Bell & Scott's Property Update, November 2009

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

In this month's issue we provide briefings on the use of “pre-pack” administrations in this recession and issues facing landlords under health and safety law when their tenants are carrying out work.

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

Briefings

Early rapping not to everyone’s taste

Pre-packaged company administrations, or “pre-packs”, have hit the headlines as the current economic climate continues to overwhelm businesses. This controversial process means a buyer is arranged prior to the appointment of an administrator and the company is sold without ever being offered on the open market. With a buyer already in place, this form of administration offers a quicker and cheaper outcome than conventional insolvency procedures, meaning there is often a better return for creditors in the end. Administrators must, however, demonstrate that there is value in agreeing to a “pre-pack” route and there is industry guidance on how they should do this. It does not follow necessarily that every corporate recovery will be suited to a “pre-pack” procedure. The inherent lack of transparency in the procedure itself can result in unsecured creditors losing out once the profitable parts of the business have been transferred out into a new vehicle, leaving the less desirable parts behind.

For commercial landlords, where a “pre-pack” buyer has left their unit out of the purchase, this will mean not only the difficult prospect of obtaining any recovery from an insolvent tenant but also the prospect of a long term vacant unit. Even where the lease is transferred to the new vehicle, landlords may be forced to consent to an assignation to unwanted new tenants, with the only alternative, in the current economic climate, being empty premises.

The British Property Federation (“BPF”) has sought to address this issue by producing a questionnaire that gives landlords some standard enquiries to make of an administrator to help uncover information about the identity of the buyer of the property, their intentions for the property, and whether the insolvent tenant's lease has been assigned (without permission) to the buyer. The answers to these questions will help landlords understand the state of play, at an early stage, following a “pre-pack”, and help them to make informed business decisions.

The Statement of Insolvency Practice 16 (“SIP 16”) introduced in January 2009, is one of a series of guidance notes issued to insolvency practitioners to maintain standards. It sets out the basic principles and essential procedures which insolvency practitioners are required to comply with when undertaking the pre-packaged sale of a business, including the provision of full and clear disclosure to creditors as soon as possible after the “pre-pack” transaction has taken place. The BPF’s questionnaire asks insolvency practitioners to have regard to SIP 16 when responding to the questionnaire, therefore imposing a duty on them to give detailed and relevant information to landlords, quickly. Compliance with SIP 16 is regulated by the Insolvency Service and failure to comply may result in disciplinary action against any insolvency practitioner.

Unfortunately, the fact that landlords will not have had the opportunity to send out the BPF questionnaire until after the “pre-pack” has taken place, means that there may be little action landlords can take to avoid their vacant premises or unwanted tenants. However, the duty imposed on the insolvency practitioner under SIP 16 means that careful consideration should be taken of landlords’ interests before arranging a “pre-pack” and the BPF’s questionnaire will, at least, prevent landlords being kept in the dark once the “pre-pack” has taken place.

If you are a landlord and are faced with a “pre-pack” situation, our specialist Landlord and Tenant and Corporate Teams can assist. Do get in touch with Mike Kane.

BPF’s SIP 16 questionnaire is available on its website accessible here

Landlords’ liability for tenants’ works under health and safety laws

When landlords rent out premises, many will assume that their obligations under health and safety law will transfer to their tenants. This is not always the case. Landlords can be liable under health and safety law for accidents that happen as a result of works taking place on properties owned by them.

The key legislation in this area is the Health & Safety at Work Act 1974.

The 1974 Act requires “employers” to conduct their business operations in a way that is protective, in so far as is reasonably practicable, of the health, safety and welfare of their employees and the wider public.

There are a number of people who could be “employers” under the Act and could, therefore, be liable for incidents affecting members of the public. Responsibility can be determined, for example, by putting in place a lease of the property or by engaging contractors to work in a building. Should an incident occur, employers can face significant penalties for breach of the Act.

In most cases, any allocation of responsibility will be straightforward. Where the owner of a building has engaged a contractor to carry out works and an incident occurs, the Health & Safety Executive (HSE) will, in the first instance, investigate the contractor. However, the HSE often looks into the matter further to establish if there are grounds to take action against the building owner as well. The HSE takes into consideration the steps taken by the owner to assess whether the contractor was able to carry out the works safely in the first place.

Often when instructing works, owners are concerned with obtaining the cheapest price possible. An aggravating factor, where an owner is convicted under the legislation, would be that it sought to save money by cutting corners on health and safety. If it can be proved that issues were not addressed just to save cash and harm arose as a result, then courts may impose more severe penalties.

The vast majority of commercial properties are not occupied by their owners, but are let to tenants. This is the situation in which complications can arise. First and foremost, landlords need to be aware that the lease contract does not always remove all exposure to liability under the 1974 Act from them. The level of exposure is dependant on whether the premises are let to a single tenant or multiple tenants (with the landlord retaining control of common areas), and, indeed, what the terms of the repairing obligations are in the leases.

Where there are multiple tenants, it is usual for the landlords to retain responsibility for maintaining the fabric of the building and the common parts and to instruct the necessary works to these areas themselves. Health and safety liability, in this scenario, would fall on the landlord and the contractors instructed by the landlord. The position is different where there is a single tenant responsible for the maintenance of the fabric of the building. In this case, HSE is likely to treat the tenant as the employer should any incidents occur.

