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Monday, 7 April 2014

Lease Break Clauses: Pay Close Attention - Court Applies Strict Interpretation

The latest ruling* on break notices from the Court of Appeal has seen it apply a strict interpretation of the wording of a break clause used in a lease.

In short, if you don't comply with a mandatory requirement of a break clause (or any other option) -  it makes it invalid.

The Court of Appeal have unanimously overturned the High Court's decision last year and held that the tenant couldn't rely on an otherwise valid break notice because it hadn't included in its notice the specific wording required by a condition in the break clause - even though the wording required by the clause no longer served any purpose.

The tenant's lease was for a term of 25 years from August 1998, but the lease contained a break right allowing the tenant to break in August 2013 by giving at least six months' notice.

One of the conditions in the break clause was that the notice "must be expressed to be given under section 24 (2) of the Landlord and Tenant Act 1954".

The notice served didn't include this wording.

The rationale for this wording at the time was the belief that a tenant could serve a section 26 request at the same time as serving a break notice, triggering a right to a new tenancy at a potentially lower rent. Case law has since clarified that a tenant can't do this, so the condition doesn't achieve anything.

Nevertheless, Lord Justice Lewison ruled that where an option prescribes substantive conditions that must be fulfilled, they must be completely fulfilled.

He recognised this was "a harsh result", but the "clear moral" was that if a tenant wants to avoid expensive litigation, and the possible loss of a valuable right to break, it must pay close attention to all the requirements of the clause, including the formal requirements, and "follow them precisely".

Landlords will scrutinise every last detail of a break clause to try and challenge whether a tenant has validly exercised its break option.

Is it really fair for landlords to be able to defeat a commercially negotiated break option - a fundamental term that will have been taken into account by the parties when agreeing length of term and rent - on the basis of legal pedantry?

Fair or not, if you're a tenant you must comply with your break clause to the letter if it's to be effective, and try to avoid conditions in break clauses altogether when negotiating new ones.

There may still be room for legal argument in future cases over what is a mandatory condition, and what isn't - but that's not going to provide any commercial certainty.

This ruling comes ahead of the eagerly awaited judgment from the Court of Appeal in the M&S case**, where the High Court had signalled what many had hoped was a more flexible approach to the interpretation of break clauses more generally, holding that the tenant was able to recover rent and other charges overpaid in respect of the period after it exercised its break clause.

The Siemens case appears to take us back in another direction.

Which path will the Court of Appeal follow in the M&S appeal?

*Friends Life Limited v Siemens Hearing Instruments Limited 2014 EWCA Civ 382
**Marks and Spencer PLC v BNP Paribas Securities [2013] EWHC 1279 (Ch)

Thursday, 3 April 2014

Government to Reform Trespass Law to Aid Fracking?

The government is considering changing the law of trespass to make it easier for companies to frack for gas and exploit geothermal energy under private land without the landowner's permission, according to officials close to the discussions reports Bloomberg.

Fracking is shorthand for  hydraulic fracturing, the process of blasting of water, chemicals and sand at high velocity into a shaft to crack rock and release the shale gas.

Unlike in the US, where the gas is owned by the landowners, in the UK the Petroleum Act 1998 vests all rights to the nation's petroleum resources (which includes shale gas) in the Crown, but the government can grant licences that confer exclusive rights to "search and bore for and get petroleum" - over a limited area for a limited time.

Those licences do not include any rights of access.

The owner of land owns everything up to the sky and down to the centre of the earth, or more poetically, “for whoever owns the soil, it is theirs up to heaven and down to hell" - a presumption that's been criticised over the years, but is generally accepted.

Therefore, as the law currently stands, anyone wanting to mine for the gas requires the landowner's permission (and must also navigate its way through  a complex web of planning and regulatory consents).

The FT, who have also reported this, said that any change would be a boost to the UK's nascent shale gas industry - something the government has been keen to promote - as it would prevent environmental groups from using the law of trespass to block exploration.

If this goes ahead, it's likely to involve a statutory scheme similar to the one governing coal mining.

What compensation, if any, will be given to landowners for this infringement of their property rights?

We'll have to wait and see whether this makes it into the Queen's speech on 3 June 2014.

