Bell & Scott's Property Update, June 2009

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

In this month's issue we comment on a case where a developer’s plan for parking spaces at its development in Edinburgh turned sour and a case which looks at the issue of practical completion in building contracts.

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

Recent Decisions

Still parking mad

Ashford Estates developed four flats in a townhouse at 24 Manor Place, Edinburgh. Mr and Mrs Holms bought number 24B. With the flat, came a car parking space and a right of access to that space over the car parking area behind the townhouse and a lane leading off the main road. The parking space was shown on the Holms’ title plan as Space 42 and was one of three numbered spaces shown on the plan and in the Deed of Conditions for the development. However, Ashford also sold another car parking space, number 43, to a Ms Mason and Ms Mason’s title to that space predated that of the Holms. Space 43 was shown on Ms Mason’s title plan but not shown on any of the other deeds. It is not possible to park in Space 42 if there is a car in Space 43.

When the case came before a Sheriff back in 2006, he awarded the Holms damages of £15,000. Ashford appealed against that decision to the Sheriff Principal in Edinburgh without success. Now the issue has come before the Inner House of the Court of Session.

The Holms stood by their position that they had been “evicted” from their right to take access to car space 42. If the Holms could not get access to it because, as a matter of physical fact, Ms Mason’s prior title allowed her to park in space 43 (which she had done and could do at any point thereby preventing the Holms getting in and out of their space) then the Holms had necessarily been evicted from their space. Ashford argued that the Holms were only entitled to damages if they could show that they had an open and shut case establishing that they had been or would be “evicted” from their car parking space.

The Inner House decided that the lower courts had approached the issue incorrectly. It was not an open and shut case that the Holms had been “evicted” by Ms Mason’s competing right. The Holms should have sued Ms Mason first to establish whether their right of access trumped her right of ownership, or vice versa. If they could successfully do that then “eviction” would be clear and they could then sue Ashford for a breach of warrandice.

Neil Fraser, Associate, comments:-

It’s not what you want to hear, but life and property law are full of surprises – and mistakes. This case provides good examples of both.

The initial mistake was that Ashford didn’t appreciate that the location of space 43 effectively blocked access to space 42 although they had sold space 42 with unrestricted access. We assume it was simply the case that Ashford (not unreasonably) wished to maximise the value of the development but failed to appreciate that there was a practical conflict between the different rights they were selling to different purchasers.

The second mistake was that Ashford failed to show space 43 either on the plan attached to the Deed of Conditions or on the plan attached to the Disposition that transferred title to the Holms. Presumably, the reason for that was that space 43 was added late in the day. There is no suggestion that Ashford deliberately omitted space 43 from the plans to try and pull the wool over the Holms’ eyes.

Now for the surprises:

Many purchasers are aware of the “warrandice clause” that is invariably contained in Dispositions, and take comfort in it. “Warrandice”, at its most basic, is simply the seller’s guarantee of good title. What is less fully appreciated is that, to make a claim for breach of warrandice, as the Holms did here, the purchaser has to show that it has been “evicted” from its property. “Eviction”, in this sense, doesn’t necessarily mean that the purchaser has to be removed from the property, but just that some third party has successfully made out a competing right that prejudices the purchaser’s title.

That said, some title defects are so indisputable that it would be pointlessly time consuming and expensive for a third party to have to prove its right in court just so that the purchaser could demonstrate eviction in order to support a claim for breach of warrandice against the seller. In such clear-cut cases, eviction is presumed. The Holms claimed for breach of warrandice on the basis of that presumption: Ms Mason was entitled to park a car on her car parking space; it was obvious from the titles that when she did so, the Holms could not use their space; the Holms’ right of access, if respected, would deprive Ms Mason of her ability to park her car thereby depriving her of her right of ownership, and that’s not allowed. Therefore, it was obvious from the titles alone that, in a theoretical contest between Ms Mason’s right of ownership and the Holms’ right of access, Ms Mason would definitely win. The Holms were, therefore, “evicted” from their space.

The surprise is threefold:

Firstly, it had been widely accepted that a right of access would be invalid if it deprived another owner of the use of his or her property. So widely accepted was this rule that it was repeated in the Title Conditions (Scotland) Act 2003 and believed to be a statutory restatement of previously decided cases. However, the Court of Session found that the cases backing that rule were more limited than previously thought. Since the Holms’ case arose from events occurring prior to the passing of the 2003 Act, the statutory “restatement” of the rule could not assist them.

Secondly, there was a question over the exact extent to which Ms Mason would have to be deprived of the use of her space before that amounted to, effectively, being deprived of ownership (which isn’t allowed). Admittedly, Ms Mason could not use her space to park a car and still allow access for the Holms, but she could still use her space to park a bicycle or a motorbike. Ms Mason could also assert her ownership by taking steps to exclude anybody other than the Holms from the space. Further, Ms Mason could arrange some potted plants and a chair on the car parking space and use it for sunbathing. (In Scotland. In a car park. We’re not kidding!) Of course, the potted plants would have to be arranged in a way that would still allow the Holms to drive past.

