Bell & Scott's Property Update, May 2009

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

In this month's issue we comment on a case where a developer tried to recoup its losses by attacking a condition in a roads construction consent.

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

Recent Decisions

Speak up now or forever hold your peace

Challenging unreasonable conditions in consents or agreements

Boyack Homes Limited developed a private housing estate adjacent to Holly Road, Leven in 2001. The development required the building of new roads which, at one point, linked up with the existing public road. Consequently, Boyack applied to Fife Council, as roads authority, for a roads construction consent (“RCC”).

The Council wrote to Boyack indicating that one of the conditions of the RCC would be that the street lighting for the development (to the standard required by the Council) must be provided by Boyack. A copy of the Council’s requirements, guidelines and specifications was enclosed with the letter. The Council also offered, at the same time, to provide a design and supervision service for the installation of the lighting for a fee. Boyack took up that offer. The Council sent Boyack the relevant design drawings which showed that three lamp standards on Holly Road, at its junction with the development, needed to be removed and replaced by five new lamp standards in the interests of safety and amenity (as a direct consequence of Boyack's development). The Council indicated to Boyack that the work was to be carried out at Boyack’s expense, in a consistent and workmanlike manner and in accordance with the Council's "Transportation Development Guidelines" and, as regards road lighting, the design provided or approved by the Council’s Head of Transportation. Boyack had the opportunity to challenge the conditions but no challenge was made.

Boyack installed the new lamp standards before June 2002. The RCC itself, containing the conditions, was issued on 1 July 2002.

Some years later, Boyack raised a court action claiming damages against the Council arguing that neither the contract that it had with the Council for the design and construction of the lighting nor the RCC could lawfully contain an obligation which was “beyond the statutory powers of the Council” - the obligation on Boyack to do something that was rightfully the responsibility of the Council as roads authority. Boyack based its argument on the fact that throughout the period of the development, and after, the Council had a statutory obligation to provide and maintain lighting at Holly Road under section 35(1) of the Roads (Scotland) Act 1984 (“the Act”) at its cost.

The Council, for its part, argued that Boyack’s position rested on the proposition that section 35(1) of the Act imposed an absolute and onerous duty on the Council which did not make sense in terms of the Act when read as a whole. The Act allowed the roads authority to impose conditions as they saw fit and enabled it to enter into an agreement with any person willing to contribute to the construction or improvement of a road. There were no restrictions in law on how they set about doing this. The only qualification on the appropriateness of having such conditions was that the services required of Boyack needed to be squarely related to the development and its associated construction consent. There was no sound reason why Boyack should not be liable for the resiting of the lighting in Holly Road, an improvement which was directly referable to the housing development. Additionally, a roads authority has a general responsibility to provide and maintain lighting on roads under its control in terms of the Act, but there was no qualification or restriction on how it should discharge that responsibility.

The Court found in favour of the Council.

Ruth Maclean, Partner, comments:

The decision reached in this case will come as no surprise to developers. The judge was always going to find it difficult to get over the fact that the parties appeared to have agreed that the upgrading of the lighting was only needed because of Boyack’s development. What’s more, the Act clearly gives a local authority the ability to strike a deal with a third party to contribute towards the construction or improvement of a road. It is hard to see what was unreasonable about the Council looking to Boyack to contribute. Given that Boyack had agreed to pay for and had put the extra lighting in by the time the RCC was issued, it is all the more difficult to see how it could, at a later date, argue successfully that it was an illegal condition in the first place.

If Boyack had had concerns about the obligation to install the street lighting, they should have employed one of the statutory protections built into the process – they could have challenged the condition when it was proposed but did not appear inclined to do so. It may be that the notion to challenge was formed at a time when the cost and viability of the development was considered in the round some time down the line. At that point it sought to recoup via a damages claim.

It is worth mentioning that the requirement that conditions in consents must be reasonable is not the preserve of RCCs. Guidance is given in Circular SPG 12/1996 about conditions to be imposed in Section 75 Agreements and their predecessor, Section 50 Agreements. Conditions in these agreements must relate to the proposed development both in scale and kind. Provided the item sought is not something which no reasonable council would impose, which must be considered in the context of the development for which permission is sought, then it will not be “ultra vires” or “beyond the powers” of the authority. In essence, these agreements may not be used for an ulterior motive, for example, to get a new sports centre constructed as a condition of consent for a four unit development.

