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Monday, 28 February 2011

Max Headroom: Ownership Of Airspace – Can You Reach For The Stars?



If you own a freehold interest in land, how much of the airspace does that include?

First, a bit of gratuitous Latin.

Cuius est solum eius est usque ad coelum et ad inferos.

Meaning the owner of the 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 colourful phrase often upon the lips of lawyers since it was first coined by Accursius in Bologna in the 13th century”, to quote Justice Griffiths, in Baron Bernstein of Leigh v Skyviews and General Ltd [1978] QB 479, in an all too rare example of judicial humour, in land law at any rate.

However, before you start thinking about fencing off parts of the solar system, Justice Griffiths in Bernstein introduced some clarity to this Latin maxim, by stipulating that a landowner’s rights in the airspace above his property do not extend to an unlimited height. Otherwise, every time a satellite passed over a suburban garden it would be committing a trespass.

Instead, the rights of an owner in the air space above his land are limited to such height as is necessary for the ordinary use and enjoyment of the land and the structures upon it; above that height the landowner has no greater rights in the air space than any other member of the public.

Civil aviation can therefore continue, as under the Civil Aviation Act 1982 it is a defence to an action in trespass or nuisance for aircraft to fly at such a height which is reasonable under the circumstances.

Getting more down to earth, where there is an interference with the legitimate rights of the freehold owner, then the owner can assert those rights by an action for nuisance or trespass. This might happen for example where a neighbour allows an advertisement to overhang your premises, or where a crane on adjoining land swings over your property without your permission (usually given in the form of a crane oversail licence).

How high can you build?

This will usually be a matter for planning control. Your planning permission will govern the height of your development. Rights of your neighbours to light may also be relevant (see my post Let There Be Light etc).

If your building is going to encroach upon or overhang someone else’s airspace, then you will need their permission to do so.

This is something that often gets forgotten about when structures are built close to the highway. If anything is going to jut out over the highway, then you first need to get the highway authority’s consent.

What about leasehold property?

Here it depends on what is included in your lease, often referred to as the extent of your demise.

The general rule is that a lease of a whole building or of the upper portion (including the roof) includes the airspace above it, unless the lease expressly excludes it. That airspace will be limited to such height as is necessary for the ordinary use and enjoyment of the land and the structures upon it, just as it is for the freehold owner.

This can be important in determining who has the right to exploit valuable airspace.

For example, if the airspace is included in your demise, this might prevent your landlord letting valuable roof space to telecoms operators. It might also limit your landlord’s ability to place air conditioning units on any adjacent property it owns, even if they are several metres above ground level, if they overhang the airspace that has been included in your demise.

Conversely, if the airspace is excluded from your demise, then you would not be able to put, for example, aerials or satellite dishes on the roof without your landlord’s consent (which he does not have to give), unless you have included a specific right in your lease to install such items.

If your lease does not include the structure of your building (if it is an “internal” demise), then the airspace and the roof itself will be excluded from your demise, and so if you want to install things on the roof, you will need express rights to do so in your lease, together with rights to run cabling as necessary and rights of access to the equipment on the roof for the purposes of maintenance, repair and replacement.

This report from Wragge & Co of a recent case (Rosebery Ltd v Rocklee Ltd) demonstrates how, in a residential context, it is important that leases which include airspace should be carefully drafted to ensure the height of the demised airspace is properly defined.

In Rosebery the problem arose from granting a lease of airspace to a tenant for them to build another storey on top of their 6th floor flat, and how that impacted on the rights of the 7th floor flat owner to the airspace above the roof of that extension in a building which narrowed towards the top.

The issue in Rosebery is far too complicated to describe accurately in a post like this, so for a summary of the problem and the decision – see the Wragge & Co piece!

The case illustrates how important it is to consider and, if necessary, define airspace carefully when granting and accepting leases and particularly, where tenants want to build extensions, supplemental leases.

Per ardua ad astra.

As you might want to say to yourself if the going gets tough in lease negotiations.

