Bell & Scott's Property Update, November 2008

Welcome to the November 2008 issue of Bell & Scott’s Property Update.

In this month's issue we comment on (1) a case where a bank had to pay damages to its client when it sold his property for less than it was worth and (2) a case where a shopping centre tenant resisted a demand for rent on the grounds that the landlord’s works to the shopping centre were depressing its turnover.

We also provide a briefing on the Scottish Government’s current consultation on including powers in the Scottish Climate Change Bill to require owners of all existing buildings to carry out Assessments of Carbon and Energy Performance.

In addition, we update you on (1) the forthcoming deadline for obtaining landfill tax exemption certificates; (2) Historic Scotland’s policy on Listed Buildings and Listed Building Consents; (3) HMRC’s guidance to housebuilders on the recovery of VAT where they let properties instead of selling them; (4) the Scottish Government’s short user guide to getting public sector contract work; and (5) recently published market updates in the commercial property sector.

Recent Decisions

What’s the best price nowadays?

The normal quid pro quo of borrowing from a bank to develop property is that the bank takes a standard security over the property. The bank can call up that security and sell the property if the borrower defaults on its repayments. When it calls up its security, the bank has a duty to advertise the sale of the property and to take “all reasonable steps to ensure that the price at which the property is sold is the best that can be reasonably obtained”.

It is safe to assume that, over the coming months, more attention will be paid to this right to call up a security than in the last few years. So what does a bank have to do to comply with its legal obligations?

In the case of Wilson v Dunbar Bank PLC, that very issue was considered. Mr Wilson had developed 6 flats at Fernieside Avenue, Edinburgh with the benefit of funding from the Bank. He marketed the flats, but was unable to sell them, so the Bank eventually called up its security and took possession of the flats. The Bank took advice from its agents on the methods of marketing the flats to achieve the best possible price.

Recommendations were given to advertise the flats both as individual units and as a whole development. The marketing strategies for each target market – individual buyer or investment buyer- were different. The court heard that whilst the Bank had been given advice on marketing strategies – to include aggressive press advertising, advertising in the ESPC and large billboards on site – these had not all been carried out. Indeed, the press advertising appeared the day before and the day of the closing date for offers, rendering it almost meaningless. The Bank was aware of the position. Ultimately, the flats were sold as a whole to an investor and the Bank retained the full proceeds from the sale which were less than the debt due to it. Mr Wilson sued the Bank for damages. He argued that if the flats had been sold as individual units, there would have been money left over for him once the Bank debt had been fully repaid. He said that the Bank had not fulfilled its statutory duty to obtain the best price.

Mr Wilson was successful in his claim. The Court heard that both the investor market and the residential market were available for the flats. There had been, in practical terms, virtually no marketing to the residential market and the investor marketing too was considered to be inadequate. The Court was satisfied that the advertising campaign “fell well below what would be expected” from reasonably competent agents. As a result, there was a failure to adequately expose the flats for sale and take all reasonable steps that required to be taken to ensure that the price at which the flats were sold was the best that could reasonably be obtained.

On damages, the Court decided that an appropriate way of assessing the loss suffered by Mr Wilson would be to look at what price the flats might have achieved in the residential market if adequate marketing had been put in place. Damages were awarded on that basis.

Ruth Maclean, Partner in our Housebuilder Team comments:

In the current climate, it is important for banks to be aware of their obligations. It is not sufficient for them to assume that their agents will properly market a property. The onus is on the lender who calls in his security to ensure that the property has been properly marketed and that the best price achievable has been obtained. The consensus view of what is best advertising practice for a bank is that it should put an ad in both a national and a local newspaper for two consecutive weeks.

From a borrower’s perspective, it must get the bank to demonstrate how the property is being advertised. If the bank is not following the generally accepted best practice, the borrower should get the bank to tell it, in writing, why not.

Case referred to Ronald Evan Wilson v Dunbar Bank Plc [2008] CSIH 27.

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

Struggling to pay the rent

Style Menswear Limited is the tenant of a unit at St Enoch’s Centre in Glasgow. Its landlord is St Enoch Trustee Company Limited. In September 2008, the landlord took action against the tenant for arrears of rent. The tenant subsequently sought interim interdict to prevent the landlord from enforcing the charge for payment it had obtained.

The tenant’s grounds for seeking interim interdict were that the landlord was in breach of the lease. The landlord began works, in early 2008, to refurbish and upgrade the common parts at St Enoch’s Centre. These works required the closure of two of the four main accesses to the Centre and a third access needed to be narrowed. This, in effect, left only one main access and three indirect accesses through larger stores into the Centre. The tenant argued that these works had the effect of reducing its turnover at its unit by 40 per cent which put the landlord in breach of the lease.

