Bell & Scott's Property Update, March 2010

Welcome to the March 2010 issue of Bell & Scott’s Property Update.

In this month's issue we comment on a case where a developer avoided repaying his loan on a property because the Bank failed to make good on its promises to give him development funding in addition to the purchase price he borrowed.

We also provide Briefings on the forthcoming impact of competition law on property contracts and the new Consumer Code for Home Builders.

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

Recent decision

Loose talk can cost

William Carlyle, a property developer, funded his developments through a facility with the Royal Bank of Scotland (“the Bank”). One of his projects was to develop a plot of land at the Gleneagles Hotel in Perthshire. A financial driver for the project was the potential return that may come from the Ryder Cup which was billed to be hosted at the hotel and course in 2012. RBS agreed to provide Mr Carlyle with a bridging loan for the purchase of the plot. The repayment date was stated in the loan agreements to be 12 months from drawdown. The repayment date came and went with no repayment made by Mr Carlyle.

When the Bank took Mr Carlyle to court to obtain repayment, it met no resistance from him on its right to call in the loan. He accepted that he had failed to repay the loan by the repayment date. However, he argued that an assurance had been given to him by the Bank, at the time of signing the loan agreement, that additional funding would be given to allow the development of the plot. No additional funding was forthcoming from the Bank making the deal commercially unviable.

The basis for his argument was that he had made it abundantly clear to the Bank that he did not want funding just for the purchase price but for the development and construction costs as well. The deal made no commercial sense to him without the global funding being allocated because the hotel required a buy-back right for the plot to form part of the transaction. For the hotel, the buy-back was there to ensure the plot would be built out in time for the Ryder Cup coming to the course. In this circumstance, Mr Carlyle maintained that an assurance was given by the Bank that funding for the full development costs was agreed and, both he and the Bank had signed up to loan agreements on that basis. It had been normal in his development funding relations with the Bank for loan funds to be dealt with at different stages in the development project and by different loan documents. He had signed the loan for the purchase price assuming that further paperwork covering the development costs would follow. The Bank did not provide any additional paperwork or funding.

Mr Carlyle withheld repayments under the loan agreement and sought damages from the Bank on the basis that the Bank was in breach of a collateral warranty or undertaking that it had given to him about the development funding. The collateral warranty had been given to him by the bank employees, to whom he had made it abundantly clear that he did not want to drawdown on the purchase price for the plot unless all development funding was to be forthcoming. He believed that the words and actions of the Bank’s employees had given him this understanding.

On the evidence, the judge decided that the assurances that additional funding would be made available had been given to Mr Carlyle by the Bank through its employees. Those assurances amounted to a collateral warranty. A witness, who was an ex-employee of the Bank, confirmed that assurances had been given orally regarding additional funding which was held to be sufficient to constitute the contractual relationship required for a collateral warranty to exist.

Anne McGregor, Partner, comments:

The decision in this case will no doubt come as a bit of a surprise to the Bank, given their loan documents failed to mention the development funding, but the court was correct to consider the bigger picture and the "whole agreement".

It is difficult to envisage that Mr Carlyle, knowing the penalty for failure to build within the agreed timescale, would have proceeded with the purchase without the belief that development funding was part of the deal. Having agreed this at the outset, the bank should not have been able to ignore its commitment simply because it failed to record it in writing.

Borrowers faced with a lender "withdrawing" funding should check not only the loan documents but all communications leading up to the loan being made as there may, as in this case, be a collateral contract which the lender has to honour. In today's harsh financial climate this could prove invaluable.

Case referred to Royal Bank of Scotland Plc v William Carlyle [2010] CSOH 3

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

Briefings

Title and lease restrictions on business competition

A new law, coming into force on 6 April 2011, The Competition Act 1998 (Land Agreements Exclusion Revocation) Order 2010, will bring the full force of competition law to title and lease conditions which prohibit trade. Conditions and clauses which breach the rules will be unenforceable and competition sanctions could bite. The new rules will apply to existing contracts signed before April 2011, as well as to new contracts.

The new rules will affect landlords, tenants, sellers, purchasers, property developers, property investors and property funders. Not all restrictive title conditions or lease clauses which limit business competition will be prohibited – but all will need to be considered closely by the parties and their advisers.

The change in the law comes in to bring “land agreements” within the rules contained in The Competition Act 1998. Until now, certain “land agreements” enjoyed the benefit of an exclusion which protected them from the prohibition on agreements which are restrictive of competition – the so-called “Chapter I prohibition”.

What kinds of provision are affected?