Thursday, 24 February 2011

King’s Speech – Queen’s Land: Escheat, Last Remnant Of Feudalism, In The Spotlight



The King’s Speech is a fine film (notwithstanding the occasional bit of historical inaccuracy, eh Sir Winston?) which deserves to do well at the Oscars this weekend. [Update September 2013 - This is a blog and this is an old post (long forgotten but now bizarrely resurfaced!), in case you're wondering why I'm blathering on about a film now gathering dust at the bottom of your Blue Ray pile!]

But what relevance does the monarchy still have when it comes to land ownership in England and Wales?

Its relevance, from a land law perspective, lies in the small trace of feudalism still lingering in our property laws today.

Although owning a “freehold” title to land is the best you, a mere mortal, can get, it doesn't mean your ownership of the land is all-embracing.

If you own a freehold, what you actually own is an estate or “interest in possession” in land.

Sometimes it's called a “tenancy in fee simple”. It's superior to a leasehold interest, but it's still inferior to the hierarchical interests of the “feudal lord of the estate”, which, in the “modern” era (that’s now, believe it or not), means the Crown or one of the Royal Duchies (Cornwall or Lancaster).

The underlying ownership of all land in England by the Crown has existed since the Norman Conquest. There is, even today, always a presumption in favour of the Crown unless it can be proved that land belongs to someone else.

Is there ever a time when this feudal remnant has any practical relevance?

Most of the time, no. We don’t live in an absolute monarchy and our registered titles (proof that we own our freehold “interests”) are guaranteed by the state through the Land Registry.

There's still an instance however where that freehold “interest” can be removed from existence, under the little talked about common law prerogative of escheat (pronounced “eesheet”), an old French legal term.

This happens when the land is disclaimed as onerous property following insolvency, for example by a company’s liquidator or an individual’s trustee in bankruptcy. The liquidator or trustee might want to do that if ownership of the land is basically a liability, when it is “onerous” property.

When a freehold interest is disclaimed it no longer exists. The land ceases to be owned by anyone.

Escheat operates to ensure that land isn't left in limbo and without an owner.

Escheat isn't governed by statute; it makes no difference whether the land is registered or unregistered; and it can only happen to freehold land.

Under common law the interest in possession of the discalimed land reverts back (is escheated) to the Crown and becomes land held by the Crown in “Royal Demesne” (pronounced “de-main”), sometimes referred to as the “allodial” lands of the Crown.

The escheated land is owned by the Crown but it isn't part of the Crown Estate.

If all this surprises you, there was even a time in the dim and distant past when an owner could lose his freehold interest by escheat if he were convicted of a felony.

The escheated land remains subject to any charges or other encumbrances created by the former freehold owner or its predecessors. 

Leases, rentcharges, mortgages and other inferior interests are therefore not affected, but (and this is where things can become complicated) the Crown doesn't assume any liabilities for escheated property and so wouldn't be liable for any landlord’s lease covenants, for example.

I mentioned this in my post What Happens If Your Landlord Goes Bust?.

All is not lost to royal fiefdom however, as any person with an inferior interest can make an application for a vesting order, effectively getting the land back from the Crown by the grant of a new freehold estate. 

This is a complex issue however and you need to take specialist advice if you ever find yourself in this position.

Some guidance is provided on the Crown Estate website.

The Crown is usually represented in escheat matters by Burgess Salmon, which has carved out a niche for itself in this area, unless the land is escheated to one of the Royal Duchies, in which case it is usually dealt with by Farrer & Co.

So does escheat happen often?

Although this may all seem a bit arcane, roughly 300-500 freehold estates escheat to the Crown every year.

Indeed it's relatively common for a liquidator or trustee in bankruptcy to disclaim the common parts of freehold blocks of flats, because they have no real value and would otherwise be a burden to the estate.

Usually in that situation the owners of the flats would collectively apply to have the ownership of the common parts vested in them, or more usually in a management company set up by them for that purpose.

Or the land might be a private road, in which case the householders alongside it might apply for ownership.

