Bell & Scott's Property Update, May 2010

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

In this month's issue we comment on a case in which a tenant’s delay in taking action to enforce his exclusivity clause proved costly.

We also provide a Briefing on issues in the Carbon Reduction Energy Efficiency Scheme for landlords and tenants to consider.

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

Recent decision

Mist in the Glen

Is a tenant’s exclusivity right enforceable against a successor landlord?

Warren James (Jewellers) Limited (“Warren”) took a 15 year lease of a unit in the Overgate Shopping Centre in Dundee, from Overgate GP Limited (“the Landlord”) in 2000. When Warren was negotiating the lease, it managed to obtain an undertaking from the Landlord that only two other units in the shopping centre would be let to traders whose principal business was the retail sale of jewellery – two jewellery retailers were already set up and trading in the centre. In 2001, in breach of its undertaking to Warren, the Landlord let another unit in the centre to Ortak.

In 2009, Warren went to court claiming damages from the Landlord because, by leasing another unit to Ortak in 2001, Warren had suffered loss of business revenue. The Landlord argued that Warren’s claim for breach of the lease contract had “prescribed” – fallen away because no claim had been made within the 5 year time limit allowed by law for making claims for breach of contract. Warren’s position was that the exclusivity undertaking in the lease was “an obligation relating to land” which was not caught by the 5 year cut-off point for making claims for breach of contract. It argued that obligations relating to land, such as exclusivity clauses, did not become redundant if not pursued for a period of 20 years according to the statute that sets out the law on time limits for raising claims - the Prescription and Limitation (Scotland) Act 1973. If that argument did not hold sway, Warren also believed that it could still recover for losses that it sustained between 2006 and 2009. That was because the Landlord’s breach of contract, by letting the other unit to Ortak, was a breach that carried on after the 5 year cut-off period until Warren raised the court action in 2009.

The court ruled in favour of the Landlord. The exclusivity undertaking was clearly an obligation relating to land which the Landlord had to observe. However, Warren had not gone to court to enforce that obligation but to sue for damages for a breach of the undertaking by its Landlord and any action for breach ought to have been taken before the end of the 5 year cut-off point. The sole breach of contract that Warren relied on was the Landlord’s grant of the lease of a unit in the centre to Ortak, which Ortak were in no position to get out of, and what followed was the consequence of that breach and not of a continuing breach after that. An obligation to make reparation for loss was a single one-off obligation in respect of which only one action could be brought to enforce it, and if the obligation had fallen away, it had done so for all purposes, even if some loss had occurred at a later date.

Richard Hart, Associate, comments:

There is not much to question or to be alarmed about in the outcome of this decision as it was argued before the court. It was always open to Warren to try and stop the Landlord from granting the lease to Ortak in 2001 to protect its position. However, a claim for damages for economic losses sustained as a result of a breach of contract must, as a matter of legal policy, have a reasonable cut-off point, and 5 years is what we have in Scotland.

However, it is not often that we get cases on exclusivity clauses making their way to the Court of Session. When they do, commercial property lawyers, dealing in the bread and butter of leasing, tend to get a little excited. My interest in this case focused on something surprising that the judge said about exclusivity clauses in leases in general.

Lord Glennie was firmly of the view that exclusivity clauses are things that you normally see in leases and, in Scots Law therefore, these would bind a party buying the landlord’s interest in a let property – even though the undertaking was negotiated and agreed to by a predecessor landlord. That statement of the law may cause a little concern to those involved in commercial leasing as many would have thought the position to be otherwise following the case of Optical Express (Gyle) Ltd v Marks & Spencer in 2000.

We have come to advise clients that there are certain lease provisions which, despite what the lease contract itself says, are not binding on the landlord’s’ successors i.e. if the landlord sells its interest in the property.

The normal and standard lease provisions such as the tenant’s repairing obligation, the obligation to pay rent, the rent review provisions and the user clause – will always be binding on the parties’ successors. However, those which are slightly more “esoteric” such as exclusivity clauses or purchase options generally do not – unless, it would appear, Lord Glennie is called to rule on the matter!

One thing that we like to pride ourselves on in terms of Scots property law is that it is clear cut and certain and, therefore, there are no surprises for the commercial operator doing business here. Not so now with exclusivity clauses that you may find in leases of retail or industrial space.

