properties Limited [2009] CSOH 150.

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

Briefing

Landlords’ rent in tenants’ administrations

A company in administration can owe debts to third parties, arising either from obligations that it had before it entered administration or from obligations undertaken following the actions of an administrator. The Insolvency Rules 1986 class some of the liabilities that the company incurs to third parties as expenses of the insolvent company. An administrator pays the expenses of the administration from the assets of the insolvent company, before he makes any payment to the (1) preferential creditors, (2) the creditors with floating charges and, finally, (3) the unsecured creditors.

If a liability ranks as an expense, the administrator will settle it in full. This means that the liability is not treated as an unsecured creditor claim against the company, which usually receives a minimal amount by way of settlement.

Many companies occupy leased premises and an important issue for an administrator is often whether to pay the rent as an expense of the administration. Landlords cannot take steps to irritate the lease of a company in administration without first obtaining the administrator's consent or the permission of the court.

In the recent case of Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration), the High Court (in England) had to consider the practice of some administrators in not meeting rent as an expense of the administration until the landlords demand rent or threaten to seek court consent to irritate the lease.

Nortel Networks UK Limited (in administration) (“Nortel”) occupied leased property under a lease between it and its landlords, Goldacre (Offices) Limited (“Goldacre”). The administrators of Nortel only needed to occupy a small proportion of the total premises to carry out their duties as administrators. Goldacre asked the High Court to rule that administrators pay the rent under the lease as an expense of Nortel’s administration. Goldacre argued that once Nortel's administrators made Nortel use the premises for the benefit of creditors, the rent automatically became an expense of the administration. The administrators argued that a liability of a company in administration was not an expense of the administration until the administrators or the court accepted it as such. If the ranking of a liability as an expense arose from the company's use of an asset for the benefit of creditors, the administrators argued that the amount of liability that ranked as an expense was determined by the extent to which the company in administration used the asset. In this case, because Nortel occupied only part of the premises, the administrators believed that only a proportion of the rent payable under the lease should rank as an expense of the administration.

The High Court decided that the administrators must pay the entire rent payable as an expense of the administration. Since Nortel had to occupy the leased premises to allow the administrators to carry out their statutory duties, the rent for the premises was an expense of the administration. The court also decided that, if an administrator required the company to occupy leased property for the benefit of creditors, its occupation was subject to the full terms and conditions of the lease.

This decision strengthens the commercial position of landlords faced with tenants in administration. If the administrators require the insolvent company to use the premises for the benefit of creditors, the administrators must pay the full rent falling due under the lease for the period of administration as an expense of the administration. The rent ranks as an administration expense from the point that the administrators require the insolvent company to use the premises for the benefit of creditors.

A note of caution - the decision does not mean that the administrator has to pay the rent immediately upon it falling due, if the administrator does not have sufficient funds to do so.

The decision does mean that prospective administrators, when considering the strategy for the administration of an insolvent company, must make suitable arrangements to meet the company's liabilities for leased property.

It is likely that the decision would be followed by the Scottish courts if faced with having to make a similar decision.

Case referred to: Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch) [2009].

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

Our specialist landlord and tenant teams can provide all the advice and guidance that you require.

News Updates

Scottish Planning Policy

The Scottish Government has issued a statement on its policy on land use planning. The statement contains its view of the purpose of planning, the core principles for the operation of the planning system and its key objectives. It gives statutory guidance on sustainable development and planning under the Planning etc. (Scotland) Act 2006 s.3E and concise subject planning policies. It also outlines the implications for development planning and development management and the Scottish Government's expectations of the intended outcomes of the planning system.

Details are available on the Scottish Government’s website accessible here

Planning Circular 1/2010: Planning agreements

The Scottish Government has issued a circular providing guidance on the processes for determining the need for, and negotiation of, planning agreements. Circular 1/2010 sets out the Scottish Government’s policy on the use of Section 75 agreements and provides guidance on the circumstances in which such agreements should be used and on how they can be efficiently concluded.