Disposals of escheated land by the Crown are made at market value.

Until recently, land held by the Crown in Royal Demesne couldn't be registered because it was not held under any feudal tenure (meaning it wasn't freehold or leasehold) and the Land Registration Act 1925 only allowed interests in land to be registered.  

This created a slow leak of property out of registration, amounting to hundreds of freehold titles every year.  

Things changed after the Land Registration Act 2002 and an escheated title is now noted on the register.

There's also another way for the Crown to come by property – bona vacantia – such as when a company that still has assets is dissolved. 

Just to confuse matters, however, it's open to the Treasury Solicitor to disclaim any property which vests in the Crown as bona vacantia, and if it does so it's then subject to escheat. So it goes back to the Crown, albeit in a different form!

Also, if a dissolved company is foreign, then its freehold land reverts to the Crown by escheat.

Of course the Crown, through The Crown Estate, still owns a great deal of other land (worth over £6.6 billion), including over half of the “foreshore” (those shifting areas between high tide and low tide on the beaches around Britain) and all of the seabed out to 12 nautical miles. 

The Crown also owns vast agricultural estates, mines and significant London property, especially in Regent Street, Regent’s Park and St James’s.

However, that's “real ownership” of the feudal interest, rather than the more esoteric position assumed by the Crown under escheat. 

 Revenue from Crown Estate land goes to the government, and in return the monarch receives a fixed annual payment known as the Civil List.

......................................................................................................................

September 2013: I'm not aware of anything interesting happening in the world of escheat since writing this post nearly three years ago, but I haven't checked, so who knows? The usual disclaimer applies...!

Friday, 18 February 2011

What Happens If Your Landlord Goes Bust?



The recession hasn't just hit tenants - landlords of commercial property may also be at risk of insolvency. 

If you're a commercial tenant, what should you look out for if your landlord goes bust?

You might be lucky, and it has little effect on you, or it might set in train a sequence of events over which you have little or no control.

Here's a brief outline of some of the things to think about and discuss with your advisors.

Will you be told?

You're likely to receive a letter from the insolvency practitioner (IP) dealing with your landlord’s insolvency telling you about the insolvency and directing you to carry on paying your rent, service charge, insurance contributions etc, but from now on to a different bank account. 

If the IP doesn’t give you enough information or if you have any questions, you should get in touch with the IP straight away.

What should you do?

Carry on complying with your obligations under your lease as before. 

If you don’t, then the IP still has the benefit of your landlord’s rights to end your lease (forfeiture) for breach of covenant.

Make sure your landlord’s obligations in the lease are complied with, for example any obligations to light and maintain common parts.

Make sure the IP has details of any side letters or other supplemental agreements recording concessions or special agreements you have reached with your landlord and which are not dealt with in the lease. 

For example you may have negotiated a personal deal with your landlord to pay your rent monthly, rather than quarterly. The IP needs to know this in order to understand how you pay your rent. 

Your landlord’s filing of deeds etc might be in a mess, so be as helpful as you can to the IP where it's in your interests to do so, for example by providing copies of any missing letters or deeds.

The IP may be looking to sell the property, so check what your lease says about you having to allow your landlord to show people around and whether your landlord is allowed to put up a “for sale” sign. 

If signs are allowed, check if you enjoy the benefit of any conditions in the lease that say your own signage must not be obscured by sales boards (particularly important if you're in retail). 

Make sure the IP complies with any obligations to give prior notice before showing people around and sticks to any hours restrictions on when they can do so.

Is your rent deposit at risk?

If you paid a rent deposit, how safe it is will depend on how well it was set up and documented in the first place.

If the money was simply paid to your landlord then there's a danger it will be swept up with any other money held by your landlord and be subject to the claims of your landlord’s creditors.

In order to avoid this, when a rent deposit is initially set up, ensure it's paid into a separate account from your landlord’s other monies so it's easily identifiable in future.

You should also enter into a rent deposit deed with your landlord when the deposit is paid. 

