In this month's issue we comment on a recent case involving the service of an inaccurate irritancy notice and the overturning of the decision in the first case to make a developer liable for remediation costs. We also look at the Pan-Industry response to the Government’s REIT consultation paper and consider a paper suggesting re-organisation of Registration and SDLT administration in Scotland.

Recent Decisions

Termination of lease despite service of inaccurate irritancy notice

In June 2003 a liquidator was appointed to SRMC, tenants at Abbey Business Centre in Paisley whose lease obligations had been personally guaranteed by Mr Freeman. The Landlord immediately gave notice that the leases were terminated under the irritancy clauses on the basis of the appointment of a receiver. The reference to “a receiver” was an error and the Landlord’s and the liquidator wrote challenging the validity of the notice. Subsequent correspondence followed during which the Landlord and the liquidator agreed terms for access to the unit. Having finally obtained legal advice, the Landlord then indicated that he now accepted the notice was invalid and thus sought to recover from the Guarantor rent and other claims due in terms of (as he argued) the continuing leases. Not surprisingly the Guarantor argued that the leases had indeed terminated on service of the notice and that he had no liability for rent or other obligations occurring thereafter.

Lord Eassie rejected the Landlord’s argument that the notice was invalid given the reference to “a receiver”,refusing to accept that the landlord could use his own uninduced error to argue that the notice was invalid. The question was therefore whether agreement had been reached between Landlord and liquidator that the leases were to continue. The Guarantor argued that, since the leases had been terminated, any agreement after that would in effect require to be treated as the creation of a new lease, to which he was not guarantor. Lord Eassie rejected that, finding that if an agreement was demonstrated in evidence, then the original leases simply continued.

He found that no agreement had been reached between the parties to continue the leases. The mere allowance onto the property of the liquidator’s staff, on clearly independently agreed terms, did not constitute affirmation of the existence of the leases, nor waiver of the Landlord’s right to enforce the notice he himself had served (a notice which at that point he had not yet accepted to be invalid). The leases had been terminated by the notice served and the obligations of the guarantor would therefore cease at the date of the notice.

Sheila Webster , Head of our Property Dispute Resolution Team comments:

Mistakes in an irritancy notice can be fatal given the serious consequences for the tenant of the notice and Courts interpret such notices strictly. Without realising it, the Landlord here inadvertently released the Guarantor from continuing obligations under the leases – something which it can be all too easy to do. Taking advice as early as possible in the process is therefore vital for all landlords.

The case is also interesting in demonstrating the need to be clear from the outset as to your objectives. Lord Eassie makes it very clear that a landlord exercising his right to irritate a lease cannot then simply say that he chooses not to stand by what he has done. He can only do so if the tenant agrees to continue the relationship. It is important to remember that the notice here was one of immediate termination (since the tenant could not “remedy” the appointment of the liquidator). I can see no reason why a landlord may not, if he chooses to do so, serve a letter warning of the possibility of termination of the lease if, for example, payment of outstanding rent is not made within a 14 day period, yet not proceed to actually terminate. However, if he takes that second step, or in the case of a breach of the lease which the tenant cannot remedy, seeks to immediately terminate the lease, he may not be able to come back from that. Even if he subsequently changes his mind about what he wants to do, he will need clear evidence of an agreement with the tenant that the lease continues. Landlords need to be clear about what they want to achieve, taking advice on reletting options, the enforcement of guarantees and such matters, before any notices are served.

Case referred to:

Marcus Dean trading as Abbey Mill Business Centre v Tony Russell Freeman

The full text of both of the decisions arising out of this matter is available from the Scottish Courts Website at :

http://www.scotcourts.gov.uk/opinions/CA111.html (No.1)

http://www.scotcourts.gov.uk/opinions/2005CSOH75.html (No2.)

News

SDLT and Registers of Scotland

Reorganisation required?

James Aitken, our Property Tax Associate, has submitted a paper to the Scottish Parliament’s cross party economy group on how to make the buying and leasing of property in Scotland both easier and less expensive.

James proposes that the Registers of Scotland take over responsibility for the administration and collection of Stamp Duty Land Tax (“SDLT”) in Scotland. At the very least, or possibly as a first step, the Edinburgh Stamp Office should be housed in the same building as the Registers of Scotland. Some of the potential advantages are cost savings due to the sharing of facilities, no need to visit 2 separate offices that are miles apart if same day registration is required and the ending of different opening hours and holidays. The devolving of power over SDLT will also allow the Scottish Parliament to consider changing the SDLT rates and bands to more closely reflect Scottish property prices.