The tenant accepted that the landlord had the right to do the works but not to the extent that it had done. The tenant tried to rely on the basic legal obligation on a landlord to give the tenant “quiet enjoyment” of his let property. This obligation requires a landlord who has granted the tenant a lease, not to do something on neighbouring premises which makes the premises let unfit for the purpose for which they were let. This is a well established principle in leasing law. The tenant also sought to argue that the lease should be construed in accordance with English law’s particular view of "quiet enjoyment". The reasoning was that the original parties to the lease had been English and, therefore, had intended the specific wording in the lease on "quiet enjoyment" to have the meaning given to it in England which may have given the tenant an advantage. This was despite wording saying that the lease should be interpreted in accordance with Scots law.

The tenant failed to persuade the court that it had a good enough case to justify a suspension of the charge for payment. The main reason given by the court was that the tenant had failed to show that the reduction in its turnover was caused by the works and not by the downturn in the economy. The judge was also not persuaded by the "quiet enjoyment" argument mainly because the premises could still be used as a retail shop despite the landlord’s works to the Centre.

The landlord was, therefore, free to pursue enforcement action.

Kirsty Martin, an Associate in our Property Dispute Resolution Team, comments:

It is not surprising, in the current economic climate, that we are starting to see tenants looking to find ways to avoid paying rent. It is also not surprising that tenants are trying to find someone to blame for their reduction in turnover or profits rather than simply having to accept that the pain is due to the economic downturn. The arguments raised in this case are potentially available to other tenants but they will have to ensure that they have clear evidence, by way of comparisons with other stores, to show that the reduction in turnover or profits is due to the landlord’s actions and not simply due to a reduction in consumer spending.

Should any landlord face a defaulting tenant, then it is recommended that it should take action very quickly once a tenant falls into arrears. Getting behind with the rent can be a clear sign that the tenant is facing significant financial difficulty and the sooner action is taken, the greater the chance of recovery. Landlords do have a number of options available to them to seek recovery of rent.

If the lease is registered in the Books of Council and Session for the specific purpose of “execution and preservation” then, as soon as the tenant falls into arrears, sheriff officers can be instructed to seek recovery. They are able to claim from the tenant any debt that is clear from the face of the lease. This will, primarily, be rent but it is important to note that, if the rent has been reviewed then a copy of the memorandum showing the rent review will also need to have been registered and provided to the sheriff officers. If any other sums are clearly due on the face of the lease, for example, insurance charges or service charges, these could also be claimed.

Case referred to Style Menswear Limited, Petitioners [2008] CSOH 149.

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

Briefing

Proposals for improving the energy performance of non-domestic buildings

Introduction

The Scottish Government is consulting on whether owners of non-domestic buildings should be required to carry out an assessment of the energy performance of their buildings. This is an extension of the forthcoming legal requirement for almost all commercial buildings to have an Energy Performance Certificate (EPC) at the point where they are sold or leased. That requirement is effective from 4th January 2009.

The extended proposal stems from the recommendations of The Sullivan Report commissioned by the Scottish Government in 2007. The Report indicated that legislation should be introduced to require all owners of non-domestic buildings to carry out an Assessment of Carbon and Energy Performance (an ACEP), and produce a programme for upgrading the building based on the results of that assessment. Local authorities, or similar public bodies, would have the powers to verify these assessments and ensure compliance with any recommendations.

ACEPs

If the ACEP were to be brought in, it is likely that the law will compel all owners of non-domestic buildings (or tenants named by those owners) to carry out any recommended works to the buildings to achieve improvements to energy performance. Clearly, a legal requirement to implement any recommendations would have significant cost implications for owners who may not be able to pass these on to occupiers.

EPCs

At the moment, there is no requirement on an owner of a building to do anything once he has obtained his EPC at the point of selling or renting. Whilst it is thought that market forces and progressive attitudes to alleviating the detrimental effects of climate change may drive owners to seek better asset ratings by making improvements which are recommended in the EPC, there is no legal sanction for not doing so. Whether or not owners will make improvements may be dictated by what the general appreciation of the value of EPCs turns out to be in the stressed market conditions over the next few years.

Currently EPCs last for 10 years. The consultation document envisages that there could be a requirement to renew an ACEP every five years, with a potential need to carry out improvements following the five yearly assessments. At this stage, no-one knows what effect the new proposals would have on existing EPCs which an owner has already obtained, at significant cost, in the belief that they would have a 10 year lifespan.

Methods of assessment

With ACEPs in mind, the Sullivan Report saw the need to develop methods to assess the practical performance standards for existing buildings. Currently, EPCs are produced following an asset based assessment of a building. This method scores the building on its energy performance much like an electrical appliance. However, if ACEPs for existing buildings are to be effective in reducing carbon emissions, it is believed that an operational rating for the building would be more appropriate. An operational rating would be based on the measured energy use of a building and its fixtures and fittings which would enable managers of buildings to drive delivery of carbon emission savings from equipment already installed. The operational assessment method would enable building managers to consider issues such as sub-metering to distinguish between business usage and comfort energy usage.