The deed should spell out the circumstances in which your landlord would be entitled to draw on the deposit money and should also say that the deposit money is either held on trust by your landlord or that the money belongs to you but is charged to your landlord. 

This will help stop your landlord’s creditors being able to claim the money for themselves.

What about service charges and sinking funds?

These payments are potentially more at risk. 

It depends how well your lease was negotiated and drafted. 

You're just another unsecured creditor, unless the money is being held on trust. 

The RICS Service Charge Code of Practice recommends that sinking funds are held in trust for occupiers and separate from the landlord’s own monies.

What if it all grinds to a halt – can you/should you step in and do what your landlord should be doing?

Check with the IP that the property is still insured. 

If it isn’t, you may need to consider insuring the property yourself. 

This could prove problematic though as you need to avoid any double insurance and you might not be able to recover the cost of insuring from anyone else (eg other tenants).

Where your lease is only of part of the property, if the common parts are not being maintained properly, you might want to consider doing it yourself or together with the other tenants, but you need to be careful you don't breach any of your lease obligations. 

You would need to get the IP’s permission to do this and you're unlikely to be able to recover the costs from anyone else. In these circumstances, try to open a dialogue between you, the other tenants and the IP.

You may be able to claim damages if you suffer loss, or be able to set off rental payments, but you should take specialist advice before contemplating these actions, as much will depend on what type of insolvency applies to your landlord.

The IP might be an administrator or a receiver, or ultimately a liquidator or (if the landlord is an individual) a trustee in bankruptcy. 

Alternatively the landlord might be entering into some form of voluntary arrangement with its creditors. 

A discussion of the different types of insolvency practitioner is outside the scope of this post.

Will your lease survive?

It's very unlikely that your lease will contain any provisions allowing it to be terminated if your landlord becomes insolvent.

Assuming the property has value and a good income stream (your rent), the IP’s aim will usually be either to carry on your landlord’s business in some way, or to sell the property with the benefit of your lease. 

In those circumstances the IP will want to maintain a good relationship with you and any other tenants. If all goes well, it should have little effect on you.

On the other hand, if the property is not economically viable, and is effectively a liability rather than an asset, then if your landlord is bankrupt or in liquidation, there's a danger your landlord’s interest might be disclaimed. 

This is where things can get complicated and where your continued occupation of the property may be in jeopardy.

If there's a risk of that happening you need to take specialist legal advice. A full discussion of disclaimer would take too long in a post like this, but briefly, the possibilities are:-

·         If your landlord owns the freehold, and it's disclaimed, it reverts to the Crown and the Crown does not accept lease obligations if this happens (see this post on the practice known as escheat).
·         If your landlord’s interest is leasehold and the IP disclaims your landlord’s lease, your own lease would also fall away. Then you might be able to apply to the court for a vesting order vesting the landlord’s lease in you (the rules are quite complex). But, the new lease would be on the same terms as the landlord’s old lease, not your old lease, which may not be what you want if you only had a lease of part of your landlord’s property.

There may be other difficulties if your lease is a sub-lease. 

If your landlord’s lease (the head-lease) allows its landlord (the superior landlord) to end (forfeit) the head-lease when your landlord becomes insolvent, then forfeiture of the head-lease would also bring your lease to an end. 

However, all is not necessarily lost as you might be able to obtain relief from forfeiture from the court (another fairly complex process).

Another possibility, where you're a sub-tenant and your landlord is in arrears under the head-lease, is the superior landlord might serve notice on you requiring you to pay your rent direct to the superior landlord until those arrears are covered. 

Again, seek advice and check the validity of the notice. It’s a cheap and quick way for the superior landlord to maintain some income, but it creates a new landlord and tenant relationship between the superior landlord and you.

What if your landlord goes bust whilst you are renewing your lease?

It can be very awkward if your landlord is opposing your lease renewal and then goes into administration.

You cannot take the lease renewal to court without either getting the consent of the IP (in this case the administrator) or permission from the court. 

In deciding what to do, the court has to strike a balance between the rights of the IP to conduct an administration in accordance with its objectives, and your right to have your application heard and to be granted a new lease. 