Since Ms Mason had, at least, some possible uses of her space consistent with allowing access for the Holms, and cases on the point were limited, it was not indisputable that Ms Mason’s right of ownership would trump the Holms’ right of access. Therefore, it could not be presumed that the Holms had been “evicted”.

The third surprise is that Ashford ran this appeal at all. It will not have been cheap, a winning party will be doing well if it recovers 50%-60% of its costs from the losing party, and yet the damages awarded to Holms in the Sheriff Court were just £15,000. Even having been successful in the Court of Session, Ashford is not out of the woods yet. The Court of Session put the case on hold pending further procedure, presumably to allow the Holms and Ms Mason to litigate the question of whose right takes precedence. If Ms Mason’s right wins (which seems likely) then the Holms will have established “eviction” and can revisit their case against Ashford. If the Holms’ right wins, will Ms Mason then raise an action for breach of warrandice against Ashford? One wonders how cost effective this appeal has been for Ashford.

The lessons are obvious. Developers should ensure that the lay-out of their developments and the rights granted work in practice. Failure could mean exposure to claims for damages which, even if successfully defended, will still be costly in terms of human resources, finance and reputation. If planning conditions are the issue, then these should be dealt with prior to going on site. The plans of the development should be uniform, should accurately reflect the layout of the development and should be used throughout the documentation. Later amendments to plans should be carefully considered before being implemented. Purchasers should be alive to the possibility that developers might make mistakes and be conscious that warrandice clauses are not necessarily as comforting as might be thought.

And what next for the long running saga of the Holms and Ashford? Will the Holms appeal to The House of Lords? Will the Holms sue Ms Mason? Can anything surprise us now?

Case referred to Robert Andrew Holms and Mrs Anne Clark Holms v Ashford Estates Limited [2009] CSIH 28

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

Is that building finished yet?

A recap on practical completion

Menolly, an investment company, challenged a number of certificates of practical completion which had been issued by a building company employed by Cerep to renovate and refurbish a building in Cheapside, London. Cerep owned the building and Menolly had entered into a share purchase agreement under which Menolly was to purchase the shares in the Cerep company which owned the building. Completion of the share purchase agreement was to take place on practical completion of building works and the issuing of an appropriate certificate under the building contract. The building contract was a JCT Standard Form of Building Contract with Contractor's Design 1998 edition. The specification of the works included part demolition of an existing building, the construction of a new building and works of renovation to what remained of the existing building. The building contract allowed for sectional completion. There could be separate certification of practical completion of the first section, consisting of retail units, and the second and final section, consisting of offices. A number of certificates of practical completion had been issued.

Menolly accepted that a valid certificate had been issued for the second stage of the works. However, at a later point, it contended that the certificate issued for the first section, by Cerep’s project manager, on which Cerep relied, was invalid for a number of reasons. The main reason was that there had been a failure to provide "level access" to the retail units as required by disability discrimination legislation. Cerep, for its part, maintained that the certificate was valid.

Additionally, Menolly argued that Cerep had failed to give it the required contractual notice of Cerep’s project manager’s intention to inspect the works before certifying practical completion.

The High Court in London decided that, as a matter of interpretation of the building contract, the works necessary to provide “level access” were within the definition of the works covered by the first section of the works. Accordingly, the provision of “level access” did form part of the contractor's obligations. This meant that it was not competent for the project manager to certify that the first section was practically complete as he had done. The project manager’s reading of the contract led him to believe that “level access” was not a requirement of the building contract when he issued the relevant certificate. On the evidence given, the court took the view that he would not have given the certificate if he had taken the correct view of the building contract. His certificate was accordingly invalid. However, the actions of both Menolly and Cerep after the issue of the invalid certificate indicated that they both thought it was, in fact, valid and, therefore, both had waived the right to rely on the fact that it had not been issued in accordance with the building contract.

As for the failure to give proper notice under the contract, the Court decided that that failure did not mean that Cerep was unable, as employer, to give a written statement under the building contract which would amount to a certificate of practical completion for the purposes of the share purchase agreement. On that basis, the failure to give proper notice to Menolly of the inspections leading to the certificate was not important.

Pat Loftus, Partner, comments:

It is not very often that we get any detailed court consideration of the meaning of practical completion and the procedures involved in confirming it in building contracts. In this case, the court was asked to rule on the validity of a certificate of practical completion issued under a contract and the effect that that certificate had on a related share purchase agreement.

Two issues which come out of the case are worthy of note by employers and their agents. Firstly, although the majority of standard form contracts require the contractor to achieve practical completion, there is, in fact, no standard form contract definition of what practical completion actually means. Secondly, the case stresses the need to ensure that, what constitutes practical completion under an associated contract connected to the works, whether that be a share purchase agreement or, more commonly, an agreement for lease or straightforward conditional missive, is capable of being achieved under the terms of the building contract.

