CRC Energy Efficiency Scheme to be Simplified

The DECC has today announced outline plans to simplify both the CRC Energy Efficiency Scheme (CRC) and the Climate Change Agreements (CCA) – but they will not be scrapped, as some observers were speculating.

Formal consultation on legislative proposals will take place early next year.

The outcome, says DECC, will be a scheme which:

·         Is simpler, reducing administrative burden on businesses

·         Provides greater certainty to participants about how they comply with CRC

·         Allows greater flexibility for businesses in how they take part

·         Reduces the overlap between CRC and other government climate policies

Climate change minister, Greg Barker, says:

“We’ve got to help business reduce their emissions, not strangle them in red tape.”

Amongst the simplifications, the government is proposing to:

Reduce the number of fuels covered by the scheme

Instead of 29 fuels, it will now cover just electricity, gas, kerosene and diesel.

Move to fixed price allowance sales

Instead of establishing an emissions cap and holding annual auctions, from the start of phase 2 in 2014 there could be two sales per year where the price of allowances is fixed. This would remove the need for businesses to come up with auctioning strategies and give price certainty to help investment decisions.

Simplify the organisational rules

Abolish the need for large businesses to participate in groups which do not reflect their natural structure.

Make qualification processes easier

To make qualification a one step process instead of two with participants just having to prove they use a certain amount of electricity from the qualifying meter.

Reducing overlap with other schemes

Any CCA or EU ETS site would be automatically exempt from CRC.

So CRC will not be replaced by a straightforward tax, as some people were advocating.

Nor will there be a revival of the policy of recycling some of the payments for allowances back to participants (the part of the original scheme scrapped by the autumn Spending Review).

Instead, Greg Barker says:

“We believe that the tailored combination of reputational, financial and standardised energy measurement and monitoring drivers remain the most effective way to tackle the barriers to the uptake of energy efficiency.”

The Performance League Table will be retained, although its operation will be monitored in early years to allow the government to revisit the basis on which it is created if necessary.

A simplified CRC alongside the Green Deal will be the way forward.

Here is a link to the outline of policy proposals for CRC if you want to read more.

However – what about trying to shoehorn CRC into the conventional landlord and tenant relationship – which I have commented on in previous posts?

The government does not propose to change the landlord and tenant rules. Here is what the government says in paragraph 34 of the policy outline:

“We do not propose to reform the landlord/tenant rules, which state that where landlords are responsible for supplies of energy to their tenants, the landlords are responsible (tenants are responsible if they arrange and receive the supplies themselves). We recognise that the split between landlords and tenants is a difficult area – a classic case of split incentives. We have previously explored options of joint responsibility, but this would neither be simple nor easy to operate. Our view is that most cost effective energy efficiency measures can be implemented by the landlord, rather than the tenant, hence the current rules on landlord/tenant relationships will be retained. However, we are considering the case for revisiting the landlord/tenant rules where the landlord owns only the land that the structures are built on by the tenant, the landlord supplies the energy but the tenant is the sole occupant of the building and is wholly responsible for its maintenance and hence can control its energy performance.”

That begs quite a few questions, not least the thorny issue of how you are meant to allocate costs, both of allowances and administration, which are charged at organisational level, on a building by building basis.

The final sentence is also strange as it doesn’t appear to relate to many common situations. The tenant might be a sole occupier and under sole responsibility for maintenance of a building, but that doesn’t necessarily mean the tenant built it. More often than not, the tenant will not have done so. In those situations, normally it is not the landlord that supplies the energy but a third party energy supplier and, as the tenant would be the bill payer, the tenant will be the relevant entity for CRC.

More comment on the landlord and tenant relationship is given in the policy outline at paragraphs 55 to 59.

It seems to me therefore that the problems of dealing with CRC in the context of existing and new commercial leases remain.

I don’t think this is going to please a lot of people.

Pier Review

Brighton Pier (above) has been put up for sale for the first time in more than 25 years, according to these reports in the Guardian, Independent and Telegraph.