There's been some recent case law on this, but clearly it's something on which you would need to take specialist advice.

As you can see, your landlord going bust can lead to a number of different outcomes depending on the circumstances. 

It's wise therefore to be aware of the possible implications of your landlord’s insolvency and to take legal advice at an early stage.

UPDATE MARCH 2012

For more about the impact of landlord insolvency on subtenants, see my post Subtenants - What Happens If Your Landlord Goes Bust? 

UPDATE 19/2/2013 - The above post is now two years old, but still seems to be a popular one on this blog - a continuing and troubling sign of the times. If I come across any more recent examples of what can happen when a landlord goes bust, I'll do a follow-up post. if anyone else meanwhile has any examples, I'd be delighted to hear from them.

Thursday, 10 February 2011

Lease Break Clauses – When Is A Landlord’s Break Clause Effective?




Can landlords make use of break clauses in commercial leases?

In my other posts on break clauses I've mostly looked at terminating commercial leases from a tenant’s point of view.

Now let’s suppose you're a landlord. Can you also have a break right?

The short answer is yes, but for it to be effective, make sure it's dealt with correctly when the lease is granted.

What should landlords do when granting new leases?

As a landlord, you will only have an effective break right if:-

1.   The lease contains a break clause that says you, as landlord, can terminate the lease; and

2.   The lease has been excluded from the security of tenure provisions of the Landlord and Tenant Act 1954 (1954 Act), sometimes called “contracting out”.

The comments I make in Lease Break Clauses – What Can Possibly Go Wrong? about serving notices apply equally to notices served by a landlord. You have to get the notice absolutely right and serve it strictly in accordance with the requirements of the lease, or you'll lose the right to terminate the lease.

If your lease contains a landlord’s break clause but it hasn't been contracted out, what happens if you serve a break notice on your tenant anyway?

If you do that, the contractual term will be brought to an end on the break date, but your tenant may still have statutory rights to renew its lease under the 1954 Act.

To have a chance of ending the lease on the break date you must also serve a statutory notice under the 1954 Act as well as the contractual break notice - so you have to serve two notices.

The statutory notice is called a "Section 25 Notice" and the rules governing the timing and service of such notices are complicated - they're certainly outside the remit of a blogpost and are something on which you would need to take professional advice. 

You might not, for instance, be able to serve both notices at the same time - even if you intend them to take effect on the same date.

So although by serving the break notice you've shortened the contractual term of the lease, the tenant may still be able to use the statutory procedure to get a new lease which, from a landlord’s point of view, would defeat the object of having a break clause in the first place.

Is a landlord’s break clause totally useless if the lease has not been contracted out?

Not necessarily. 

Let’s say you are the landlord of a 10 year lease of property with a landlord’s break right at year 5, but the lease hasn't been contracted out. 

After a couple of years you decide you'd like to redevelop the property and then re-let it for more money, and eventually you get planning permission to do so. 

You serve the break notice, which will shorten the contractual term and bring it to an end at year 5. 

You can then oppose your tenant’s right to ask for a new lease on the ground that you intend to redevelop the property, which is one of the statutory grounds for opposing lease renewal under the 1954 Act. 

To do that, you need to serve a Section 25 Notice on the tenant in addition to the break notice (and you'll need to take advice on the timing of the notices).

If you succeed in proving the statutory ground, you'll have got rid of your tenant, although you'll have to pay your tenant statutory compensation under the 1954 Act.

Another statutory ground for opposing lease renewal you might be able to use, depending on the circumstances, is where you can show a genuine intention to reoccupy the property yourself. But there are complex rules governing the availability of this ground and again you'll have to pay your tenant compensation if you succeed.

So if the lease isn't contratcted out, it’s not ideal. 

Your opposition to lease renewal might fail (this has been the cause of a great deal of litigation over the years). 

Even if you succeed, you'll have to pay your tenant compensation. 

Nevertheless, depending on the circumstances one of these scenarios might work for you commercially.