The kinds of provision in property agreements which are most likely to be affected by the new legal development include:

• Exclusivity agreements in a shop, office or factory lease which limit the type of commercial activity which the tenant may undertake, especially if this is intended to protect the landlord or other tenants from competition.

• Restrictions in leases which limit the freedom of the landlord to let other premises to competitors of the tenant – for example, in a shopping centre where a landlord agrees with a retail tenant not to let other retail outlets to competitors of that tenant.

• Restrictions on competition affecting retail outlets, restaurants or refreshment kiosks at sporting venues, events sites, exhibition halls, conference centres – including in connection with the Glasgow Commonwealth Games or Olympics.

• Title conditions accepted by a seller of property not to sell adjacent property to a competitor of the buyer.

• Exclusivity periods in property deals – where the seller agrees with a potential buyer not to negotiate with anyone else for a certain period – will generally not be caught, provided that the period is reasonable.

• Restrictions on development in planning agreements will be outside the prohibition if the only parties are the landowner and a local authority.

Consequences of breaching the prohibition

Provisions in a contract which breach the Chapter I prohibition are automatically void and unenforceable in the courts. In addition, third parties who are adversely affected by the unlawful provision – for example, a retailer excluded from a shopping mall by restrictions on competition in the shopping centre’s leases – may take legal proceedings in the courts to obtain an interdict or declarator and/or to get damages from the parties for any losses they have sustained as a result.

The UK’s competition authority, the OFT, may investigate alleged breaches of the Chapter I prohibition, either on its own initiative or following a complaint by a third party. If the OFT decides that a restrictive provision does breach the Chapter I prohibition, it may make a legally-binding order for termination or modification of the provision. The OFT also has powers to impose substantial fines on the parties to the agreement although fines are usually imposed only for the most seriously anti-competitive practices (and in practice it is unlikely that fines will be imposed for provisions in land agreements newly subject to the prohibition, at least in the initial aftermath of the exclusion being revoked).

Assessing the restrictive provisions - what will be permitted?

A restriction only breaches the Chapter I prohibition if it has an appreciable effect on competition in relevant markets. This requires proper assessment of its actual effect on competition in the particular circumstances of the arrangement, taking into account the goods or services concerned and the locality. For example, if the tenancy arrangements in a shopping centre provide that only one supermarket unit will be allowed in the centre, and competitors will be excluded, the assessment of whether that has a restrictive effect on competition may depend on whether that supermarket faces competition from other supermarkets outside the centre and within a reasonable radius. Additionally, agreements where the parties are below certain market share thresholds (10 to 15 per cent) will generally be regarded as de minimis and therefore outside the ambit of the Chapter I prohibition.

Even if a restrictive provision comes within the ambit of the Chapter I prohibition, it can be treated as “exempt” from the prohibition if the parties can demonstrate that it brings economic and consumer benefits, that the restrictive effects are no wider than is necessary to achieve those benefits, and that it does not effectively rule out competition. An example of the kind of arrangement which might benefit from exemption is where a shopping centre developer might seek to justify provisions restricting competition against the department store that is the “anchor tenant” in the centre. Here the argument would be that the location of the shopping centre brings economic and consumer benefits, and that the restriction is required to attract enough tenants or rental to justify the substantial investment made – i.e. no other tenants would come unless the anchor tenant was there.

Another kind of restriction on user which might be exempt is where a tenant is required to operate a certain kind of store in order to have an appropriate “tenant mix” in a shopping centre – that is, to help ensure that the centre offers a wide range of shops and not just one type.

The UK Government has granted a one-year period until 6 April 2011 for businesses in the property sector to comply with the new law. It may be that the OFT will issue guidance on how the law will be applied to property contracts, and some regard can be had to treatment of such restrictions under the competition law of other European countries.

For those buying investment properties, due diligence should include checking for potentially unlawful conditions in lease and titles which restrict business competition. Warranties can be negotiated against this type of liability.

Retailers will wish to check exclusivity agreements which they have to see whether these are in fact enforceable.

The Consumer Code for Home Builders

The Code

This is a group of 19 requirements and guiding principles targeted at getting the industry to deal effectively and efficiently with its customers throughout the entire home-buying process.

The Code requirements come into effect on the 1 April 2010 and apply to all new private home-buyer reservations made on or after that date. The Code does not apply to homes built under an architect’s certificate, those bought by registered social landlords or those bought by a company or partnership for investment purposes.

Where there are disputes about whether a housebuilder has complied with the Code, and the home buyer suffers a loss as a result, there is an independent redress scheme available to the buyer.

From pre to post occupation, the Code strives to ensure that a consistently high level of customer service is offered and maintained – this will be monitored through customer satisfaction surveys and industry compliance checks.

