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Wednesday, 27 April 2011

Conditional Contracts – Waiving Not Drowning

Conditional contracts are widely used in the commercial property world.

A prospective buyer or tenant might only be willing to take on a property once something has happened to make it suitable – so the contract will be made conditional on that thing happening.

A contract might be conditional, for example, on the grant of planning permission for a particular type of development; or on the remedying of a title defect; or on the carrying out of remediation works to the ground or buildings. These are just a few of the conditions that might be appropriate.

Or the contract might be conditional on the consent of a third party, for example in the case of leasehold property, a landlord’s licence to assign the lease to the buyer – without which the transaction cannot lawfully proceed.

Conditional contracts provide more comfort for a seller than simply granting the buyer an option to buy the property. This is because once the condition has been satisfied, the buyer will become contractually obliged to complete the purchase.

The contract will usually set out a timetable for satisfying the condition, with a long stop date after which one or both parties are given the right to terminate the contract by giving written notice to the other.

But what if one party wants to waive the condition and complete anyway - in other words, pretend the condition has been satisfied or that the contract was unconditional?

Say for example time is running out under the contract to get planning permission, but as a buyer you still want the property because prices are rising and you know you’ll either be able to get planning eventually or even sell it on at a profit without planning (remember those days?!). In those circumstances the buyer might want to waive the condition and call for completion.

Many contracts will spell out whether a party has the right to waive a condition and what will be the effect of a waiver on other terms of the contract, such as a right to terminate – if you are waiving a condition you want to make sure the other party no longer has a right to terminate the contract for failure to satisfy the condition, otherwise the waiver does not work..

It is a good idea to try and agree these points when negotiating the contract and make sure they are drafted accordingly.

As a buyer, if you have built in suitable terms of waiver, then in the example I have used you would simply give the seller notice of waiver in the time set out in the contract and the contract would then provide for a short time between that notice and completion.

But what if the contract is silent on waiver?

In a recent case - Irwin v Wilson [2011] EWHC 326 (Ch) -  the High Court has had to decide on this issue.

The court ruled that a party to a contract may waive a condition so long as that condition is solely for that party’s benefit and it is severable from the contract (which means the rest of the contract can be performed without it).

However, the waiver cannot revive the contract if notice has already been given to terminate it.

This can get complicated, which is why it is better to deal with the matter head on in the contract.

For example, if the contract gives both parties the right to end it if the condition is not satisfied, that does not necessarily mean the condition is of mutual benefit and therefore not capable of being waived unilaterally by one party.

See what I mean?

That is what happened in Irwin v Wilson. It concerned a title defect (the wrong plan had been attached to a lease of a flat, which had then been registered at the Land Registry – whose Stalinist plan approval regime amazingly seemed to overlook the error on this occasion). The contract was conditional on sorting that out within a certain time frame, failing which either party had the right to terminate the contract.

The buyer moved in after exchange, but despite having tried to sort out the defect, the seller was unable to do so in the time allowed. The seller then served notice to terminate the contract, so the buyer tried to waive the condition and call for completion anyway.

The judge said there was no doubt that the condition was for the exclusive benefit of the buyer – as it was like a term stating what title the seller must give.

The judge also ruled that the condition was severable from the remainder of the contract and that there was no difficulty is setting a completion date either from the date of waiver or as though there had been no condition in the contract in the first place.

Unfortunately for the buyer, what torpedoed its case here was not the waiver as such, but the fact that the seller had already terminated the contract before the buyer had waived the condition.

The judge, following an earlier Court of Appeal decision in Akzo Nobel UK Ltd v Arista Tubes Ltd [2010] EWCA Civ 28, ruled that waiver of the condition could not revive the contract once notice had been given to terminate it.

If the seller’s notice had given further time, say a few more days, for satisfaction of the condition failing which the contract would terminate, then the buyer might then have been able to waive the condition. As it was, the seller’s notice ended the contract immediately so it was too late for the buyer.

