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Tuesday, 16 June 2015

Bad Bargains

In a recent decision the Supreme Court* has refused to step in to rescue tenants from a very bad deal where the meaning of the language used in the contract is clear.

The case concerned the service charge clause in leases of chalets in a holiday park let in 1974 for terms of 99 years.

The service charge clauses typically required the tenants to pay a proportionate part of the service charge costs set at £90 for the first year, increasing at 10% compound per annum throughout the term.

The effect of the clause was that by 2072 the service charge would increase to a whopping £1,025,004 – for a chalet.

To put that in context, some other chalet leases at the park provided for a 10% increase every 3 years, which would result in a service charge of £1,900 by 2072. Actual inflation, based on the last 10 years, would result in a lower figure still.

The miracle - or disaster (depending which side of the fence you sit) - of compounding.

The Court recognised this had alarming consequences for the tenants, but ruled that this didn’t justify departing from the natural meaning of the clause.

When interpreting a contract:

·         The importance of the language of the provision shouldn’t be diminished by placing reliance on commercial common sense.

·         Commercial common sense can’t be invoked retrospectively to facts arising after the date of the contract. It’s only relevant to ascertaining how matters would or could have been perceived at the date of the contract. Just because an arrangement has resulted in bad or disastrous consequences, that doesn’t justify departing from the natural meaning of the wording used.

·         It’s not the court's function to relieve a party from the consequences of imprudence or poor advice.

·         There’s no special principle of interpretation that service charge clauses are to be construed restrictively. The usual principles of interpretation apply.

The decision was reached by a majority of 4:1. The dissenting judge felt there was ambiguity in the clause and that the commercial aim was that each tenant paid a “proportionate part” of the costs and the second part of the clause was meant only as a cap.

However, the majority saw no ambiguity.

Only where there is ambiguity can the Court apply the principle of commercial common sense – not where the natural meaning of the language used is clear.

This is an objective test. If someone wants to argue a contract doesn’t reflect the parties’ intentions, then they would need to bring a claim for rectification.

This case is also a reminder that service charge clauses are subject to the same rules of interpretation as any other contractual clauses.

Tenants therefore need to assess carefully the effects of any fixed increases or other formulae used to calculate service charge liability throughout the term of a lease.

Fixed service charges don’t benefit from any statutory protection against excessive charges.

Against the high inflationary background of the 1970s – when inflation was higher than 10% per annum - the service charge increase imposed in these leases wouldn’t have seemed as unreasonable as it does today.

When entering into long term leases, it’s important to anticipate the future.

Tuesday, 2 June 2015

Restrictive Covenants and Building Schemes

In a recent case* the High Court has been willing to determine the existence of a building scheme even in circumstances where there are doubts over the area affected by the scheme.

Why does this matter?

Restrictive covenants are a title-based impediment on development that operate independently of, and override, public policy led considerations, such as planning permission.

The law relating to restrictive covenants is complex and often misunderstood.

Developers of land may sometimes be able to get round old covenants if buying them out isn’t an option.

This is done either by title indemnity insurance where the covenants are very old and the original purpose and beneficiaries of the covenants have all but disappeared over time; or by the more cumbersome method of applying to the Upper Tribunal (Lands Chamber) for them to be modified or discharged under section 84 of the Law of Property Act 1925 – a process that is timely, costly and uncertain of success.

Where there’s a “building scheme”, even very old covenants can be kept alive and remain enforceable by the owners of individual plots and their successors between themselves, effectively operating as a “local law” for the area covered by the scheme and overriding any planning policy.

When developing an estate (usually houses), the original developer can create a building scheme so that restrictive covenants entered into by all the owners of the individual plots will be mutually enforceable between the plot owners, no matter when the covenants were entered into or when the plots were sold.

The covenants could say anything, but typically they will limit the number of houses that can be built on a plot and may also impose user restrictions.

The requirements for establishing a building scheme are:

·         A defined area – the area covered by the scheme must be clearly defined (usually by a scheme plan) and known to all the plot owners.

·         Reciprocity of obligation – there must be an intention to impose a scheme of mutually enforceable restrictions which is known to everyone in the scheme and is in the interests of all the parties and their successors.

Proving the surrounding circumstances and the parties' intentions where restrictive covenants are old and the evidence is incomplete can nevertheless be difficult.