The Code will be enforced by a change in the Rules for NHBC and other co-operating warranty bodies. Clear and continued non-compliance with the Code can result in a severe penalty – the housebuilder being removed from the warranty bodies' registers.  

What it means

For housebuilders, this will mean that they will need to develop systems and procedures to inform their customers on the provision of delivery dates, rights to terminate contracts, the reimbursement of reservation fees and deposits, and the external redress scheme. Some builders may choose to do this by way of their own “Customer Charter”.

Housebuilders may also need to make some changes to reservation forms and builders missives, to maintain openness with customers. This will involve making sure that documents are amended to cover everything from reliance on oral statements, through to clarity on service and management charges which will apply in respect of common or amenity areas in new build developments.

How does it work?  

The Code Scheme will be financed and operated via warranty bodies and led by a management board and supported by an advisory forum. The advisory forum is the industry-wide representative body that represents, consults and advises on Code content, its practical application and operation, through which changes and improvements will be made.

For example, enforcement of the Code for NHBC registered builders and developers is by way of the NHBC Rules, amended to refer specifically to the Code. This change will also come into force on 1 April 2010.

For NHBC registered builders, there is also a set of Consumer Code Scheme Rules which explain how builders are to comply with the Code, how NHBC will deal with those builders who refuse, and the appeals process for dealing with those who are deleted from the register for non-co-operation with the Code and its adjudication service.

As the premier law firm representing housebuilders in Scotland, we are ideally placed to give advice on the terms of your reservation forms, standard missives, “Customer Charters” and staff awareness training. Please get in touch with Ruth Maclean or John Gallacher for advice and further assistance.

Details of the Code are available on the Consumer Code for Home Builders website accessible here

News Updates

New SEPA flood warning scheme for the North East is launched

A new £1 million SEPA scheme to protect vulnerable communities from the threat of flooding in high-risk areas of the North East of Scotland was launched on 2 March by the Scottish Government. Approximately 2,000 homes and businesses will benefit from the funded flood warning scheme around the rivers Dee, Don, Deveron and North Esk.

Rainfall and river level monitoring across the catchment areas will provide SEPA with improved information on conditions, which will then be used to provide advance warning of flooding to members of the public who can access the information via SEPA's 24 hour Floodline information service. This will allow local people crucial extra time to take action to protect themselves and their property.

Details are available on SEPA’s website accessible here

Designing Streets: A Policy Statement for Scotland

The Scottish Government has issued a new policy statement for street design which brings in a change in emphasis in guidance on street design. The move is towards place-making and away from a system focused upon the dominance of motor vehicles. It has been created to support the Scottish Government’s place-making agenda and is intended to sit alongside the 2001 planning policy document Designing Places, which sets out the Scottish Government’s aspirations for design and the role of the planning system in delivering these.

Details are available on the Scottish Government website accessible here

Land Use Futures: making the most of land in the 21st century: final project report

The UK Government has published a report detailing the use of land in the UK for the next 50 years which acknowledges the essential contribution made by land managers and recommends ways they can be encouraged and incentivised to continue their good work. The report covers subjects ranging from ecology, economics, planning and geography and outlines the importance of a new approach to managing the UK's land.

The Report can be accessed on the Government Office for Science website accessible here

Revised guidance on Land Remediation Relief

The Land Remediation Relief (LRR) scheme was introduced in 2001 and enables companies to make a deduction against corporation tax for capital expenditure incurred in the remediation of certain contaminated sites. Companies can deduct an amount equal to 150% of the qualifying clean-up cost when calculating their taxable profits.

The revised LRR guidance has been introduced following a consultation on draft guidance to accompany the Corporation Tax (Land Remediation Relief) Order 2009 (SI 2009/2037), which extends LRR to expenditure on long-term derelict land and for the removal of Japanese knotweed.

HMRC's policy intention is that, as far as possible, companies will know whether or not they are entitled to LRR on the basis of the risk assessments carried out as good practice in re-developing land in a contaminated state.

Details are available on HMRC’s website accessible here

Order amending the option to tax rules

On 1 March 2010, HM Treasury made the Value Added Tax (Buildings and Land) Order 2010 (SI 2010/485), which comes into force on 1 April 2010. The order makes three changes to the option to tax legislation, which:

• allow developers to exercise the option to tax buildings where persons financing the construction are only in minor occupation of the building.
• remove the condition that a taxpayer who has exercised an option to tax land is not allowed to revoke that option if he has used the land (although further conditions will apply for revocation).
• make consequential changes to the definition of a relevant housing association to reflect the Housing and Regeneration Act 2008.

Details are available on the OPSI website accessible here