Monday, 31 March 2014

No More Distress

From 6 April 2014 the ancient common law remedy of distress bites the dust.

For commercial premises, in its place comes the new commercial rent arrears recovery (CRAR) procedure.

Distress is a self-help remedy that allows a landlord to recover unpaid rent by seizing its tenant's goods that are on the premises and selling them to pay off the arrears - all without the bother of having to go to court.

The abolition of distress has been a long time coming - it's 7 years since a change in the law was first trailed in the Tribunals Courts and Enforcement Act 2007, and the relevant provisions are only now being brought into force.

From 6 April 2014, any arrears relating to residential premises must be pursued through the courts.

For commercial premises only, the new CRAR procedure will replace distress.

CRAR preserves the concept of self-help remedy for landlords, but with important differences.

·         A warning notice of at least 7 clear days must first be given to the tenant of the intention to use CRAR, followed by a further 7 days’ notice of the proposed sale of the seized goods.

·         At least 7 days' rent must be overdue.

·         A landlord may only use certificated bailiffs to enforce the remedy.

·         CRAR is for commercial premises only - it will not be available for mixed use premises (eg where a flat above a shop included in the same lease) - if any part of the premises are residential, CRAR cannot be used and arrears must be pursued through the courts.

·         CRAR can only be used to recover "pure" rent arrears, which includes VAT and interest, but not other items that might be "reserved as" rent (such as service charge or insurance rent).

The key change is likely to be the requirement to give 7 days' notice.

At present, when using the distress remedy, landlord's agents can just turn up unannounced.

The notice period will give the tenant an opportunity to clear out goods before the landlord tries to take them away.

The 7 days' notice is however a concession to landlords, who lobbied against the original proposal of a 14 days' notice.

Landlords still have the option of serving a notice on any sub-tenants requiring them to pay their rent direct to the head landlord, but the notice will now only take effect 14 days after service.

For mixed use properties, from now on owners may wish to consider letting them on separate residential and commercial leases in order to preserve the CRAR remedy for the commercial part.

With distress being at long last consigned to legal history, landlords may also feel more inclined now, when granting new leases, to look for rent deposits or guarantors.

For more details on the new procedure, see The Taking Control of Goods Regulations 2013.

Thursday, 20 March 2014

Ways and Means 2014

Not much for property practitioners to get excited about in the budget on Wednesday, but here are some bullet points:

·         Extension of the Help to Buy equity loan scheme to March 2020 and the continuation of the mortgage guarantee scheme to 31 December 2016.

·         Reform of the planning system to improve and streamline it (a good thing) to include a review of  permitted development rights, both for development and change of use (this is something that will generate a lot of interest - government consultations are in the offing).

·         15% SDLT rate applied to residential properties, purchased by certain non-natural persons, to be applied to properties valued above £500,000, with effect from 20 March 2014.

·         An increase in funds available for flood repairs. A further £140 million has been allocated for repair and restoration of flood defences which were damaged in the winter flooding 2013-14, although it's not yet clear how this money will be spent, or by whom.

·         Housing regeneration measures intended to improve the lack of housing in the South East, the main one being the creation of an Urban Development Corporation for a new garden city in Ebbsfleet, Kent (although no specific measures in the North, or anywhere else - although there will be a £150m fund to help regenerate housing estates).

If you want to read more on the above, or the more headline grabbing savings measures (which I like), or just want something open on your screen to make it look like you're doing something serious - here's the Full Budget 2014 Monty.

Or, like everyone else, you could just laugh at this instead.


Thursday, 13 March 2014

Onwards and Upwards?

The London skyline is set to get even more crowded over the coming years, as a survey by New London Architecture suggests 236 buildings of more than 20 storeys could be on the way.

The Guardian asks whether we'll one day look back on the Shard as the thin end of a vertical wedge.

80% of the new towers are intended to be residential blocks, with the remainder either offices, hotels or mixed use.

According to the study, based on local authority figures, 48% have been approved and another 19% are under construction.

The heart of the tower boom is the appropriately named Tower Hamlets, to be home to 23% of the new buildings.

It remains to be seen what these new towers will look like.

Here's some they built earlier.

Photos by me!