Bell & Scott

In this month's issue we comment on (1) a case where a tenant had to endure disruptive investigations carried out by its landlord; (2) a case where a borrower’s fraud cost a surveyor who valued the wrong property; and (3) a company’s windfall from Luftwaffe damage.

In addition, we update you on (1) the VAT implications for housebuilders who rent before selling; (2) property issues in the Holyrood budget for the coming year; (3) the removal of the “whitewash” procedure for private companies; (4) a new flooding bill for Scotland; and (5) a report into the effect of land reform on rural Scotland.

Landlord takes quick look under premises

Kwik-fit Properties Limited was the tenant of a property on Falcon Road West in Edinburgh. Possfund Custodian Trustee Limited was the landlord. Possfund wanted to carry out an inspection of the property to find out the extent of any underground contamination. The Kwik-fit store had been built on the site of a former petrol station which had underground fuel storage tanks. The inspection would involve the drilling of a number of bore holes over several days. Kwik-fit refused to allow Possfund access to carry out the inspection and the matter ended up in Court.

The clause in the lease dealing with the landlord’s right of entry and inspection was in standard terms – allowing it and its agents (with or without workmen) to go onto the premises at all reasonable times, on giving prior notice, to inspect and examine the state of repair of the premises.

The disputed issue was whether or not the clause permitted investigations of an intrusive nature to be carried out.

Kwik-fit’s position was that, as the works actually involved the landlord taking possession of part of the premises for a distinct period, this breached one of the fundamental landlord lease obligations – that having let the premises to a tenant a landlord would not disturb the tenant’s peaceable possession. In addition, Kwik-fit argued that the lease clause only allowed Possfund to “enter on” the premises for a period of time sufficient to allow a visual inspection to be completed but not to remain there for any longer than that. Possfund argued that the reference to “workmen” in the clause indicated that any inspection need not be limited to just a superficial visual examination.

The Court favoured Possfund’s view. The power to inspect and examine implied a power to carry out intrusive works where that was a necessary part of the inspection or examination – the lease clearly said that the landlord could take his workmen onto the premises. In its view, it made good commercial sense for a landlord and a tenant to accept that a thorough and intrusive inspection of the state of repair of the premises might be necessary over the lease period of 25 years.

The landlord’s right of entry and inspection (most commonly used by a landlord to put together Schedules of Dilapidations) was, until now, considered to be a fairly standard and harmless part of a lease.

The court’s decision here has, potentially, far reaching consequences, particularly for tenants who may not have appreciated that such clauses could cause serious disruption to their businesses. I doubt many landlords or tenants would have anticipated that a straightforward right to enter the premises with workmen could also be used to permit intrusive investigations involving the landlord occupying part of the premises for, what might amount to, a significant period of time. It goes against the basic principle of leasing that a landlord will not interrupt his tenant’s possession of the property let.

Both landlords and tenants need to bear in mind that the right to inspect relates to the whole of the premises which includes the ground under the surface and not simply the buildings or other surface features such as access roads or landscaped areas.

From the tenant’s perspective, it will want to water down the landlord’s right by regulating both the timing of his inspections and how far he can go. The court, in this case, saw significance in the right that the landlord had to come onto the property with his workmen. Try and avoid reference to workmen and equipment coming on with the landlord. Clearly, restricting any right of inspection to non intrusive inspections or prohibiting any inspection that involves the landlord remaining on the land for any period of time would avoid the type of disruption experienced by Kwik-fit. Whether you will get the landlord to agree to this will be a matter of commercial negotiation at the time.

From the landlord’s perspective, he will want to have as much power as possible to carry out intrusive inspections.

The case highlights another interesting issue – that of environmental liability under leases. The purpose of the inspection, in this case, was to establish if there was contamination beneath the site. If the inspection had indicated that there was contamination, the issue would then have become who was liable in terms of the lease.