So what to do, if you are a tenant who has negotiated a purchase option or an exclusivity clause with a landlord to protect your right to enforce those conditions in the lease against an incoming landlord? Make sure that the lease specifically says that the exclusivity or option to purchase is binding on any successor to the landlord’s interest in the property and that the landlord will ensure that it takes any buyer of his interest to be bound by the relevant provision. Additionally, the tenant should ensure that its landlord will get any buyer of its interest in the property to sign up to a separate agreement with the tenant binding the landlord’s successors to comply with the relevant provision. If the landlord sells its interest in the property without complying, the tenant would have a claim for damages against the outgoing landlord. In the best of all possible worlds, it would also be useful for the tenant to get a standard security over the landlord’s interest in the property to back-up the landlord’s obligation. It is fair to say, though, that this may be heavily resisted by the landlord and would probably only be agreed to in exceptional circumstances.

Case referred to Warren James (Jewellers) Limited v Overgate GP Limited [2010] CSOH 57.

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

Briefing

CRC Energy Efficiency Scheme (CRC) issues

Back in December 2009, a working party representing the interests of the property industry issued a consultation document seeking the industry's views on how the costs of complying with the CRC should be apportioned between landlords and tenants. Responses to the consultation have revealed a number of divergent views and positions amongst those involved in the property industry as to how the costs of the CRC should be shared. A report analysing these responses, and considering possible options for landlords and tenants, is expected to be issued at the end of June this year.

Much of the pre-April 2010 discussion on CRC centred on whether a company needed to register as a full participant in the CRC. However, even for those landlord and tenant companies that do not need to register as full participants, there are potential implications. We set out below the main ways that the CRC may affect landlords or tenants of buildings.

For landlords that will be taking part in the CRC scheme as full participants, the potential issues may include the following:

• Additional overheads - the net cost of participation in the CRC may not be recoverable from a tenant.

• If a landlord allocates costs against particular properties, then the CRC cost attributable to a particular property may reduce the net rent that the property produces. This may affect the capital value of that let property – costs can cover registration, management and the net costs of CRC allowances.

• Recovery from a tenant under current lease arrangements will be difficult because the typical outgoings clause and/or the service charge clause in existing leases will probably not extend to the costs incurred by the landlord under the CRC. It is doubtful that the cost of purchasing allowances is a "tax" or similar levy.

• An existing tenant will have little incentive to vary its lease to introduce another overhead.

• Even where a new lease is to be granted, a strong tenant may refuse to accept a clause containing this overhead.

• Even where a tenant (existing or new) is prepared to pay or contribute towards some of the CRC costs, it may not be willing to include all of them. There seems to be more reluctance to contribute to the landlord's costs of registration and CRC reporting than to the cost of allowances (after deduction of the Revenue Recycling payment).

• Whether it is possible to install a separate electricity supply to tenanted areas of its properties so that tenants will contract direct with the energy company for the supply of energy. This may help because whether it is the landlord or the tenant who has to participate in the CRC for energy supplies to a building depends on who is "responsible for the energy supplies". In simple terms, where the landlord procures and pays for the energy that is supplied to the tenant and the tenant reimburses the cost, it is the landlord who will be responsible for that energy supply under the CRC. The landlord will, therefore, have to report on the emissions arising from that supply and buy allowances to cover these. If the tenant contracts and pays for the energy itself, it will be responsible under the CRC for that supply and the landlord will not need to buy allowances to cover the emissions arising from that supply. Even if a separate supply to the tenanted areas can be achieved, the landlord will still need to comply with the CRC as far as supplies to the common parts are concerned.

• If a landlord is selling its interest in a building (or portfolio), it will need to be well prepared to answer the likely preliminary enquiries that will be raised on CRC issues and the data relevant to energy consumption.  

For tenants (whether or not they are also direct participants in CRC):

• A tenant who is taking a new lease needs to scrutinise the lease provisions it is being asked to sign up to which deal with its landlord’s CRC commitments.

• If a landlord’s CRC costs are passed down to a tenant, this may increase the cost of a property to the tenant making it less attractive (or apt to attract a lower premium) on assignation. A tenant will need to know what to look for in the lease documents in order to determine whether it may be required to pay towards CRC costs.

