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Monday, 28 September 2015

Street Art – Who Owns It?

As someone who’s spent quite a lot of time over the last few years looking at and photographing street art around London, I was particularly interested in reports of a recent High Court decision on who owns that street art – sufficiently so as to be roused from my recent blogging slumber.

Although the subject matter of this case is art, it’s really an examination of landlord and tenant law – specifically, if a tenant removes something from a building, who owns the thing that’s been removed?

The short answer is it depends what the lease says (as you’d expect) and how much the thing’s worth (which might come as more of a surprise, turning as it does on value rather than purely principle).

The now famous, albeit pseudonymous, Banksy had drawn a mural on a tenant’s wall in Folkestone – the piece is known as “Art Buff” and depicts a woman wearing headphones staring at an empty plinth – without either the landlord’s or the tenant’s  prior knowledge or consent, during a public art festival.

It was painted over – “buffing out” – an earlier piece of graffiti (the judgement uses the no doubt correct singular term “graffito”, but I can’t help thinking that just looks pedantic).

Not surprisingly it attracted a great deal of press attention and the Council, seemingly without any authority to do so, protected it with a sheet of Perspex.

The tenant removed the mural (and the wall itself) and shipped it off to New York in order to offer it for sale on the lucrative Big Apple art market.

The question before the court was who owned the wall (and mural), the landlord or the tenant?

In other words, who was entitled to a spectacular windfall of around £470,000 (if estimates are to be believed) from an art deal?

Incidentally, the motives of the tenant appear to have been benevolent as in evidence they said that they’d intended to donate the net proceeds of sale to a trust established by their late founder for the care of terminally ill patients – an important observation as some reports I’ve read of this case might leave the impression the tenant was acting out of pure greed.

The 20 year lease expires in 2022. The tenant, Dreamland, operates an amusement arcade from the building.

The lease demises the structure and exterior of the property, with standard obligations to keep it in good and substantial repair and condition and to yield it up in such repair at the end of the term; as well as to restore and make good any external rendering and not to maim or injure any of the building’s walls or make any alterations without the landlord’s consent.

The tenant tried to argue it was obliged to remove the mural as part of its repairing obligations and that, once removed, it became a chattel and its own property in accordance with an implied lease term.

The High Court disagreed and suggested that removing the wall rather than simply painting over it was not a reasonable way of complying with the repairing covenant.

The Court ruled that the term to be implied in the lease is that the chattel becomes the property of the landlord, for the following reasons:

·         Every part of the property belongs to the landlord. The tenant only has a tenancy for a period of time, so it’s for the tenant to show that it’s proper to imply into the lease a term which leads to a different result.

·         The mere fact that the tenant is discharging its repairing obligation doesn’t lead to the implication it acquires ownership of a chattel.

·         Even if you could imply a term of ownership of waste or chattels with scrap value, it doesn’t follow one should be implied for ownership of a chattel with substantial value.

·         It doesn’t make any difference that the value is attributable to the spontaneous actions of a third party. Someone gets a windfall, and the landlord has the better right to it than the tenant.

So if the thing removed is scrap, it probably belongs to the tenant. But if it’s of high value, it is the landlord’s.

This decision doesn’t help in knowing where you draw the line between what’s scrap and what’s valuable.

It arguably places tenants in a difficult position.

A lot of street art – or graffiti, depending on your point of view – may well be of no value, or rubbish if you want to put it that way.

But equally a lot of street art has great credibility in the art world and prints and reproductions of it sell for significant amounts.

How is a tenant who has little knowledge or interest in such things to know the difference?

If the tenant ignores it and does nothing, the landlord would be able to argue it’s in breach of its repairing covenant.

On the other hand, how pleased would the landlord really have been in this instance if the tenant had simply painted over the Banksy mural (which the Council had anyway protected with Perspex)?

Simple and practical rules may be desirable, but are difficult to formulate when considering repairing obligations.

As the judge points out, even the most conventional and common repairing covenant can give rise to “nice questions of judgment” in particular factual circumstances.

The Council's decision to cover the mural in Perspex is interesting too. They seem to have treated the wall as part of the public realm rather than as private property - presumably because a famous artist-in-disguise chose to draw on it.Graffiti by the less renowned is more usually treated as criminal damage.

And what about the rights of the artist to the intellectual property in the art?

That wasn’t considered in this case, save for a comment at the beginning of the judgement that the copyright in the artistic work “prima facie belongs to Banksy”.

In the past Bansky has condemned the removal and private sale of his artworks as disgusting.

The Landlord had assigned its title to the artwork (and the cause of action in this case) to the Foundation, which now intends to put the mural on display in Folkestone.

The photo used to illustrate this post isn’t connected with this case. It’s a Banksy drawing on Rivington Street, Shoreditch.

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.