So to make sure you can waive a condition, rather than end up drowning in a quagmire of legal argument, do yourself a favour and try and deal with it up front when agreeing the contract in the first place.

Tuesday, 26 April 2011

Living on the Edge – Coastal Erosion and Homes by the Sea

Life has a funny way of sneaking up on you.

But a good deal worse than a traffic jam when you’re already late or rain on your wedding day (whatever Alanis Morissette or royal personages might think), has to be having your house disappear over a cliff. Nothing ironic in that, just bloody awful luck – or poor judgment -  depending on what you knew at the time you bought or built it.

I am always reminded of this danger whenever I visit the South West of England. Here is a link to footage from this is Cornwall of the recent collapse of part of the sandstone cliff in Sidmouth, Devon (part of which can be seen in the photo illustrating this post).

It’s been a problem round the coast of Britain for hundreds of years as once safe cliffs have crumbled under the onslaught of waves beating against them.

The Holderness coastline on the North East coast of England is the fastest eroding coastline in Europe, thanks to a dangerous combination of soft clay cliffs and pounding waves.

Similar problems have occurred in other regions, especially in North Wales, East Anglia and along the coastline of the South West, where both chalk and sandstone cliffs provide inadequate buttresses against the power of the sea.

In the early 20th century, coastal erosion, exacerbated by dredging, even led to the disappearance of an entire village, as Hallsands in Devon was washed away overnight.

This report from the BBC gives an example of the scale of work being carried out on some parts of the coast today to tackle the problem. A £1.2 million project has recently been completed in Walton-on-the-Naze in Essex to help preserve an area of crumbling coastline. 16,000 tonnes of granite rock have been shipped in to build sea defences.

Not everyone is so lucky. Another recent report from the BBC tells of the demolition of a once desirable cliff-top home near Southwold in Suffolk. Built in the 1930s, the house was originally about 260 ft (80m) away from the cliff edge; by the time of its demolition this month it was just a few yards.

Further reports on the fate of that house, which was a second home that had been owned by one family for many years, can be read in local news websites Evening Star and the Advertiser.

The council had served the owners with a demolition notice, which was then suspended for two years whilst they waited to see if more of the cliff disappeared, which it did.

Luckily for the owners, they were able to take advantage of the Pathfinder Project, a Government-funded scheme managed by Defra and being piloted by Waveney District Council, which has been awarded £1.5m from the fund. The scheme was approved in January to explore subsidies for affected properties in the region for relocation, the purchase of high risk property and the use of planning policy to assist relocation and other initiatives to help the community and businesses adapt to coastal change. There is more on the scheme here and a similar use of the scheme in Great Yarmouth, here.

This report from the Sunderland Echo shows how further north, expensive work is needed to a coastal road to stop it falling into the sea.

As well as homes and infrastructure, businesses too have been affected by coastal erosion.

Many of you will remember the pictures of Holbeck Hall Hotel in Scarborough collapsing into the sea in 1993 - an image that became famous world- wide and was seen by many at the time as emblematic of a nation in decline. In fact that disaster was caused by soil creep and heavy rain, rather than the sea. The owners of the hotel unsuccessfully sued the council for damages, alleging that as owners of the shoreline the council should have taken more steps to prevent the mudslide. Holbeck Hall Hotel Limited and another v. Scarborough Borough Council [2000] QB 836 (CA)) became an important case in the law of nuisance and duty of care.

This piece from the Guardian quotes Jules Pretty, professor of environment and society at Essex University, on how in parts of Suffolk and Norfolk houses are literally falling into the sea as great chunks of coastline are being eaten away. He says:

“Some houses near the coast are valued at no more than £1. These are the homes of people who have lived there for generations in some cases. They have an emotional attachment.”
As with life on a flood plain, owners might be slow or unwilling to accept that nature is knocking on the door and turning the dream home into an uninsurable, unmortgageable and unsellable nightmare. It can be painful, not to mention expensive, to say goodbye to a home that may have been in the family for generations.