Older buildings

A large part of Scotland’s building stock is what is described in the consultation as “traditional”. The term covers not only listed, historic and conservation area buildings but, more generally, any building constructed before around 1919. Older buildings, in general, will require more energy to heat than newer buildings but refurbishing or repairing an older building may require less energy usage and involve materials which take up less energy in their manufacture than those required for newer buildings. ACEPs, nevertheless, would apply to “traditional” buildings as well. However, it is recognised that this type of building merits a different method of assessment and criteria are proposed on which the public’s views are sought.

Landlords and tenants

With EPCs, owners of buildings must make these available to buyers or tenants free of charge. On the other hand, with ACEPs, the consultation suggests that owners of buildings would be able to delegate the responsibilities under an ACEP to tenants of the building. However, it would be up to a tenant whether or not to accept responsibility, making it a matter for commercial negotiation at the time of letting.

The future

Any legal requirement to execute schemes of improvements following on from an ACEP, would, most probably, be introduced on a staggered basis over a number of years, so that the financial and operational impacts of such works on businesses could be factored in and managed.

For landlords, there would be a need to ensure that they have all the rights they need to access the premises occupied by their tenants to carry out both the ACEPs and any improvements. In addition, landlords and tenants and will need to consider the appropriate division of the cost of any required improvements. It is fair to assume that most improvement measures will be required due to the tenant's use of, or activities within the building but that may not always be the case.

Like all new proposals which have significant cost implications, the consultation document stresses the notion that the initial costs will be offset in the longer term by diminished rates of consumption of resources and consequent reduction in expenditure on energy and materials. More significantly, buildings have been identified as a major contributor to the UK’s elevated levels of carbon dioxide emissions and the Scottish Government, along with all other EU governments, is committed to significantly reducing such emissions by 2050.

The consultation period runs until 24 November 2008.

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

News

Deadline looms for landfill tax exemption certificates

Those developers who are carrying out, or who intend to carry out, remedial works to brownfield sites should be aware that 30 November 2008 marks the deadline for submitting applications to HMRC for certificates of exemption from landfill tax. Until that date but not after, developers intending to dispose of contaminated waste at landfill can apply for and obtain from HMRC a relief certificate for the period up to 31 March 2012.

To apply for the relief certificate, the waste destined for landfill need not have been generated at the time of application (application must be at least 30 days prior to removal to landfill), however the cause of contamination to the land must have stopped. Anyone who has a relief certificate will then be able to benefit from the exemption until 31 March 2012.

From 1 April 2012, all relief certificates will become invalid and all disposals of contaminated waste to landfill from this date will be liable to landfill tax.

Some commentators estimate that these changes may increase off-site disposal costs for contaminated waste by very significant amounts and make some developments of small brownfield developments unviable. From December 2008, a developer would have to pay an additional £32 per tonne in addition to disposal and carriage costs to landfill. This goes up to £40 per tonne in April 2009 and £48 per tonne in 2010. The exemption will disappear completely in 2012.

Details of the tax exemption and how to apply for a certificate of exemption is available on the HMRC website accessible here.

Consolidated Scottish Historic Environment Policy

The Scottish Government has published its policy on Listing and Listed Building Consents in conjunction with a consultation with local authorities on a new joint working agreement.

The Scottish Historic Environment Policy now includes policies on Listing, the process that identifies, designates and provides statutory protection for buildings of special architectural or historic interest; and Listed Building Consents which deals with applications to alter or demolish listed buildings.

The policy document is available on Historic Scotland’s website accessible here.

VAT - new zero-rated dwellings – whether arrangements are abusive

HMRC has issued Brief 54/08 confirming that certain arrangements, to sell homes to connected persons prior to temporary letting, are not abusive for VAT purposes.

Due to constrained market conditions in the residential housing sector, short term leasing may be the only viable commercial option for housing developers unable to sell their recently completed stock. Housing developers can, in general, recover input tax on construction costs on the basis that their property sales are zero rated.

HMRC had given VAT guidance to housebuilders who let before selling, which stated that input tax adjustments may be required where there is a change from an intention to develop and sell properties to an intention to let properties temporarily, which would be a VAT exempt supply.

Brief 54/08 means that if the HMRC approved arrangements are followed, then the input tax adjustments may not be required.

The Brief is available on the HMRC website accessible here.

Scottish Planning Policy (SPP) 3: Planning for Homes: Strategic Environmental Assessment Post Adoption SEA Statement

The new SPP3 has been subjected to a process of Strategic Environmental Assessment (SEA). This SEA Statement brings to an end the SEA process, by setting out how the SEA has influenced the development of the SPP. It explains how the finalised SPP now addresses the environmental problems and effects which were identified during the course of the assessment.

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

Tendering for Public Contracts: A short guide for businesses

The Scottish Government has published a short overview of how to sell to the public sector in Scotland, the rest of the UK and in Europe.

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

Commercial property market updates published

RICS has published its Commercial Property Survey. Its surveyors indicate that demand for commercial property in the third quarter of this year has fallen at its quickest rate in 10 years.

The survey is available on the Institution’s website accessible here

The latest edition of Ryden’s “Scottish Property Review” has been published.

The review is available on Ryden LLP’s website accessible here