The circular draws on the findings of research projects commissioned by the Scottish Government, published in 2004 and 2008, as well as a facilitated stakeholder workshop held in November 2008.

Details are available on the Scottish Government’s website accessible here

Land use strategy

The Climate Change (Scotland) Act 2009 required a land use strategy to be laid by Scottish Ministers before the Scottish Parliament by 31 March 2011. The strategy must set out the Scottish Government's objectives for sustainable land use as well as proposals, policies and associated timescales for meeting those.

The objectives, proposals and policies must contribute to obligations on emissions reduction targets, to climate change adaptation objectives and to sustainable development.

Details are available on the Scottish Government’s website accessible here

Extending Permitted Development Rights for Domestic Micro-Wind Turbines and Air-Source Heat Pumps

The Scottish Government has issued a consultation paper on permitted development rights applying to micro-wind turbines, anemometry, air source heat pumps and the possible cumulative effects of permitted development rights in areas designated for their natural and built heritage value.

Details are available on the Scottish Government’s website accessible here

New BBP toolkit to help businesses measure energy use from commercial buildings

The Better Buildings Partnership (BBP) has launched a new toolkit to help businesses and landlords measure and reduce their energy use from commercial buildings.

Many commercial businesses have difficulties in measuring their energy use accurately. Energy use data is frequently only provided for an entire building, which contains a number of separate businesses. Measuring how much energy a building uses on a more accurate basis is essential to working out how buildings operate and where energy savings can be made most effectively.

The toolkit gives best practice guidelines on how to install hour-by-hour, floor-by-floor energy meters. The BBP adopts a "graduated approach" encouraging businesses to keep the process of measuring energy simple, building up complexity as and when the understanding of a building's environmental performance grows.

The toolkit encourages those in the property industry to share their own knowledge and experiences. It is hoped that the toolkit will stimulate the industry to define and agree a set of industry standards and common sustainability metrics for reporting and benchmarking environmental performance.

Details of the toolkit are available on the BBP’s website accessible here

FSA publishes requirements for sale and rent back arrangements - property implications

On 29 January 2010, the FSA published its final requirements for sale and rent back arrangements. The final rules will come into force on 30 June 2010.

The new rules will mean that all firms wishing to carry out sale and rent back activities, after 30 June 2010, must apply for FSA authorisation to do so. This includes those firms that have been permitted to carry on these activities under the interim regime which operates at the moment.

Details are available on the FSA’s website accessible here

FSA consults on strengthening its arrears handling and approved persons rules

On 26 January 2010, the FSA published a consultation paper entitled: "Mortgage Market Review: Arrears and Approved Persons".

In the consultation, the FSA sets out a package of measures designed to strengthen its current rules on arrears handling and approved persons. These were identified by the FSA in its October 2009 mortgage market review discussion paper as priority areas that need to be addressed.

The FSA proposes a number of measures to help to ensure that mortgage holders in arrears are treated fairly. The key measures proposed clarify the FSA's existing arrears handling rules in chapter 13 of the Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) and introduce some new provisions which include:

• clarification that firms must not apply a monthly arrears charge where a firm and its borrower have agreed an arrangement to repay the arrears. Any charge imposed should represent the cost of additional administration work;
• clarification that firms must not add early repayment charges on arrears charges and interest levied on those charges;
• clarification that payments by borrowers in financial difficulties must first be allocated to clearing missed monthly payments, leaving charges to be paid later;
• a requirement that firms consider all options for borrowers, with repossession always being the last resort; and
• an obligation on firms to record all arrears handling telephone calls and to keep all arrears records for three years.

The FSA also proposes to extend the approved persons regime to home finance business, so that all home finance advisers and those who bring about "home finance transactions" are individually accountable to the FSA. The FSA believes that this extension of the approved persons regime will reduce both mortgage fraud and unsuitable advice, by allowing it to "prevent unfit or rogue individuals from entering the industry".

Details are available on the FSA’s website accessible here