How close to the edge is it safe to build?

Can we predict where the next collapse will be?

The Government’s policy for managing future development in coastal areas affected by coastal change is set out in Planning Policy Statement 25 Supplement: Development and Coastal Change.

But how can you tell if it’s safe to buy existing cliff top homes?

The Environment Agency  says it is using the most up-to-date data on climate change, advanced modelling techniques and the best local survey information available to display coastal erosion predictions across England. 

“This information will be easily accessible to everyone from our website, so that all who live at, work on and manage the coast are better able to decide how to approach coastal change in their local area.”
So if you’re tempted by a room with a view, make sure you do your homework first. Get a good surveyor with local knowledge to carry out an extensive structural survey of the property and assessment of the area.

And look for the obvious clues – if the garden shed is now a beech hut and the vendors have a panicked look in their eyes, flinging the keys at you before legging it inland, it’s probably best to look elsewhere.

On the other hand, if you have piles of cash, no heirs, a death wish and a desire to see out the end of days against a breathtaking backdrop – go ahead, grab yourself a bargain!

Friday, 15 April 2011

After The Gold Rush - Solar Farms To Be Blown Away By Wind Power?

We may have had a lot of sun over the past few weeks, but a chill wind continues to blow through the solar energy industry.

This is a round-up of my earlier posts on solar and wind together with links to some more recent reports.

On 18 March 2011, Environment Minister, Gregory Barker, announced a consultation as part of the review of Feed-in Tariffs (FITs) for fast-track consideration of large scale photovoltaic (PV) solar projects (over 50kW) with a view to making any resulting changes to tariffs as soon as practical, subject to consultation and Parliamentary scrutiny as required by the Energy Act 2008.

The solar FIT review came a year earlier than originally planned.

You can view my report on that review here and my previous posts on solar farms here.

The Government is seeking to remove large scale solar from the FITs scheme, and is cutting tariffs by about 40% for schemes above 50kW peak capacity and 70% for schemes above 250 kW.

Anyone with an interest in the industry does not have long left to respond to the consultation, which ends on 6 May 2011.

The changes proposed to the FITs scheme, depending on the outcome of the review, will be announced in July 2011 and are likely to take effect from 1 August 2011, but will not be retrospective (although they are as good as, given the effect they will have on the industry).

Before the Government succumbed to sunstroke, the South West in particular was anticipating a Klondike-style solar gold rush as landowners geared up to invest in large solar energy projects.

This looked like an investment bubble in the making – but the FIT review has stopped it in its tracks.

Some solar developers have already had their fingers burned. Backing any new market is risky, but when a government suddenly announces it is removing a subsidy that the industry was going to rely on, and then brings forward that proposal by a year, it undermines confidence and spooks investors.

The industry believes that the new rates will mean large solar PV projects will no longer be commercially viable and that this will undermine the whole solar PV sector.

This has led to some in the industry even considering a legal challenge if the proposals proceed following the review.

The FIT review was criticised on 12 April by solar consultant, Michael Rieley in this piece in Industry Today. He believes it is no longer viable or economically sound for communities to create their own solar parks – larger than 150kW – without the FIT, saying:

“Does this not fly in the face of David Cameron's 'Big Society' policy where individuals and communities have the right to take ownership of local assets?...With reduced tariffs, I fear many communities will not pursue their own projects, despite the energy saving benefits.”

The UK lags well behind the global sun king, Germany. The UK is only aiming for 2.7GW of solar power by 2020, compared with 40GW in Germany.

Energy Matters reports that Google, no less, has recently acquired a 49% stake in a solar farm in Brandenburg. Google says it has invested over $100 million in the clean energy sector so far and has a team of engineers researching the creation of utility-scale renewable electricity generation that is cheaper than coal.