However, in this latest case a developer was prevented by neighbouring owners from building more houses on a plot which formed part of a building scheme established over 100 years ago.

This was in spite of there being no overall estate plan.

Restrictive covenants had been imposed by indentures in 1909 and 1910, including a covenant limiting the number of houses that could be built, which prevented the developer from implementing a planning permission.

An adjoining owner claimed entitlement to enforce the covenant as part of a building scheme.

As the scheme was so old, the evidence for the scheme had to be pieced together from the title deeds of the developer’s plot (which included the 1909 and 1910 indentures); conveyances of other plots between 1906 and 1914 which contained similar, but not identical, restrictive covenants; agreements for the sale of two other plots dated 1908 and 1914 and the estate plans attached to those agreements; and historical evidence, including unsuccessful attempts to vary the covenants before the Tribunal.

None of the old conveyances contained an estate plan.

There were significant inconsistencies between the estate plans attached to the 1908 and 1914 sale agreements. The 1914 plan omitted over 30 lots shown on the 1908 plan. However, the Court decided these could have resulted from a mistake or perhaps a variation of the estate.

The Court also inferred that when the lots involved in the case were originally sold, there would have been estate plans attached to the sale agreements showing the same boundaries as the 1908 plan.

Once the Court had concluded there was a defined estate, it was able to show the restrictions were for the benefit of the various plot owners as the estate had been laid out for sale in lots and the covenants were all substantially the same.

Taking all these factors into account, the Court upheld the restrictive covenants.

Developers will be concerned at the implications of this decision.

The fact there were differences between the old plans on the 1908 and 1914 agreements makes it hard to reconcile the decision with established law that a buyer can’t be subject to an implied obligation to owners of an unknown and undefined area – that he must know both the extent of the burden and the extent of the benefit.

A separate application was made to the Tribunal for an order to modify or discharge the restrictive covenants under the 1925 Act, which has been suspended pending any appeal of the High Court’s decision.

It will be interesting to see the outcome if this case makes it to the Court of Appeal.

Wednesday, 27 May 2015

Queen’s Speech – Focus on Housing

Today’s Queen’s Speech provides for a Housing Bill.

For those of you who haven’t had time to read it, or who are perhaps still giggling over the Queen reading out announcements about “psychoactive substances”, here’s the section relating to the Housing Bill in full:

“Legislation will be introduced to support home ownership and give housing association tenants the chance to own their own home.”

The purpose of the Bill is to:

• Help provide more hard working people with the chance to own their own home.
• Increase housing supply and access to home ownership.

The main benefits of the Bill would be:

•Helping more tenants of housing associations to buy a home of their own.
•Increasing the supply of new Starter Homes (to be exclusively offered to young first-time buyers, at a 20 per cent discount below their open market value).
•Helping those wishing to build their own home.
•Ensuring local people have more control over planning.

The main elements of the Bill are:

Home ownership

•To enable the extension of Right to Buy levels of discount to housing association tenants.
•To require local authorities to dispose of high-value vacant council houses, which would help fund the Right to Buy extension discounts and the building of more affordable homes in the area.
•To provide the necessary statutory framework to support the delivery of Starter Homes.
•To take forward the Right to Build, requiring local planning authorities to support custom and self-builders registered in their area in identifying suitable plots of land to build or commission their own home.
Housing supply

•To introduce a statutory register for brownfield land, to help achieve the target of getting Local Development Orders in place on 90% of suitable brownfield sites by 2020.
•To simplify and speed up the neighbourhood planning system, to support communities that seek to meet local housing and other development needs through neighbourhood planning.
•To give effect to other changes to housing and planning legislation that would support housing growth.

The proposals have been welcomed by the British Property Federation, whilst recognising however that the government has a huge task to deliver enough new homes and must focus on supply-side solutions.

The BPF also cautions that for the starter homes policy to work, the government must ensure there is sufficient infrastructure provision on the allocated sites.

It will also be interesting to see how much suitable brownfield land is actually brought on to the market.

The right to buy proposals extending to housing associations will be hugely controversial. A discussion of this is outside the remit of this blog, but it will be interesting to see how this progresses and what challenges are made to it by the housing associations themselves, for example in the context of their private and charitable status.

Elsewhere in the Queen's Speech, the government’s proposals on devolution will also have an impact on real estate, both in the devolved administrations and potentially in the English regions.