Leases don’t normally address environmental law or environmental liability specifically. In a Full Repairing and Insuring Lease, the tenant would almost certainly be liable for the removal or cleaning up of any contamination of the site - even contamination which existed before the lease was entered into. FRI leases impose on the tenant an obligation to put and keep the premises in good order and repair and it is generally accepted that this obligation covers environmental liability. If the site is contaminated or there is some other environmental liability the premises would not be considered to be in good order and repair and the tenant is responsible for the clean up.

Also leases almost always contain a “compliance with statute” clause which makes the tenant liable for complying with all legislative requirements. This would include environmental legislation.

Case referred to: Possfund Custodian Trustee Limited v Kwik-fit Properties Limited [2008] CSOH 79

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

A recent case has thrown into sharp focus the extent of a valuer’s duty of care in carrying out instructions to value a property on behalf of a bank.

The facts of the case are straightforward. Platform Funding Limited proposed lending £154,495 to a Mr Hawes secured against a property, Plot 1 Baker’s Yard, Belchmire Lane, Gosberton, Lincolnshire. Colleys surveyors were instructed by a mortgage broker, acting as an intermediary, to provide a Scheme 1 valuation of the property for Platform. The valuation was carried out and Platform made the loan. Inevitably, Mr Hawes failed to make his repayments and Platform repossessed the property.

At this point, it became clear that something had gone awry in the process of carrying out the valuation. Colleys’ instructions stated that the plot to be valued was Plot 1 Baker’s Yard which was to have a purchase price of £300,000. Arrangements for access to the property were to be made directly with Mr Hawes and a telephone number was given. Colleys contacted Mr Hawes. The valuer met him at the property identified by Mr Hawes as being 1 Baker’s Yard, and the valuation was carried out. The valuation report was made to Platform and the loan completed in the usual way.

In fact, Mr Hawes had directed the valuer to Plot 5 Baker’s Yard and it was this property that the valuer had inspected. Despite Mr Hawes’ deliberate and fraudulent act in misleading the valuer, Colleys were found to have been in breach of their contractual instructions and their valuation report was wrong. The valuation report included a specific, unqualified undertaking that “the property [1 Baker’s Lane] has been inspected by me”. Platform sued and the court of first instance awarded damages for breach of contract. Colleys (now part of the Bank of Scotland) appealed.

The Appeal Court, by majority, dismissed the appeal. Its view was that the valuer would have been obliged to carry out the valuation using only the skill and care to be expected of a reasonably competent professional valuer, but that standard did not apply to the identification of the property to be valued. In the court’s opinion, there was an unambiguous instruction to value Plot 1 Baker’s Yard and an equally unambiguous undertaking by the valuer to value that specific property. Failure by the valuer to do so was a clear breach of contract. There was no suggestion by Platform that Colleys had been negligent. The court also dismissed suggestions that the fraud of the borrower should not be used to impose liability on the valuer.

This is undoubtedly a harsh decision for valuers (and perhaps other property professionals). The instructions given were in standard form. The instructions were carried out in the normal way. Fundamentally, however, the assumption of reasonable skill and care applicable to the services rendered in connection with the actual valuation do not apply to the basic step of actual identification of the property itself. The borrower’s fraudulent behaviour was irrelevant. This has to give pause for thought to both valuers and the providers of their professional indemnity insurance policies.

In the current market, insurers are looking for ever more creative ways of limiting their exposure to claims. If this case is followed, and in troubled times we suspect that there will be more and more claims of this sort coming through as repossessions rise, there is little doubt that insurers will be looking very hard at withdrawing cover for such errors. Can the valuation profession afford to continue to charge as little as they have had to for Scheme 1 surveys when the risk of potential liability in cases such as this cannot be adequately managed or offset?

Much remains to be seen but a flood of claims of a similar nature may lead directly to many small valuation businesses simply shutting up shop.

Case referred to: Platform Funding Limited and Bank of Scotland Plc (formerly Halifax Plc) [2008] EWCA Civ 930

A full text of the decision is available on the British and Irish Legal Institute website accessible here.