Solar uncertainty has led to renewed interest in the wind industry, according to this report from Business Cornwall yesterday.

It seems many of the landowners in that part of the world who were banking on the sun are now turning to wind as an alternative.

FITs for wind energy have not been made subject to a special review and currently provide a guaranteed payment for electricity produced. In some cases annual income from a small to medium sized turbine could be up to £100k.

There is however a risk that the wind might also be taken out of the turbines’ sails (metaphorically speaking) in the wider review of tariffs being undertaken by the Government, which is due to be completed by the end of 2011 (with tariffs remaining unchanged until April 2012 unless the review reveals a need for greater urgency).

Also, wind farms can be controversial. Local opposition is often strong, leading to difficulties in obtaining planning permission. People have even resorted to decorating the turbines with art to make them more appealing.

Then there’s the problem of turbine shadow flicker, which I wrote about here.

But whilst it might not always be a breeze (last pathetic meteorological metaphor – honest), get it right and it seems there’s money to be made literally out of thin air (sorry).

Business Cornwall quotes a lawyer from South West firm Stephens Scown

“The costs of turbines can range from £10k to more than £2 million depending on their size, but the returns are substantial. A medium sized turbine could generate up to £100k a year through a combination of the Feed in Tariff, reduced energy costs and the sale of surplus power to the National Grid.”

Meanwhile, if you’re interested in off-shore wind farms instead, you might like to see this earlier post on Digging the Dirt about coastal turbines and ownership of the sea bed.

Image from

Wednesday, 13 April 2011

Offices To Homes - Change Of Use In The Fast Lane

Lawyers will be all too familiar with the concept of living in the office.

Why, such a lifestyle is positively de rigueur in Big Law!

And soon many more people will get to sample the delights of office living,

No, the Coalition hasn’t brought back the workhouse (yet). Instead, the Government wants to encourage the conversion of offices to residential use.

According to the Communities & Local Government website, if all the long-term office space currently available was converted into residential use it could potentially deliver 250,000 new homes and save just under £140 million over ten years in unnecessary red tape costs.

Communities Secretary, Eric Pickles has launched a consultation on proposals to scrap the planning approval requirement for changing use from a commercial property to a residential property, which can be costly and time consuming, so it is easier for developers to turn vacant offices into new homes.

The Government is seeking views on the proposal to amend the Town and Country Planning (General Permitted Development) Order 1995 to grant permitted development rights for change of use from class B1 (Business), B2 (General Industry) and B8 (Storage and distribution) to class C3 (Dwelling houses) without the need for planning permission.

The consultation is also looking at a wider review of changes of use and permitted development in the context of the broader reforms sweeping through the planning system via the Localism Bill, the National Planning Policy Framework and the presumption in favour of sustainable development announced in the budget.

The consultation will run until 30 June 2011.

Pickles says in support of the proposals:

"Many towns and cities have office blocks, warehouse and business parks needlessly lying empty, while housebuilding has fallen to the lowest in peace time history because the planning system has tied developers up in knots of red tape.”

The British Property Federation (BPF) has backed the plans, but warned they will not work in every location.

The BPF says that it supports the relaxation of the change-of-use laws in unlocking desperately needed new housing, but agrees with government that they should be consulted upon, to avoid any unintended consequences.

Ian Fletcher, director of policy at the British Property Federation, said:-

"Office to residential conversions won't work for all buildings, or in every area, but any trip through our suburbs soon exposes redundant office space that is never going to be brought back into commercial use....such conversions will be good for those seeking homes, the wider community and local authorities, who will gain from the New Homes Bonus and council tax receipts that occupation generates...the Government is, therefore, right to consult on how best to make this happen."

Location will be a key factor in determining whether some of these buildings are suitable. Are there nearby shops, schools and other amenities?

But if it enables the positive alternative use of otherwise redundant buildings then this proposal is welcome.