It has been owned by Noble Group since 1984 and is a Grade II* listed landmark and one of Britain’s most visited places.

No guide price has been revealed, but there has apparently been strong interest already, so get in there quick! According to the Telegraph you’re likely to have to stump up between £10M and £50M.

It’s not clear whether any “what the butler saw” machines will be thrown in, but hey, everything’s negotiable!

And then there’s the rock concession too...and the rides...and the chips (*starts looking behind sofa for spare £50M!*...*finds only one tarnished penny and a piece of carrot*)

The pier even became a trending topic on twitter yesterday as people urged any new owner to change the name of the pier back to the Palace Pier.

Interestingly, the now destroyed West Pier (pictured above and below), just along the coast, is Grade I listed, even though it has been wrecked by fire and storms.

As I mentioned in an earlier post, according to English Heritage, of buildings that are listed, 92% are Grade II (nationally important and of special interest), 5.5% are Grade II* (particularly important of more than special interest) and 2.5% are Grade I (of exceptional interest, sometimes internationally important).

The West Pier despite its many devotees, looks destined to remain a ghostly presence on the shore.

“Sustainable Development” – What Does it Mean?

There will soon be a presumption in favour of “sustainable development” at the heart of planning policy.

But what does it mean?

Is it about encouraging economic growth and jobs with more buildings and more infra-structure?

Is it about the battle against climate change?

Is it about complying with the metaphorical forest of environmental legislation, both at national and European levels?

Or is it a combination of all of the above?

In other words, what exactly is it that we are supposed to be sustaining?

They are not necessarily mutually exclusive ambitions, but inevitably there will be tensions and conflicts between them.

It's difficult to get a handle on what’s going on in the planning world at the moment.

In my recent post – Planning Permission? Answer: Yes...If it’s Sustainable– I noted that planning is set to play an important part in the government’s economic agenda; that it wants to simplify the planning system and use it to support economic recovery.

That would tend to support the argument that what the government really means by “sustainability” is something that is needed for economic growth.

There is a very interesting article by Beverley Firth and Christine de Ferrars Green (who, unlike me, are planning specialists) in the Estates Gazette of 25 June which looks at the historic development of the meaning of sustainable development, which in the early days focussed on environmental protection, up to the present, where the emphasis has switched more to economic growth. Unfortunately I can’t link to the article as it’s only available to EG subscribers.

The environment minister, Greg Clark, in his statement alongside the Budget, made it clear that the need to facilitate economic growth should be treated immediately as a material consideration in planning decisions, so that priority is given to jobs and growth.

This may fall to be decided at local level given the agenda of the Localism Bill, which the National Planning Policy Framework (NPPF) is likely to follow (see my earlier post for more on the NPPF).

So will all these issues be thrashed out – at local level – each time there is a controversial planning application?

The Plan for Growth, which emerged at the same time as the Budget, connects “sustainable” with “economic” growth. In calling for a radical shake-up of the planning system, it promotes a powerful presumption in favour of sustainable development in order to facilitate that economic growth.

The default answer to whether there should be development will be “yes”.

The draft DCLG statement calls on every local authority to plan positively for new development, and approve all individual proposals wherever possible.

The EG article concludes we are unlikely to be given a single definition of sustainable development that draws together economic, environmental, social and cultural factors, but that we can expect to see reforms to the planning system to allow development that promotes economic and community benefits – “providing for the present without prejudicing – rather benefiting – the future”.

I wonder what any of this will mean?

Perhaps it will simply be the planning equivalent of that well-worn political cliché - it’s the economy, stupid!

No Quarter

And so it is coming to pass.

There is a saddening inevitability about the effects of quarterly rents on beleaguered retail businesses – see last week’s post on this Fearing Friday – Is It Time to Scrap Quarterly Rent Payments?

The firms either going into administration or in danger of doing so have been well publicised.

Here is a summary from the BBC.

