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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.

Wednesday, 6 April 2011

Lease Guarantees – It’s Time To Get Real!

Will there soon be clarity on the position of guarantors under leases?

Don’t hold your breath.

The commercial property world has been muddling through in the aftermath of last year’s decision in Good Harvest Partnership LLP v Centaur Services Ltd [2010] EWCH 330 (Ch).

You can view my older posts on this case here.

But to save you the trouble of crawling through the annals of Digging the Dirt, basically Good Harvest confirmed what everyone had suspected, which is that when a tenant that has a guarantor assigns a lease, the outgoing tenant’s guarantor cannot give a guarantee for the incoming tenant – either directly or by way of an authorised guarantee agreement (AGA).

This is because of the Landlord and Tenant (Covenants) Act 1995 (1995 Act).

Nor can the original guarantor give repeat guarantees for successive tenants.

This has been a rather large fly in the ointment on group company reorganisations.

Good Harvest also cast doubt on the validity of parallel or sub-guarantees – where the outgoing tenant gives an AGA for the incoming tenant and the outgoing tenant’s guarantor guarantees the AGA.

Although Good Harvest was not about parallel or sub-guarantees, the judge nevertheless made some comments to the effect that he doubted that they worked either.

Those types of guarantee were, and are, quite common and so the judge’s aside managed to cause something of a collective nervous breakdown amongst property lawyers and commentators and a frantic search for alternative methods of preserving covenant strength in what was already a difficult enough market without throwing legal impediments in the way.

Here is an earlier post referring to some of the options, and here is a recent article by Mischon de Reya which suggests some more creative and convoluted ways round the problem.

None of these suggestions is entirely satisfactory. What’s more, it is absurd that the law has made it necessary for anyone to go to such lengths to try and achieve something so straightforward.

What a sorry state of affairs for anyone trying to run a business, either as a landlord or a tenant.

Good Harvest was on its way to the court of appeal for a hearing set for 29 June 2010 when, on the day before, the parties decided to settle the matter out of court instead.

Subsequently the first instance decision was applied, albeit with some reluctance, by the judge in K/S Victoria Street v House of Fraser (Stores Management)Ltd (2010)PLSCS 278 (sorry, no link for this one).

Although the judge in Victoria Street said there were “difficulties with parts of the reasoning of Newey J in Good Harvest”, he felt constrained to follow the decision in it, and held that the 1995 Act prevented a parent company that had given a guarantee to one company in the group from giving a guarantee if the lease was assigned to another group company.

So much for freedom of contract.

Victoria Street has been appealed and the hearing will, or rather might, be in May.

Here we see the limitations of judge made law when there is a pressing need in the marketplace for clarity on a matter. (I could rant my way into the middle, or muddle, of a third rate jurisprudential essay on this – or maybe I have already!).

Many legal commentators over the last year have expressed disappointment that the parties in Good Harvest reached an out of court settlement, as it has left us with an unsatisfactory outcome.

Perhaps they think the unfortunate litigants had some kind of civic duty to bankrupt themselves through the court of appeal, and probably beyond, so as to clear up the confusion left by the first decision, all for the greater good.

It was “disappointing” too that, the parties settled out of court in the rights of light case, HKRUK II (CHC) Limited v Heaney (2010) EWHC 2245 (Ch), which I reported on here.

It happens.

The law does not inhabit an ivory tower.

Real life often gets in the way, especially when presented with the colossal expense, uncertainty and investment of time that goes with the territory of getting caught up in a 21st century Jarndyce v Jarndyce.

Meanwhile, commercial property law is failing business if the simple matter of a corporate reorganisation cannot happen because of legal hair splitting resulting from ambiguities in an act of parliament passed 16 years ago.

The 1995 Act, whilst sweeping away what many saw as the iniquity of original tenant liability throughout the lease term after assignment, unfortunately appears to have taken away the freedom for a tenant to offer its guarantor as a continuing surety if it wants to do so.

We are left with the frankly ludicrous situation that a parent company that has guaranteed a tenant, cannot even voluntarily guarantee an assignee that is in the same corporate group.

What’s more, investor confidence, already low, will be even slower to recover if a landlord can no longer rely on guarantors’ covenants following an assignment.

Perhaps we will get clarification in the court of appeal in May.

But is it right that obtaining clarity on the position of guarantors under leases should ultimately depend on the parties to an appeal not being able to reach an out of court settlement over the next month?

Or is this issue one of sufficient importance that requires, demands, clarifying legislation?

Monday, 4 April 2011

Rights Granted In Perpetuity – Is That Forever Or Just A Mighty Long Time?

Can you grant a right over something which doesn’t exist yet?

At first glance, this might seem like an existential conundrum best suited to a philosophical forum, but in fact it’s a more prosaic question often encountered in the world of property.

For example, you might want to grant a right of way over a roadway that hasn’t been constructed yet, or a right of drainage through pipes to be laid at some unspecified point in the future. Or you might want to be given a right of escape over a walkway if one ever gets built in the future.

Can you grant rights to take effect in the future?