Even if this reorganisation is resisted steps must be taken to improve the administration of SDLT in Scotland. James has also suggested that a separate Scottish SDLT helpline and Complex Transactions Unit should be set up. This would ensure that Scottish property matters are dealt with by people that have a knowledge and understanding of Scottish property law. Separate Scottish SDLT forms and guidance notes should also be produced so as to reduce their length and complexity.

The cost of registration in Scotland also needs to be closely examined as it is higher in Scotland than in England. The registration fee for a property valued at £100,000 in England is £100, in Scotland it is £200. The registration fee for a property valued at £5,000,000 in England is £700, in Scotland it is £7,500. If there are good reasons for the higher Scottish registration fees then these reasons should be made public.

If you would like a copy of this paper please click here.


Circular Facilities Overturned

First contaminated land case overturned and sent for re-trial

The first contaminated land case to be heard by the UK courts, in which a housing developer was held liable to bear the whole costs of remediation, despite not having caused the pollution, has been overturned and submitted for re-trial.

In Circular Facilities v Sevenoaks District Council (See Property Update October 2004 ) the developer of a small housing scheme built in the early 1980s was held to be liable for the full costs of remediation, based on the fact that the soil investigation report which they had submitted to the planning authority had contained references to pollution.

The appeal hinged on a legal point: that as the court had not found that the company director who was the “controlling mind” of the company had known about the content of the site investigation report (which he denied) it was not competent for the court to determine that the company had known about it. A lack of knowledge meant that the company could not have “knowingly permitted” the contaminants to stay in place.

Stephanie Mackenzie, an Associate in our Property Development and Acquisition Team specialising in Environmental Law comments:

As the same evidence and the same legal principles could still leave Circular Facilities responsible for the remediation costs, the Appeal Court decided to submit this case for re-trial. It is quite possible that the court will simply find that the director was mistaken or not believe him and once again find that the company knowingly permitted the pollution to stay in place.

What is more interesting is whether the Belgian case, Criminal proceedings against Van de Walle and others which extended the European Framework Directive on Waste to contaminated land in the period between Circular Facilities being determined and the appeal, will be cited and the effect that this might have on the apportionment of liability.

Case referred to: Circular Facilities v Sevenoaks District Council

The full text of the decision is available from the British and Irish Legal Information Institute here.

The full text of the decision in the Van de Walle case is available from the European Court of Justice here.

REITs Discussion Paper: The Pan-Industry Response

Tax-exempt company is the way forward?

In the April 2005 Edition of Property Update we commented on the Government’s Discussion Paper on Real Estate Investment Trusts which was issued along with the Chancellors 2005 Budget. The paper advises that the Government remains committed to the introduction of a UK REIT but also identifies what it describes as “challenging issues” around the tax treatment of the model to which the Government will require answers before proceeding with the implementation of a UK REIT.

The Pan-Industry Response to the Discussion Paper has recently been published by the BPF, IPF and RICS with the input of a group of industry technical experts who have considered the specific tax questions raised in the Discussion Paper. The response “welcomes the positive progress towards REITs that the Discussion Paper represents” and finds the proposed timetable which could see introduction of the UK REIT in the Finance Bill 2006 encouraging.

The Response paper recommends the introduction of a straightforward tax exempt company as the basic structure for a UK REIT. Whist it is accepted that such a model may lead to some initial tax loss, it is considered that all of the other options identified would be overly complex and consequently lead to delay to the timetable or simply be commercially unviable or unattractive thus limiting the uptake of REITs in the UK.

Mike Kane , Head of Corporate comments:
The tax treatment of REITs is obviously at the heart of the issue and the Government would be well advised to take a longer term view of the model they choose from a revenue generating perspective. As a model, the taxable company would produce more revenue, but there may be less take up on this, with funds continuing to stay offshore. It is anticipated that the tax exempt model would in the longer term produce a better return for the Treasury, albeit some work will be required at the outset in renegotiating some double tax treaties.

The full text of the Pan-Industry Response is available here.

The Government’s discussion paper is available here.