Some leases require tenants, even where they have responsibility for repairs and maintenance, to seek the approval of the landlords for the works required. This type of clause increases the likelihood of liability attaching to landlords under the 1974 Act because the landlords are exercising some element of control over the works. The HSE, in this situation, may consider that the landlords have influenced the steps taken to mitigate the health and safety implications of the works. This situation would lead to the landlord, tenant and contractor all potentially bearing responsibility and having the obligation to take all reasonably practicable steps to ensure the safety of employees and the general public.

Liability may also fall on landlords where tenants do not carry out works as required to maintain the premises safely. Landlords can protect themselves from liability in this situation by reserving the right to enter the premises to carry out repairs for the tenant if the tenant is in default of its repairing obligation. This is a common clause in most modern leases which will also allow the landlord to reclaim the cost of the repair works from the tenant. This right allows landlords to ensure repairs are carried out properly and that all statutory obligations are adhered to.

Knowing exactly what steps are “reasonably practicable” to avoid any breach of the 1974 Act is always going to be an area of some uncertainty for landlords. However, claims under the Act can be mitigated by having in place a robust public liability insurance policy. Employers must always bear in mind that this insurance does not cover the potential criminal liability that can result, particularly as individual directors of a company can be prosecuted in their own right in addition to prosecutions against the company involved.

The health and safety aspects of works in the landlord and tenant relationship can be an area of some tactical difficulty. If landlords are overly inquisitive of their tenants’ intentions for works, the tenants may be reluctant to disclose information. Indeed, the landlords could be challenged by tenants on the basis that they are unreasonably withholding or delaying consent to works, which is, itself, a breach of the standard commercial lease.

Landlords should always protect their position here by using a properly drafted licence for works and by asking the tenant to provide written information about how health and safety issues are being addressed.

Our specialist Landlord & Tenant and Employment Teams can advise on any issue of health and safety law as it impacts on leased property. Do get in touch with Rhona Wark.

News Updates

PAN74 Affordable Housing - Chief Planner letter

The Chief Planner has issued a letter to clarify some aspects of PAN74's aims for the valuation of land for affordable housing and seeks views on the best basis for calculating commuted sums where these are being contemplated as an alternative to providing affordable housing on site.

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

A basic introduction to Strategic Environmental Assessment

The Scottish Government has published a basic introduction to Strategic Environmental Assessment (SEA) which is aimed across a wide spectrum of sectors, including planning. The guide offers a simple explanation of the key elements of the SEA process and procedures for those who have limited knowledge of what is involved.

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

Argyll and Bute consults on development plans

Argyll and Bute Council has launched a consultation exercise to seek the views of all interested parties on how the area might be developed in the future. Developers and landowners are being asked to identify potential development sites. Members of the public, community groups and all other interested parties are being asked what they believe are the most important planning issues in their areas and how best those might be addressed. The move comes as part of the preparation of a new Local Development Plan.

Details are available on Argyll and Bute Council’s website accessible here

Research into rural land use

The Scottish Government has published its research into rural land use.

According to the research, rural land makes up 97% of the country, accounts for one in every six jobs and generates over £17 billion a year for the economy.

The study also identifies the pressures likely to face Scotland in the short and longer-term, including the key importance of climate change and highlights the increasing involvement of communities in rural land use decisions.

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

Drinkers get VAT New Year break

This year’s Hogmanay revellers will get an extra six hours of reduced-VAT drinking, the government has announced. The rate, which was cut to 15% as part of the government's anti-recession package, rises back to its normal 17.5% at midnight on 31 December. But HM Treasury minister Stephen Timms has said pubs, restaurants and clubs could go on charging at the lower rate until 6am on New Year's Day.

HMRC has also published its Briefing 68/09 which explains two measures designed to assist businesses in implementing the return of the standard rate of VAT to 17.5%. It also includes details of the consultation currently being carried out by the Department for Business, Innovation and Skills about a proposal to amend the Price Marking Order 2004.

Details are available on HMRC’s website accessible here

Support for local high streets

41 Scottish high streets are to benefit from a further £20 million share of Scottish Government finance to revitalise their town centres.

The money is coming from the £60 million Town Centre Regeneration Fund, set up in April 2009 to transform the fortunes of hard-pressed high streets. Access to the fund is by grant application and 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 are eligible to apply.

Towns in every local authority area in Scotland have already benefited from the multi-million pound fund with a range of projects having been given the green light including open-air entertainment venues, soft play centres, wi-fi zones, town hall and theatre and shop front upgrades and facilities for weekend markets.

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

Consultation on guidance for second charge lending

The Council of Mortgage Lenders (CML) has launched a consultation aimed at producing effective guidance on the practices and procedures brokers and lenders should employ in relation to second charge lending to ensure that customers are not subject to "unfair or improper treatment".

Details are available on CML’s website accessible here

OFT publishes research reports as part of home buying market study

On 11 November 2009, the OFT published four reports on research that it has undertaken as part of its ongoing market study into home buying and selling.

Following a qualitative and quantitative consumer survey, an estate agent survey and a survey of local authority Trading Standards Services, the findings in the reports will be fed into the OFT's review of the home buying and selling market.

The OFT intends to publish its market study in early 2010.

Details of the reports are available on the OFT website accessible here