Welcome to the September issue of Bell & Scott's Property Update.

In this month's issue we comment on (1) a case where the seller of a development site did not get his deferred price because the project was not completed and (2) a case where there was a costly delay to a project when the developer developed an unreasonable fear that his site and workers were in danger from the condition of an adjoining property.

In addition, we update you on (1) possible tax returns needed following the fifth anniversary of the introduction of SDLT; (2) moves in the UK to stimulate the housing market; (3) new Council of Mortgage Lenders guidelines on disclosure of incentives for new build houses; and (4) a consultation on the energy performance of non-domestic buildings.

Recent Decisions

To complete or not to complete

Gowanbrae Properties Ltd ("Gowanbrae"), was a shareholder in Splendid Homes Ltd ("Splendid"). It held £135,925 redeemable preference shares which were redeemable (at par) when Splendid completed a development at Howden House in Livingston. The shares were supposed to ensure payment to Gowanbrae of the sum of £135,925 when the practical completion certificate for the development was issued.

Splendid, through its Board of Directors, decided not to proceed with the development because the company found itself in financial difficulty. Consequently, it decided to sell Howden House, its only asset, undeveloped, to a third party. The effect of the decision was that there would be no redemption date for the preference shares and Gowanbrae would not receive what was the last part of a payment due under a Share Purchase Agreement (“SPA”) it had entered with Splendid.

Under the SPA, Gowanbrae had agreed to sell its shares in the company to Splendid for a predetermined value - the value of infrastructure work previously carried out by Gowanbrae at Howden House. The price attached to those works was set and agreed at £235,925. The arrangements for the payment of that sum were set out in a guarantee agreement which provided for the issue of the redeemable preference shares to the value of £135,925 - Gowanbrae having received the balance of £100,000 not long after the signing of the SPA.

Following Splendid’s decision not to carry out the development, Gowanbrae asked the court to rule that the actions of the Directors of Splendid were resulting in unfair prejudice to it. Its argument was that the Directors were not entitled to carry on the affairs of the company in a manner which was unfairly prejudicial to it as a shareholder. Splendid's decision to sell the property undeveloped meant that Gowanbrae would not get the payment it was due and which was part of the consideration for the work it had done and was provided for in the SPA and the guarantee. 

The issue the court had to consider was whether or not there was an implied term or understanding arising from the terms of the SPA and the guarantee that the Company would achieve practical completion of the development works within a reasonable time of the date of the guarantee.

From the documents signed by Gowanbrae and Splendid, the Judge could not find any basis on which it could be implied that Splendid was under an absolute obligation to ensure that the development reached practical completion. Those documents indicated that Splendid had only undertaken to use reasonable endeavours to complete the project.

Iain MacDonald, Managing Partner and Head of our Housebuilder Team, comments:

This is a cautionary tale for all property development companies and their advisors, particularly in the economic climate prevailing in the industry.

When a payment is postponed until the occurrence of some future event, you need to make sure you are protected and will get what you are due, in case the future event never occurs. In the present downturn in the market, everyone in the property development business is having to look carefully at where to deploy their resources in order to make gains in the short, medium and long term. The judge, in this case, placed great emphasis on the basic fact that practical completion is never guaranteed to happen in any development and that parties should have been switched on to this fact at the negotiation stage of the deal. The mistake could have been avoided easily by a having a “longstop” or other “drop dead” date triggering the deferred payment. That would have ensured that Gowanbrae got its money whether the project proceeded to completion or not.

The use of corporate structures in land deals has resulted in payment, completion and other deal points being addressed using mechanisms which are not run of the mill in the property industry. The court’s decision in this case follows basic contract law and those working in the industry should ensure that all payment and other provisions are enforceable regardless of the vehicle being used.

Case referred to: Gowanbrae Properties Ltd v Splendid Homes Ltd [2008] CSOH 106.

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

Don’t go jumping to the wrong conclusions

In the course of its development of the Cube (part of the Mailbox development in Birmingham), Birmingham Development Company Ltd (“BDC”) demolished the gable wall of a building on site. This exposed parts of the flank wall of the neighbouring factory, owned by Mr Tyler. Part of the exposed wall appeared loose and dislodged. BDC felt that this presented an imminent danger to their workers on site and so works had to stop in the area next to the wall until the defects were remedied. Another area of the flank wall was bowed and bulging and BDC also considered this to be dangerous.