A clause in the English Land Compensation Act 1961 (“the LCT”), the origins of which are founded in the Blitz, has given a welcome boost to Greenweb Limited, an investment firm, in these uncertain times. The provision gives automatic planning permission for the rebuilding of houses destroyed by Luftwaffe bombs during the war. The case centred on land upon which a row of terraces stood until they were destroyed by a flying bomb. Wandsworth council cleared the site and included it in a neighbouring public park.

However, the land was still privately owned and was bought for £30,000 in 2001 by a housing developer. After the council refused planning permission, Greenweb Limited served a purchase notice compelling the council to buy the land as it would not allow its use for any commercial purpose. The market value of the land was set at £15,000 but due to the clause in the LCT, the value of the land shot up to £1.6 million.

Whilst recognising that Greenweb was getting a windfall, the judge reluctantly ordered the council to pay the uplift value and called on councils to lobby for a repeal of the law.

At least one good hand then has been dealt to a developer in recent months. However, developers in war damaged parts of Scotland should not hold their breath for a similar windfall if the facts were to repeat themselves up here. The LCT only applies in England & Wales and it surely has little life left in it there.

Case referred to: Greenweb Limited and London Borough of Wandsworth [2008] EWCA Civ 910

A full text of the decision is available on the British and Irish Legal Institute website accessible here.

HM Revenue & Customs (HMRC) has published an information sheet giving guidance to housebuilders on the VAT implications of letting unsold houses: VAT Information Sheet 07/08: VAT: Partial Exemption - adjustments when house builders let their dwellings. This guidance has been published in response to enquiries from housebuilders who are letting dwellings which they are currently unable to sell in the present housing market.

The guidance explains that, where a developer defers the intended sale of a dwelling and temporarily lets it instead, the developer will become partly exempt for VAT purposes. This may affect the amount of VAT it can recover on its costs. The developer may have to adjust the VAT it has previously recovered on its VAT returns and/or reduce the VAT to be recovered on its future returns. However, if the amount of exempt input tax relating to the temporary letting is "de minimis", a developer can continue to recover all of its input tax. The information sheet gives worked examples so that developers can "check for de minimis".

The Property sector receives attention in the Scottish Government’s budget for the coming year. While the content of the draft budget reflects the decisions taken in last year's Scottish government spending review, there are adjustments that take into account decisions made in the last twelve months. These include:

Further detail is available on the Scottish Government’s website accessible here.

Under the Companies Act 1985, private companies could only give financial assistance (e.g. by granting security or making loans) to enable a third party to buy its shares if the ‘whitewash procedure‘ was followed. Public companies could not give financial assistance. From 1 October 2008, the rules for private companies relating to financial assistance are repealed and private companies will be free to give such assistance without having to go through the whitewash procedure, although banks are likely to seek additional comfort where financial assistance (under the 85 Act rules) is being given. The prohibition remains for public companies.

You can get in touch with Mike Kane, Partner in our Corporate Team by clicking here.

The Scottish Government has put forward a Bill to improve the protection of homes and communities from flooding.

Following one of Scotland's wettest summers on record, the Flood Risk Management (Scotland) Bill aims to update legislation to manage the increasing risk of flooding. The general aims of the legislation are to (1) streamline and speed up the development and implementation of flood defences; and (2) introduce a more sustainable and modern approach to flood risk management which is suited to the needs of the 21st century and the impact of climate change.

a framework for coordination and cooperation between all organisations involved in flood risk management;
assessment of flood risk and preparation of flood risk management plans;
new responsibilities for SEPA, Scottish Water and local authority functions for flood risk management;
a revised, streamlined process for flood risk management measures;
new methods to enable stakeholders and the public to contribute to managing flood risk; and
a new single enforcement agency for the safe operation of Scotland's reservoirs.

The draft Bill can be accessed via the Scottish Government’s website accessible here.

An analysis of the impacts in rural Scotland of land reform measures such as the community planning, new tenure proposals for farmland, the abolition of feudal tenure and access to land rights is now available on the Scottish Government’s website accessible here.