In these straightened times for developers, some will be taking a good look at “planning gain” deals struck with councils in the good years and will be considering whether there is any chance of recouping monies paid. Just like any other contract, a planning agreement is simply a commercial agreement between the developer and the local authority so, if the agreement says that refunds are available or that the deal can be looked at again, then the terms of the agreement need to be considered carefully to see if there is any scope for an approach to the council to be made.

Boyack tried to have the legality of a condition overturned in a claim for damages in the Sheriff Court and asked the Sheriff to rule that the Council’s imposition of the condition in the RCC and design agreement was unlawful as part of that claim. It may be open to developers to challenge a council’s decision in Judicial Review proceedings in the Court of Session. If a developer asks the council to review an agreement, that allows for a review, such as a Section 75 Agreement, and he is met with a refusal, such a challenge may be possible. It may be that, in these difficult times, the refusal to renegotiate or review the agreement is a decision which no reasonable authority would take - there may be scope for a judicial review challenge on that basis. It has to be said, however, that such challenges in this type of situation have rarely succeeded historically and would be costly to run.

Best advice is always to seek to re-negotiate or look to the possibilities of arbitration if the agreement allows for that.

Case referred to Boyack Homes Limited v Fife Council [2009] CSIH 7 XA155/07

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

News

Company voluntary agreements and landlords

The Insolvency Service is reporting a significant increase in the number of companies that have managed to put company voluntary agreements (CVAs) in place with their creditors.

JJB Sports is one example of the trend. At the end of April, JJB Sports and KPMG announced that 99% of the retailer's unsecured creditors have agreed to a CVA which will allow for a restructuring of JJB's business.

JJB's CVA is the first of its size to get through without challenge or opposition from landlords following the successful challenge made by landlords to the Powerhouse CVA in 2007. The success is put down to the reasonable terms (in the current market) offered to the landlords of stores that JJB proposes to close. Landlords of stores which will close will get about £10,000,000 (or six months’ rent). The rent will also be paid monthly, rather than quarterly, from June 2009.

It may be that the terms of the JJB CVA set a yardstick for other companies struggling to meet rental costs on a portfolio of leasehold premises.

The insolvency service is currently consulting on extending the optional CVA moratorium (available at present only to small companies that propose a CVA) to large and medium-sized companies and affording absolute priority to new money lent to companies in CVA or administration.

However, the British Property Federation has given its support to findings made in a Westminster government select committee report for the closer monitoring of insolvency practitioners and their use of “pre-pack administrations”.

A Business and Enterprise Committee has found that “public confidence in the insolvency regime will be damaged unless prompt, robust and effective action is taken to ensure that “pre-pack administrations” are transparent and free from abuse.” It also states that "phoenix pre-packs", where the existing management buy back the business and continue to trade clear of the original debts, cause particular outrage and “fuel understandable concerns about illegitimate, self-serving alliances between directors and insolvency practitioners.”

Details of the proposed consultation can be found on the Insolvency Service website accessible here

Scottish Property Support Scheme

The Scottish Government has applied to the EU for permission to extend its ability to fund stalled or collapsed property schemes under a Scottish Property Support Scheme until 2013.

Under recently changed EU regulations, which form part of a wider EU stimulus package, funding can be provided to developers by local authorities and development agencies where there has been “a market failure”. “Market failure”, in the context of the EU regulations, means that the estimated development costs of the property exceed its anticipated end market value or where risk-aversion and uncertainty in forecasting project outcomes prevents property development.

Both speculative and bespoke developments are potentially eligible for support under the scheme. Aid can be given in various forms, including grants, subsidised loans, development financing aid and development services. Aid given must be toward specific eligible costs and must be the minimum necessary for the project to proceed. The developer still has to meet at least 25% of the costs.

The new funding programme will work alongside other schemes aimed at assisting the commercial property industry, such as the Joint European Support for Sustainable Investment in City Areas.