Julie Palmer, a partner at insolvency practitioners Begbies Traynor comments:

"It is likely that the next quarter rent day in September could see a further surge in the number of retailers facing administration as High Street stores struggle to pay the rent against a backdrop of decreasing discretionary spending and low consumer confidence."

Some landlords have recognised the problem of quarterly rents for retailers and have offered monthly rents as an alternative.

But the commercial property world in general is going to have to soak up more of this pain - because it is also a problem for the indebted landlords of retail property and the creditors of those landlords.

More than ever there is a need for the landlord and tenant relationship to be a partnership for mutual benefit.

I’m not suggesting that landlords are responsible for the failure of their tenants' businesses.

But it is ultimately in their interests to do what they can to assist struggling tenants and moving from quarterly to monthly rents might just help some companies stave off administration.

Better that than empty shops, no rent at all and liability for business rates, maintenance, insurance and security.

For many retailers, clicks are looking a better bet than bricks.

Lease Guarantees – Reserve Judgment!

Back in April I asked whether there would soon be clarity on the position of guarantors under leases in my post Lease Guarantees – It’s Time to Get Real!

To recap - the decision in last year’s Good Harvest case had 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).

Nor can the original guarantor give repeat guarantees for successive tenants – which could potentially torpedo group reorganisations (or at least make them more difficult to structure).

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.

Good Harvest never made it to the Court of Appeal last year because the parties settled out of court.

The decision was later followed by the High Court in K/S Victoria Street v House of Fraser (Stores Management) Ltd (2010) PLSCS 278 but there was an appeal and, at the time of my April post, I was speculating on whether that appeal would go ahead, or whether, if the parties settled out of court in that case too, we would be left with uncertainty in the absence of any legislative clarity.

Well, the appeal in K/S Victoria Street has now been heard and we await the Court of Appeal’s decision on whether the controversial High Court decision in Good Harvest (which it was later compelled to follow at first instance in K/S Victoria Street) is correct.

For the time being the Court of Appeal has reserved judgment.

Watch this space...

The Shard in June

Back in January – in my post Let There Be Light: Developers, Skyscrapers, Rights to Light and the Theory of Everything - I wrote about the inexorable rise of the Shard from the South Bank of the Thames.

Since that time, its glass walls have continued to rise high above London Bridge station.

The lines and shapes of many of the office buildings around the GLA, bordering the Thames near London Bridge - More London - are breathtaking in the evening light, and soon there will also be the London Bridge Quarter around the Shard. 

Here are some more photos I took yesterday (click on them to enlarge).

Fearing Friday – Is it Time to Scrap Quarterly Rent Payments?

Most people look forward to Friday, but for many the end of this week will bring anxiety rather than joy.

Friday is 24 June, the second “Quarter Day” of the year, and therefore rent payment day under the majority of commercial leases.

This report from the Guardian warns the high street could be hit by another wave of administrations as retailers struggle to come up with the latest quarterly payment, according to Frances Coulson, president of insolvency trade body, R3.

The quarterly rent day has previously done for a number of high-profile retailers, including Whitard, Officers Club, and Zavvi.

Paying rent quarterly in advance has been the traditional way of structuring rent payments in England & Wales for a great many years and underpins the classic commercial property investment model.

The English Quarter days are traditionally 25 March (Lady Day), 24 June (Midsummer Day), 29 September (Michaelmas) and 25 December (Christmas Day).

People starting out are often taught to remember these by adding to 20 the number of letters in the month in question, so the March Quarter Day is the 25th, June is the 24th etc and the December one is easy to remember as it’s Christmas Day – which is always a nice way to make your hard pressed tenants celebrate the Yule!

The Quarter Days were historically the days when debts were settled and when magistrates would visit outlying districts to administer their justice in the “Quarter Sessions”. 

Some leases now use instead the so-called “modern” quarter days of 1 January, 1 April, 1 July and 1 October, although they haven’t really caught on.

Regardless of the history, the fact is that having to stump up a quarter’s rent in advance can have a disastrous effect on a company’s cash-flow.