BDC raised a court action against Mr Tyler for negligence and nuisance and sought an initial order requiring Mr Tyler to carry out remedial works. The order was granted and Mr Tyler carried out the works at a cost of approximately £5,000. This allowed the development to continue.

The matter then went to a full trial to determine the extent of liability. To succeed in its claim, BDC had to establish that the condition of the factory presented a danger, in other words, that there was a serious risk that personal injury or damage would occur in the immediate future. It also had to show that the danger it feared was well founded. At trial, the Judge found that despite BDC’s own belief that the part of the exposed wall presented a real danger, at no time was it actually dangerous. The Judge also decided that the damage to another part of the wall, although dangerous, had been caused by water leaking from BDC’s gutter. In the end, he decided that Mr Tyler was not liable to BDC for the condition of the wall.

BDC appealed that decision. One of the questions the Court of Appeal had to consider was whether the fear of danger, however reasonable that fear was, was sufficient grounds for a claim in nuisance when it later transpired that there was no danger at all. The Court of Appeal held that it was not sufficient that BDC were simply fearful of the danger. BDC had to prove that the property was actually dangerous and this has to be proven on the balance of probabilities. BDC failed to do this and the Court of Appeal decided the matter against BDC.

Central to the Court’s decision was the superficial nature of the initial investigations carried out by BDC to establish if the wall was dangerous in the first place. The wall was viewed through a camera lens and binoculars and also from a cherry picker, but only once the original injunction had been obtained did anyone actually carry out a hands-on inspection. At that point, it became clear that a part of the wall which appeared loose and dislodged was not dangerous at all.

Kirsty Martin, an Associate in our Property Dispute Resolution Team, who is also qualified in England and Wales, comments:

A substantial amount of time and money could have been saved by both parties if someone had just carried out a more detailed examination of the wall before raising a court action. Both parties had had experts “look” at the wall and they had agreed that it “looked” dangerous, which had been sufficient to obtain the interim injunction, but a close inspection, at a later stage, had revealed that their fears were unfounded. I think the cursory nature of the initial inspection did have a substantial impact on the Court when the decision was made – indeed the Judges in the case were “baffled” by it. They were also baffled by the fact that Mr Tyler had been forced to spend money on remedial works to the factory, when the factory was eventually bought by BDC and demolished!

Had the property been situated in Scotland, then BDC could have applied for an interim interdict to prevent any damage occurring, which is similar to the interim injunction in England. The Scottish position with nuisance is that you cannot do something or allow something to happen on your land which causes material damage to your neighbour’s property or is a serious disturbance or substantial inconvenience to your neighbour. Like in England , there is very little case law in Scotland on the issue of what amounts to a reasonable fear that damage will occur. However, it is likely that the Scottish Courts would take a similar view to that taken by the English Courts; fear itself is not enough – you have to fear an actual danger.

There is one consequence of an interim interdict that is also worth bearing in mind. If you succeed in obtaining an interim interdict then in all likelihood you will be obliged to give an undertaking that you will compensate the other party should the court ultimately find you were not entitled to it. This could be a substantial undertaking if, for example, you prevent a development proceeding. The compensation payable could be the cost to the developer of having its development delayed for over a year.

Case referred to: Birmingham Development Co Ltd v Michael Jacob T yler [2008] EWCA Civ 859

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

News

Happy anniversary SDLT?

We are fast approaching the fifth anniversary of the arrival of Stamp Duty Land Tax (SDLT). This anniversary is significant. It could mean that some tenants need to make additional SDLT returns for leases that they entered into after 1 December 2003.

Who might be affected?

SDLT legislation sets out a number of triggers requiring either delivery of additional returns or, at worst, a recalculation of SDLT liability. The main triggers for tenants are (1) a rent review or variation in rent after the first five years of the lease term, resulting in an "abnormal increase in rent"; (2) a previously “uncertain, unascertained or contingent rent” becoming certain – this might be an event occurring outwith the first five years of the rent which has the effect of finally fixing the amount of rent due for the first five years.

What is an "abnormal increase in rent"?

As a rough rule of thumb, if the rent increases by more than 20% for every complete year which has elapsed since the highest rent previously taxed became payable, this will constitute an abnormal increase in rent.