So if you're a landlord granting a new lease and want an effective landlord’s break clause, it's important to make sure the lease is contracted out of the 1954 Act.

By the way, a lease does not have to be contracted out for a tenant’s break right to be effective.

The above is only an outline of course and you should always seek professional advice.

UPDATE 9/5/12

I have noticed this post is still popular with quite a lot of readers of this blog. Having received a few questions privately from readers, I have rewritten it slightly to make it clear that if a lease is not contracted out, to have a chance of making the break clause work, as a landlord you would need to serve both the contractual break notice and a Section 25 notice opposing renewal. 

I must reiterate however, the comments made in this post are really just for general information - not legal advice. It's a complicated area of law.

As far as the timing of the notices and the likelihood of success under the 1954 Act procedure are concerned, these are things on which you would need to take professional advice, ideally from a property litigation specialist. 

Here's a link to my other posts on break clauses, both before and after the date of this post.

Tuesday, 1 February 2011

Lease Break Clauses – What Should You Agree In A New Lease?


What should you look for if you are a tenant negotiating a break clause in a new commercial lease?

In my posts Lease Break Clauses – What Can Possibly Go Wrong? and Lease Break Clauses – What If You Change Your Mind? I looked at how you should manage your break clauses, either if you want to terminate your lease, or if you have served a break notice but then subsequently change your mind.

When negotiating a new break clause you should try to end up with a clause which will help you avoid the problems I referred to in those posts.

What will be the break date or break dates?

Will there be only one opportunity to break the lease or several? Will the break dates be specific one off dates, for example on every anniversary of the commencement date? Or will you be able to break the lease at any time after a specified period has elapsed, for example at any time after the first five years of the term?

You will want as much flexibility as possible.

If you pay rent quarterly, try to make the break date a quarter day or, if the break date will fall inside a quarter, include an obligation for your landlord to reimburse you for all rent (and other sums) paid in respect of the period after the break date.

It is a good idea to include a reimbursement clause even if the break date is a quarter day so as to pick up any other  money that might be owed to you after the break date, for example a balancing service charge payment.

Will you have to pay anything?

The landlord might want to negotiate a premium that has to be paid before you can break the lease. This will be a matter for negotiation, but obviously you will want to resist an obligation to pay a price for being allowed to terminate the lease. It is more usual for the flexibility that a break clause gives a tenant to be reflected in the level of rent, both initially and subsequently in any open market rent reviews.

What notice will you have to give?

It is usual to have to agree to give the landlord formal prior notice in writing to activate the break clause. Make sure you are comfortable with the length of notice period.

6 to 9 months prior notice is fairly standard in most commercial leases, unless the lease term is short (say less than 3 years), in which case you will probably want a shorter notice period.

Try to avoid any unusual notice provisions that might trip you up when you come to serve the notice, for example having to serve copies of the notice on someone other than the landlord.

What conditions will you have to comply with for the break clause to work?

Ideally you should insist on an unconditional break clause.

However, your bargaining position may not be strong enough for that. In any case you should avoid the sort of conditions which I refer to in Lease Break Clauses – What Can Possibly Go Wrong?  and which might trip you up.

If you have to agree to include conditions, then I would suggest you limit any conditions to the ones recommended by the Code for Leasing Business Premises in England and Wales 2007 (backed by the Government) as they strike a fair balance between the concerns of landlords and tenants.

The Code says that the only preconditions to a tenant’s break right should be:-
  • The basic rent is paid up to date (not “all sums” or service charge). Note that if the break date is in the middle of a quarter you would still have to pay the whole of that last quarter’s rent, so still include an obligation for your landlord to reimburse you the balance relating to any time after the break date.
  • The tenant gives up occupation of the property. This is not as onerous as having to give up “vacant possession”.
  • There are no continuing subleases. Make sure any subleases you grant expire before the break date and are excluded from the security of tenure provisions of the Landlord and Tenant Act 1954.

The above is a brief outline and you should always seek professional advice.

Here are links to my other posts on break clauses.