And you’ll be able to get in the lift on a Monday without someone saying “still, soon be Friday”.

You might even get your name on the last!

Monday, 11 April 2011

Virtual Assignments – Legal Sleight Of Hand?

When is an assignment not an assignment?

As we have seen with the ongoing uncertainties concerning lease guarantees, the restrictions on assignment in leases can sometimes seem to frustrate legitimate transactions.

The lease guarantee conundrum resulting from the decision in Good Harvest  has particularly affected group reorganisations and given vent to some imaginative ways round the problem.

One other area where a certain amount of creativity has crept into the world of leases is outsourcing – and the magic of the so-called “virtual assignment”.

This is where a tenant agrees to pass the economic benefits (such as rents paid by sub-tenants) and burdens (such as payment of the lease rent) under a lease and the performance of other responsibilities under the lease, such as management, to a third party without actually assigning the lease or changing the occupancy of the premises.

Typically the virtual assignee is appointed to act as the agent of the assignor and agrees to indemnify the assignor against any costs it may incur.

You might want to do this, for example, where a landlord’s consent cannot in practice be obtained before a scheduled completion date because it is part of a large outsourcing deal involving many properties.

A virtual assignment was approved by the Court of Appeal (after it had first been rejected by the High Court) at the end of 2009 in Clarence House Ltd v National Westminster Bank Plc [2009] EWCA Civ 1311 .

That case concerned only one property, which was sublet, and the virtual assignee was to collect the rent from the sub-tenant as agent for the virtual assignor. The court decided that this was a purely contractual arrangement that did not alter the underlying relationship between the landlord and the tenant. There had not been any actual assignment, so there was no breach of the lease covenant against assigning without landlord’s consent.

In April 2010 the Supreme Court refused leave to appeal, so the decision stands.

On the face of it this was good news for tenants, as the legality of virtual assignments had been confirmed. They had been widely used in the City for at least 10 years in various kinds of outsourcing deals.

In one sense it was also beneficial to landlords as it confirmed that the underlying property relationship of landlord and tenant was not altered or affected by such an arrangement.

But on the other hand this looks like a chipping away at the control supposedly given to landlords by standard assignment conditions.

Without control, these arrangements can be forced on landlords and there may be an argument that the covenant strength of the tenant has been weakened if it is no longer the person receiving the rents from the sub-tenants.

Some commentators have taken a dim view of this legal chicanery. See for example this piece by Collins Benson Goldhill, who comment:-

“The acceptance of “virtual assignments” does seem to drive a “coach and horses” through typical alienation clauses in the sense that the entity that is truly in control and benefitting from the property is not the tenant with whom the landlord has a contractual relationship.”
For a contrasting view there is this comment from Wilberforce Chambers, who were actually involved in the Nat West case, and who were clearly pleased that they had successfully overturned the High Court decision. They comment that

“commercial property lawyers all over the City will breathe a sigh of relief as a result."
As a landlord you might try and control situations like this by including in future leases restrictions against virtual or equitable assignments, but beware they don’t turn round and bite you on rent review. The tenant might be able to argue such restrictions are unduly onerous and worthy of a discount.

The issues surrounding virtual assignments can be complex and are certainly beyond the remit of a blog post. I mention them however to show that, as well as the solutions being sought to the problems thrown up by Good Harvest, there are other innovative ways in which tenants and their advisors are navigating standard lease restrictions to put in place often complex large scale transactions without having to obtain individual landlords’ consents, which often would not be forthcoming in time.

Now, on a lighter note, and in a different virtual world...

UK Blawg Roundup #6 – The Time Travel Edition has been published on Brian Inkster’s The Time Blawg, and I am pleased to say that Digging the Dirt gets a mention as one of the newer law blogs (I hate the word “blawg” – sounds too Lloyd Grossman!).

Thanks go to Brian for this.

Trumpet having been blown, it will now be returned to its case.

‘Til the next time!