• A tenant will need to scrutinise service charge accounts more closely. The service charge costs may increase if a landlord pursues energy saving initiatives (perhaps conducting repairs or improvements to the common parts or the plant and machinery) to improve its CRC performance. This may have an impact on the value of the lease when it is assigned.

• A tenant may be able to negotiate other amendments to the lease on the back of his landlord’s need to amend his lease to allow recovery of CRC costs. Where a landlord is keen to amend a lease to permit recovery from his tenant of the net cost of compliance with the CRC, the tenant may be able to use this as an opportunity to negotiate other amendments to the lease that it would find attractive (perhaps relaxations of prohibited uses or a greater freedom to make alterations).

Our specialist leasing team at Bell & Scott can give advice on how the CRC may impact on your letting arrangements. Please contact Dawn Henderson, Partner, in the first instance.

SEPA has issued guidance on the CRC which is available on its website, accessible here

News Updates

Proposed CGT changes

Capital gains on non-business assets are to be taxed at rates “similar” to income tax rates, with "generous exemptions for entrepreneurial business activities". The new coalition government is working on "a detailed agreement" on this key change to the CGT regime. This proposal was not in the pre-election, Conservative manifesto but the Liberal Democrat manifesto included a pledge to align CGT rates with income tax rates.

OFT announces "stock-take" of infrastructure ownership and control

On 14 May 2010, the Office of Fair Trading (OFT) announced that it intends to conduct a stock-take of ownership and control across the UK economic infrastructure (including ports, airports, car parks and energy, water and communications networks). It intends to map ownership and control of such infrastructure and assess how its ownership affects outcomes for consumers. It will examine different forms of ownership and who controls which assets. The aim of the exercise is to improve public understanding of competition issues in UK infrastructure markets. It may result in further work if specific competition or consumer issues are identified. The OFT intends to complete the stock-take in autumn 2010. It is inviting submissions from interested parties by 11 June 2010.

Details are available on the OFT website accessible here

Responses to Consultation Paper on a Proposed Housing Bill: The Private Rented Sector, Mobile Homes and the Twenty Year Rules

The Scottish Government has published the responses received to its consultation paper on the proposed Housing Bill.

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

Consultation on Planning Obligations and Good Neighbour Agreements Regulations 2010

The Scottish Government's Directorate for the Built Environment has issued a consultation asking for views on the proposed Regulations on planning obligations and good neighbour agreements, including the Town and Country Planning (Planning Obligations) (Scotland) Regulations 2010 and the Town and Country Planning (Good Neighbour Agreements) (Scotland) Regulations 2010. The proposed Regulations would further implement s.23 and s.24 of the Planning etc (Scotland) Act 2006 which respectively amend and extend s.75 of the Town and Country Planning (Scotland) Act 1997 and introduce good neighbour agreements.

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

Consultation on Tobacco Draft Regulations

The Scottish Government has published a consultation seeking views on regulations covering the prohibition of tobacco sales and displays. Responses to the consultation are required by 20 July 2010.

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

Consultation on Residential Property Managers and Land Maintenance Companies in Scotland: Core Standards for a Voluntary Accreditation Scheme

The Scottish Government has published a consultation on its draft standards for a voluntary accreditation scheme for residential property managers and land maintenance companies in Scotland. The accreditation scheme aims to help homeowners identify managers who provide high standards of service.

Responses are to be received by 10 August 2010.

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

Procedural Guidance on Certification including information to be submitted with a Building Warrant Application

The Scottish Government’s Directorate for the Built Environment has issued guidance to assist Approved Certifiers and Verifiers when dealing with building warrant applications supported by Certification of Design.

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

Legislation

Some new pieces of legislation on the horizon include:

The Historic Environment (Amendment) (Scotland) Bill

This Bill aims to amend certain aspects of the law on ancient monuments and listed buildings, including changes concerning unauthorised works, powers of enforcement in connection with unauthorised works, the control and management of certain ancient monuments and liability for the expenses of urgent works on listed buildings.

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

Disposal of Land by Local Authorities (Scotland) Regulations 2010

These new Regulations cover the situation where local authorities dispose of land for a consideration less than the best that can reasonably be obtained.

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