Definition of practical completion

Logic necessarily dictates that the meaning of practical completion will change from project to project – a standard form definition, therefore, is well-nigh impractical. What’s more, it would be commercially unviable to delay the handover of a project because of some minor piece of work remaining to be completed which should, rightfully, be a snagging item. For these reasons, the majority of building contracts require a building contractor to hand over the building when all but minor snagging works – those that can be carried out without undue interference or disturbance to the owner/occupier of the building – are complete. Although parties are free to use whatever definition of practical completion they choose to suit their project, this can be a double-edged sword as the wording chosen may be too intricate in detail and potentially unattainable for a contractor. Additionally, there is a risk that a key component of the works required is missed out which could lead to the owner having to accept the works from the contractor as being complete when they are not.

Associated contracts

You must be careful to ensure that what amounts to practical completion under an associated contract can be achieved under the building contract itself and that the contractor is aware of what the requirements under the associated contract are. There is a real risk here of a mismatch between the requirements of a standard form building contract which adopts the undefined standard of practical completion and, for example, the requirements of an agreement for lease which lists certain elements of the works which must be completed to the satisfaction of the incoming tenant before the works can be certified as practically complete. If there is a mismatch between the contracts, you can find yourself in a position where the contractor thinks the works are done and must be paid for but the incoming tenant does not and refuses to occupy the property and start paying rent. This situation arises most commonly where the definition of practical completion under an agreement for lease requires all deliverables i.e. collateral warranties, operation manuals, health and safety files etc to be handed over as a condition precedent to practical completion. Under a standard form building contract, achieving practical completion does not require these documents to be handed over.

Practical completion process

Not only do you need to take care over what constitutes practical completion under the building contract and any associated contract, but you also need to follow the agreed process in order to avoid any challenges on the basis of a failure to adhere to proper procedure. Therefore, set timescales, opportunities to inspect and set forms of notice need to be adhered to, afforded and used. Compliance may appear to be counter intuitive at the time because there will always be commercial pressures for a certificate of practical completion to be issued - the owner wants to sell or let the building and the contractor wants to move on to a new project. However, by following the correct procedures, you can eliminate any risks of the validity of the certificate being called into question.

The impact of the practical completion certificate

During the practical completion process, employers need to be aware of how the issue of the certificate of practical completion will impact on the contractual rights and obligations of the parties. The issue of the certificate will normally trigger: (1) the release of the first half of the retention money to the contractor: (2) the start of the defects liability period: (3) the start of any limitation periods in the contract and warranties: (4) the loss of effective employer remedies against the contractor and any right to claim liquidated damages (save where the contract says these can be charged for remedying defects): (5) the obligation to insure the development passing back to the employer: and (6) the end of or a reduction in value of performance bonds taken out for the works.

Developers need to be aware that when the certificate of practical completion is issued, there is a sea change in the obligations of the parties beyond the simple completion of the building. The employer, in particular, should be prepared for this.

Case referred to Menolly Investments 3 SARL v (1) Cerep SARL (2) Menolly Homes [2009] EWHC 516 (Ch).

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

News

RICS publishes new valuation guidance

The RICS has published new guidance on valuing property in the prevailing market.

The new guidance recognises that there may be a need for valuers to provide advice on the outlook for a property’s value as well as establishing its current market value.

A copy of the full valuation information alert “Guidance to Lenders and Valuers when conducting Loan Security Reviews” can be found on the RICS website accessible here.

Planning Circular 12/96 Review: Planning Agreements

The Scottish Property Federation has now submitted comments to the Scottish Government on the consultation issued on Planning Circular 12/96 Review: Planning Agreements.

The comments are contained in a SPF Policy Statement which is available on its website accessible here.

Review of fees for planning applications

The Scottish Government is looking into the existing methodology employed to calculate planning fee increases to establish if this methodology remains appropriate.

Details of the enquiry can be found on the Scottish Government’s website accessible here.

Climate Change Bill "beefed up"

The Scottish Government is taking further steps to strengthen its Climate Change Bill.

The aim is that targets to reduce harmful greenhouse gases will now include a new interim target to cut emissions by 34 per cent by 2020. However, Scottish Ministers intend to introduce an amendment to the Bill to ensure this rises to at least 42 per cent as soon as the EU agrees to reduce its greenhouse gas emissions by 30 per cent by 2020.

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

Biomass heat schemes

A Scottish Government initiative aimed at reducing businesses’ emissions through the deployment of renewables is underway.

Twenty six projects across Scotland have been awarded a share of £1.6 million under the Scottish Biomass Heat Scheme to install biomass and district heating systems in small businesses like hotels and offices.

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

Historic Scotland Consultation: The Ancient Monuments and Listed Buildings (Amendment) (Scotland) Bill

Historic Scotland is currently seeking the public’s views on the proposed provisions of the Ancient Monuments and Listed Buildings (Amendment) (Scotland) Bill.

The Bill will introduce new provisions and remove barriers to the use of existing powers that will enhance the ability of the regulatory and planning authorities to manage the historic environment in a sustainable way.

The consultation closes on 14 August 2009.

Details can be found on Historic Scotland’s website accessible here