By way of example, take the case of a 10 year lease of an office premises which the tenant entered into on 1 January 2004. The rent starts at £50,000 per annum and increases annually by £50,000 to £250,000 in the fifth year. The lease provides for a rent review on the fifth anniversary of the lease start date. An SDLT return will have been completed and the tax paid when the lease was granted. As part of the SDLT paid at the start, the highest rent payable in the first five years of the lease would have been calculated (i.e. the £250,000). The date on which the £250,000 becomes payable will be 1 January 2008. The abnormal rent increase assessment is to take place on the fifth anniversary of the start date of the lease i.e. 1 January 2009. This is one full year after the date on which the highest rent of £250,000 became payable. Therefore, at the review, the rent payable can only increase by 20% or less of the £250,000 figure i.e. an increase of £50,000. Anything above this is an "abnormal increase in rent" and triggers an obligation to deliver a return. The HMRC guide to calculating abnormal increase in rent is accessible here

Uncertain rent becoming certain

If, at the end of the fifth year of the lease term, the rent for the first five years of the lease becomes certain or fixed (because it was calculated by reference to an event which occurred after the fifth year of the lease term), a tenant may need to make a return if the amount of rent payable rent is high enough that SDLT becomes payable or the transaction becomes notifiable.

HMRC will not send any reminders to make further returns and it may levy penalties if returns are not made and tax paid within 30 days of the transaction becoming notifiable.

Moves to stimulate housing market

From 3 September 2008 to 3 September 2009, SDLT will not apply to purchases of residential properties costing £175,000 or less. This exemption will apply to land transactions consisting entirely of residential property where the chargeable consideration is not more than £175,000.

In Scotland, the Holyrood Government is to spend £250m over the next 3 years on the Low-cost Initiative for First Time Buyers (LIFT). As part of that proposal, there is to be an increase to the threshold of property prices which buyers can acquire under the Open Market Shared Equity Pilot. Under that scheme, eligible buyers can buy any property in an area where the scheme is operating which is within set threshold prices. These prices are set to represent the value of the cheapest 25% of properties sold in an area. There will also be additional funding for the New Supply Shared Equity Scheme aimed at helping people across Scotland who are on low incomes, particularly first-time buyers, to purchase homes from Registered Social Landlords (RSLs).

In England & Wales, there is to be (1) free five year loans of up to 30% of a property's value for first-time buyers of new homes; (2) more powers for councils and housing associations to enable them to pay off debt for homeowners who can no longer afford mortgage payments and then charge rent; and (3) an acceleration of spending from future years to encourage more social housing to be built.

However, RICS urges both Governments to go further. It has put together a package of measures which it believes will assist alleviate the downturn in the property market. Its package contains 15 measures, the most radical of which include:

• buyers of new mortgage-backed securities and covered bonds would have a repurchase agreement for the securities with the Bank of England. Both would have to be sold in a public issue before being acquired by the Bank of England. The scheme would also be directed at increasing the flow of funding for new mortgage lending;
• a tax free savings account for first time buyers;
• rent before you buy schemes;
• building for rent and investment in the private sector;
• RSLs to commission developers and contractors to provide housing on their behalf thus increasing volume and to be able to convert affordable homes which cannot be sold into rental homes with a view to sale when the market recovers;
• empty homes to be brought back into use by reducing VAT on repair and maintenance
• making HIPS/Home Reports less costly and more consumer friendly.

The RICS proposals can be accessed here

Incentives offered to buyers of new homes must now be disclosed to lenders

From 1 September 2008, the Council of Mortgage Lenders (“CML”) requires solicitors acting for buyers of new build houses to obtain a completed "disclosure of incentives form" from the solicitor acting for the developer. The form ensures that any discounts or other incentives offered by developers are disclosed to the buyer’s lender. The lender or its solicitor must pass this information to its valuer to ensure a proper valuation.

In conjunction with the CML, the RICS has amended the valuation advice in its 'Red Book' of standard instructions to valuers. The amendments make clear the need for valuers to consider the effect of any incentives which could distort the agreed sale price.

The CML hopes that the new procedure, set out in CML's Lenders' Handbook, will reinforce lenders' confidence in newly-built property, which has fallen due to recent experience of over-valuations and frauds.

The new CML guidance on incentives is available via its website accessible here

Consultation on energy performance of non-domestic buildings

The Scottish Government has published a consultation document which sets out its proposals for measures to improve the energy performance of non-domestic buildings and reduce carbon dioxide emissions. Its objective for this consultation is to ensure that all interested parties have the opportunity to contribute their opinions at an early stage.

The consultation document and accompanying material are available from the Scottish Government website accessible here