The short answer is yes, and for future rights granted since 6 April 2010 there's no restriction on your ability to do so thanks to the Perpetuities and Accumulations Act 2009, which abolished the old, rather eccentric, rules against perpetuities, under which land lawyers had laboured up to that point.

The 2009 Act was a welcome piece of legislation, but it wasn't retrospective.

So if you're relying on future rights granted before 6 April 2010, then the old law on perpetuities still applies and will determine whether the right can take effect.

Now this is a subject that has been the subject of much old case law and can get mind numbingly tedious, and so to stop you bouncing off to the wilder excesses of the internet I’ll try to keep it brief.

The previous great milestone in the world of perpetuities was 16 July 1964, the day on which the Perpetuities and Accumulations Act 1964 took effect.

With a future right granted before 16 July 1964, for the right to be valid it must have been granted to take effect within the common law perpetuity period. 

That period was fixed at 21 years after the death of an identifiable person alive at the time the right was granted (usually the reigning monarch). 

If there's any possibility at the time the right was granted, however unlikely or remote, that the right will come into existence after the perpetuities period, then the right is void and won't take effect.

With a future right granted after 16 July 1964 (but before 6 April 2010) the “wait and see” rule applies. 

That rule says that if the right does in fact take effect within the relevant perpetuity period, it is valid. If it doesn't, it's void. The 1964 Act introduced a statutory perpetuity period of 80 years.

Because the 2009 Act isn't retrospective, you still have to know the old law when looking at future rights granted in old deeds. 

Rights granted many years ago may still be invalidated by these arcane rules.

This was illustrated by the recent case of Magrath v Parkside Hotels Ltd [2011] EWHC 143 (Ch)

You can read the case in full, if you are of a mind to, by clicking on the link. Briefly it concerned a 1947 deed granting a right to alter and erect a fire escape between two neighbouring mews properties in London, and therefore subject to the pre-1964 common law rule against perpetuities.

The properties had been redeveloped since the original right was granted and one of the parties wanted to erect a new staircase. 

Unfortunately for them, however, when the right was granted in 1947 it wasn't limited to take effect within the perpetuity period. 

Because it was possible that a new fire escape might be constructed outside the perpetuity period, that meant the right to erect a new staircase was void. 

Basically, because of the oddness of the old law, there was no right at all.

If the right had been granted after 16 July 1964 it would have been saved by the “wait and see” rule.

Thanks to the 2009 Act the old rules will gradually become less significant over time.

But the old law may still be relevant when you're carrying out due diligence on a property you want to buy.

Does the property have the rights the seller says it has?

Will it have a right over a future roadway or a right to use services which may be laid at some time in the future?

Or has time caught up with the supposed “rights” and made them disappear, or even divined that they never existed in the first place?

Update 28/8/12
This post has been revised since it was first published. 

Friday, 1 April 2011

Right To Light Gets Heavy

It has just become even more crucial for developers to resolve all rights to light issues before starting on a development.

In my post Let There Be Light etc  I referred to the case last year of HKRUK II (CHC) Limited v Heaney (2010) EWHC 2245 (Ch) where the High Court ordered a developer to remove part of the top two floors of a recently completed development, because they interfered with the right to light enjoyed by a neighbouring building.

The court granted a mandatory injunction instead of awarding damages, even though the offending floors had been let to a tenant by the time of the hearing, and despite the fact that both parties had been in discussion about the size of the development since before it had began.

In Heaney the court was applying principles established as far back as 1895 in Shelfer v City of London Electric Light Company (1895)1 Ch 287 that injunctions should be the norm and that damages should only be awarded in very exceptional circumstances, where the damage is small and it would be oppressive to grant an injunction.

Where the confusion has arisen is that since Shelfer the Courts have appeared to respond inconsistently to rights of light cases, refusing in some instances to grant an injunction where, for example, it would prevent an otherwise ‘worthwhile’ development. The courts have also appeared on occasion to take the view that the enjoyment of natural light is considered more important in a dwelling than in a commercial building. 

In Heaney the court decided it would not be oppressive to grant the injunction, even though the top floors had already been let to a tenant, because HKRUK had been fully aware that it was interfering with Mr Heaney’s right to light, and had reduced the price it had paid for the building by £350,000 because of those rights.

But this was nevertheless a very expensive outcome for the developer.

The cost of removing the offending part of the building was reported to be close to £2 million, and there was the added complication of having to deal with the doubtlessly unimpressed tenant occupying the floors that now had to be made to disappear.

The developer lodged an appeal in the Court of Appeal and the property world was waiting for further illumination (cheap pun) on the subject.

Real life however has overtaken jurisprudence. The parties settled out of court this week and so, for them, the matter appears to be at an end.

This leaves us with the precedent set by first instance decision in Heaney, which seems to underline the older principle that an injunction is the suitable remedy.

The right of neighbours to light has got heavy again for developers, who will be running a big risk if they decide they can get away with ignoring potential light issues thinking the courts will only award damages.

The shadow of an injunction will, in many cases, influence the design of a development and could potentially increase development costs.