The British Retail Consortium has been campaigning for years for landlords to switch to monthly rent payments and, in the Guardian piece, say they believe monthly payments have become the norm in new leases, thanks to its campaign.

The Code for Leasing Business Premises in England & Wales 2007 too recommends that landlords should consider offering more flexible rent payments.

I wonder though to what extent that is happening in practice? I would like to see some figures.

I have acted for large multiple retailers in the past whose importance as a tenant meant they were able to negotiate monthly payments as a matter of course, but even then that was often only a personal concession made by the landlord, which would cease to apply if the large retailer or “anchor tenant” assigned their lease to someone else, meaning rent would revert to quarterly payments for their assignees.

For smaller organisations I suspect it is much harder to win the concession in prime sites, although it might be easier to do so where the landlord is desperate to let the premises, which of course might be true in many high street and secondary locations.

The BRC say quarterly payments are an anachronism, which should not be necessary in the modern world of automatic electronic payments.

The BPF won’t buy that however. Their director of policy Ian Fletcher is quoted:

"Landlords have been very flexible during the recession and saved some significant retailers from insolvency as a result...Concessions on existing leases ultimately have a cost to someone, in this case pensioners' savings in property. That is why our members feel it is better to offer help to those in need, rather than healthy businesses trying to exploit an opportunity to change their terms of trade."

However, as Coulson says, landlords are usually pragmatic enough to accept that getting some of the money they are owed and having the property occupied is better that getting nothing and having an empty store (which soon becomes a liability because of business rates on empty property).

For now that is happening on a deal-by-deal basis, rather than a wholesale change in the investment model.

In some areas, for example office lets, landlords will want to cling to quarterly rents.

But with online retail growing fast, how long will it be before, at least in retail property, quarterly rent payments become a quaint relic from the past?

Lease Break Clauses – Pretty Vacant

One thing you can be sure about in a time of economic grimness – there are a lot of tenants trying to get out of their lease obligations by exercising a break right, and there are a lot of landlords looking for an excuse to stop them.

As I've said before, if you are a tenant looking to take advantage of a break clause and you do not comply with the conditions set out in the lease for doing so, then the courts will not come to your rescue.

The latest example of this was provided only last week by the Court of Appeal in NYK Logistics (UK) Limited -v- Ibrend Estates BV [2011] EWCA Civ 683.

The case concerned a condition which is often found in break clauses (and which I advise tenants not to agree when negotiating new leases) – that vacant possession must be delivered up on the break date.

“Vacant possession” is not a phrase you tend to come across in normal life – it is a legal term and that’s why people often get caught out by it.

It is such a problematic term that the non-binding Code for Leasing Business Premises in England & Wales 2007 instead recommends that the only pre-conditions to a tenant’s break right should be the tenant giving up occupation of the property (which is less onerous); that there are no continuing subleases; and the basic rent is paid up to date.

But nevertheless leases often make “vacant possession” a condition that must be satisfied before the break is effective.

In my post Lease Break Clauses – What Can Possibly Go Wrong I looked at what “vacant possession” means in more detail. In short, you mustn’t leave anything (or anyone!) behind at the property; you must give the keys back (change the locks if you’ve lost them and give the landlord the new keys); if you’ve installed an alarm, give the landlord the code; get rid of any trespassers; and make sure all subtenants, licensees, franchisees or other sharers have all gone and that their agreements have all been lawfully ended.

The latest case, Ibrend, underlines the importance of getting everything done by the break date. You won’t be let off the hook if you are too late.

The tenant, NYK, served notice exercising their option to end their lease. The break clause contained a condition requiring vacant possession of the property to be delivered up. 

Unfortunately for NYK, by the time the break date arrived, they were still in the property carrying out the final dilapidation works and they were going to need a few more days to finish off those works. So NYK asked the landlord to confirm that they could carry out the works past the break date. 

The landlord gave no such confirmation, but nevertheless NYK continued with the works and entered the property after the break date. 