Details of the Scottish Property Support Scheme and other EU assistance to the property sector can be found on the State Aid Scotland website accessible here

Town Centre Regeneration Fund

A £60 million Town Centre Regeneration Fund can now be called upon by those towns that have been badly hit by the worst of the downturn in the economy.

The Fund, alongside other Scottish Government initiatives, aims to revitalise the country’s high streets which have taken the brunt of the fall in retail activity over the last 18 months.

Applications for a share of the money from the scheme can be made now by a wide range of bodies including local authorities, community planning partnerships, Business Improvement Districts, Town Centre Managers, local Chambers of Commerce, businesses and third sector groups.

Details of the Fund can be accessed on the Scottish Government’s website accessible here

Scottish Water postpones connection charges

Some assistance to embattled housebuilders has been offered by Scottish Water. It will postpone the point at which connection charges are payable at sites.

Whilst, at present, developers have to pay connection charges at a point in the development process where no sales have been made, from 1 July 2009, no payments will be demanded until the first connection to a unit is required.

More comment on the proposal is available on Scottish Water’s website accessible here

£644 million for affordable housing

A record £644 million is to be spent this year by the Scottish Government to generate affordable housing.

As the first step, £50 million will be made available to providers to bring through a new generation of council house building. In addition, the draft Housing (Scotland) Bill will lay out a road map for securing Scotland's stock of social housing for the benefit of future generations of tenants.

Details of the measures to assist housing and housebuilders can be accessed on the Scottish Government’s website accessible here

“Right to Buy” reforms

At the end of April, the Scottish Government launched a consultation which aims to exclude new build social housing from “Right to Buy” legislation. The proposed reforms, part of the consultation on the draft Housing (Scotland) Bill, have, as their overall purpose, the protection of social rented housing for future generations.

It is believed that the reforms, if implemented, will retain between 10,000 and 18,000 homes for low cost rent that would otherwise be lost through “Right to Buy” sales over the next twelve years.

The Scottish Government’s consultation also outlines proposals for modernising how social housing is to be regulated. A Scottish Social Housing Charter is proposed which will set out what social landlords should be delivering for their tenants and the Scottish Housing Regulator will be given statutory independence with the aim of safeguarding and promoting the interests of tenants.

The draft Housing (Scotland) Bill consultation will close on 14 August 2009.

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

Planning culture overhaul to alleviate pressures on rural housing provision

A Scottish Parliament report claims that the planning system is contributing to a serious shortage of housing in Scotland’s rural areas.

The Rural Affairs and Environment Committee believes that the Scottish planning system has historically proceeded on the basis that the countryside should be protected from development. The Committee is calling for a cultural change within local authorities to end the “over-cautious planning culture” which is hampering new housing developments across Scotland’s rural areas.

The Committee Report is available on the Scottish Parliament’s website accessible here

Speeding up the planning system

A new online system to enable people in all parts of Scotland to apply for developments, appeal against decisions and track progress of proposals has been launched.

The £11.2 million “ePlanning” initiative aims to make Scotland's planning system simpler, faster and more accessible, providing a consistent level of service throughout the country.

It is anticipated that “ePlanning” will save planning authorities £16.7 million over 10 years, and save users, including developers, a further £43.8 million.

Development forum meets

The new Edinburgh City Council Development Forum met for the first time on 28 April. The Forum is made up of representatives from the Chamber of Commerce, Homes for Scotland, the Scottish Property Federation, RTPI in Scotland's planning consultants’ forum and Historic Scotland.

The Council hopes that the Forum will lead to a cultural change in the way that property developers and the planning authority interact and do development business.

Edinburgh City Council’s Spring Planning Newsletter can be accessed here

Simplifying the option to tax

HMRC has published VAT Information Sheet 06/09, which contains details of changes to the option to tax process where prior exempt supplies of the land over which an option is to be exercised have been made. The changes are aimed at simplifying the option to tax process for taxpayers.

VAT Information Sheet 06/09 is available on HMRC’s website accessible here

HMRC’s Notes on VAT changes following April’s budget can be accessed here