So had NYK given up vacant possession, as required by its break clause?

No, said the Court of Appeal.

The Court did not buy NYK’s argument that they were simply finishing off some outstanding works, which they could have stopped doing immediately if asked to do so and that they had not left any items at the property.

The Court of Appeal ruled that at the moment vacant possession is required to be given:

·         the property must be empty of people

·         the landlord must be able to assume and enjoy immediate and exclusive possession, occupation and control

·         the property must be empty of chattels

NYK had not handed the keys back, they had retained their security guards to control access to the building and had continued to carry out works to the property past the break date - so vacant possession had not been given.

So, if you want to end your lease and your break clause requires vacant possession, make sure you agree the scope of any works that need doing to the property as soon as possible, and then set yourself a timetable for doing those works so that they are completed in advance of the break date.

Then, on the break date make sure the property is empty, both of people and things (and that all subleases and other sharing arrangements have been legally ended); hand back the keys; if there is an alarm, hand over the code; and terminate any security arrangements.

Do all that, and you have a fighting chance of saying goodbye to the lease.

Fail to do so, and you could be left with costly ongoing liabilities for a property you no longer need or want.

CRC Energy Efficiency Scheme: Should the Government Pull the Plug?

The CRC Energy Efficiency Scheme (CRC) is a botched job gaining in unpopularity.

First it was revenue neutral, then it effectively became a tax when the recycling payments were scrapped in the October Spending Review. There followed a government consultation and review, the government announced it wanted to simplify the scheme and some speculated the government even wanted to do away with it altogether.

The promised league table has been attacked for being misleading and for failing to take account of the positive aspects of a growing business.

See my previous posts on CRC for more background.

The government’s review continues, and meanwhile the scheme is mired in uncertainty and lacks focus – the only thing anyone knows for sure is that it creates a huge administrative burden for businesses.

What a fiasco.

It’s no wonder then that CRC has few friends and risks alienating businesses from the original purpose of the scheme, which was to make buildings more sustainable.

CRC was recently slammed by the John Cridland, the director-general of the CBI, as reported in the construction index, saying:

“...the CRC was meant to be green, aimed at encouraging energy efficiency by recycling financial incentives. Well, not any more it isn’t. It’s just a cost, and a complex scheme. So the government should axe the CRC as it stands. If it wants a green tax, it should do the job properly.”

In the North East, nebusiness reports that Northumbrian Water says CRC will add an extra 9% to its annual electricity bill, increasing energy costs for the company by an estimated £3m next year, with further increases of £1.5m anticipated by 2014/15.

CRC will result in additional costs for businesses as well as the cost of establishing new systems to ensure they keep accurate records. Failure to do so risks an organisation being hit by penalties.

It’s a shame it has come to this. The aims and rationale behind the original CRC scheme were laudable, albeit shoehorned into a framework that was too complex and which needed to fit better into the traditional landlord and tenant relationship.

But once it ceased to be revenue neutral, it seemed to lose the moral high ground too and will now struggle to carry people with it towards what was supposed to be its main objective, reduction in carbon.

Now it is regarded as a tax, it will be infected by the cynicism and focus on avoidance that naturally greets all revenue-raising schemes.

What is more, the headlines are now full of talk about the government putting all environmental legislation up for grabs in the drive for deregulation, right up to the environmentalists’ flagship, the Climate Change Act.

Will CRC survive this cull or will the government pull the plug?

CRC will probably survive in some form, as it will now be a revenue earner – although if the government had started out wanting a carbon tax, I doubt it would have come up with something as complex and burdensome as CRC.

And how does any of this square with the government’s environmental hostage to fortune – to be the “greenest government ever”?

Planning Permission? Answer: Yes...If it's Sustainable

Planning is set to play an important part in the government’s economic agenda.

It sees an urgent need to simplify the planning system and to use it to support economic recovery.

In 2004/05 there were 645,000 planning applications, with 514,000 granted. By 2009/10 the number of applications decided had fallen to 418,000, with 335,000 granted – a 35% reduction in the number of applications approved.

House building in 2009-10 was just 128,680 despite an aim to deliver 213,000 additional homes.

A central part of the government’s strategy is to introduce a “presumption in favour of sustainable development” – in other words the default answer to whether there should be development will be “yes”, except where this would compromise the key sustainable development principles set out in national planning policy.

DCLG has issued a statement of the approach the government could take to introducing the presumption in favour of sustainable development in the forthcoming National Planning Policy Framework (NPPF).

Planning Policy Statements, Planning Policy Guidance and Circulars are going to be consolidated into one document, the NPPF, which the government is currently working on. Formal consultation will take place in July 2011.

The draft presumption in the DCLG statement will mean that every local authority should:

·         Plan positively for new development, and approve all individual proposals wherever possible

·         Prepare local plans on the basis that objectively assessed development needs should be met, and with sufficient flexibility to respond to rapid shifts in demand or other economic changes

·         Approve development proposals that accord with statutory plans without delay and

·         Grant permission where the plan is absent, silent, indeterminate or where relevant policies are out of date.

The government is stressing the need for local authorities to get their local plans in order – without an up to date plan, decisions will be made according to national policy.

The BPF said this week the publication of the draft presumption was welcomed by the property industry.

BPF chief executive Liz Peace cautioned however that “the presumption is not simply a green light for development. It will still have to be exercised within the protections afforded by national planning policy and community-led local plans.”

Environment campaigners are sceptical about whether those protections will prevent the opening of the floodgates to development that is harmful to the environment.

I do wonder though, given the government’s desire to simplify planning and presume in favour of sustainable development, why it wants to legislate to limit immunity from enforcement action over historic planning breaches – see this earlier post – when this aspect of planning is already covered by case-law.

If the general thrust is for less law, why, when it comes to enforcement, will we be getting more law?

And, while we’re on a planning roll, here's a report in Property Wire of the danger to the City of London which, according to its chief planning officer, is posed by changes in planning law that would permit converting office space into homes (I did a post on this here) – threatening the City’s international competitiveness and status as a world class investment environment and once-again ticking time-bomb of financial Armageddon (ok I may have added a bit there).

The government’s consultation on changes of use and permitted development runs until 30 June 2011.

Generally there seems to be a lot of support for the policy. The Institute for Public Policy Research recently estimated that Britain faces a shortfall of 750,000 homes by 2025, with house building at its lowest peacetime level since 1923.

The BPF welcomes the proposal, albeit with caution in key areas like the City, where adjustments to the policy might be required.

No damp laundry flapping over Broadgate then.

Speaking of which - the culture secretary Jeremy Hunt this week brushed aside attempts by English heritage to have the Broadgate estate listed – which paves the way for an £850m headquarters for UBS.

Lease Break Clauses – This Time it’s Personal!

And so to another story of break clause woe – I know you love them!

This time I’m looking at what happens when a break clause is only for the personal benefit of one tenant, not anyone taking an assignment of the lease in the future (assignees).

Personal break clauses are usually given to the original tenant, but sometimes they can be introduced into a lease when an assignment takes place at a later date, when they might be added to the lease for the benefit of the one assignee only.

Either way – they are a personal benefit, as opposed to more standard break clauses that can be operated by whoever happens to be the tenant at the relevant time.

A recent case, involving a personal break right, concerned three leases which, by anyone’s standards, were an expensive proposition – Norwich Union v Linpac MouldingsLtd [2009]EWHC 1602 (Ch) and again Linpac Mouldings Ltd v Aviva [2010] EWCA Civ395.

The leases were of three industrial units for terms of 99 years from 1971 which, very unusually for commercial leases of such duration, imposed a full market rent reviewable upwards only every 7 years (it’s more usual for a 99 year lease to be granted at a premium and then reserve a nominal ground rent instead). By 2010 the rents had ballooned to approximately £600,000 per annum and the leases stretched on over the horizon to the jet-packed future of 2070!

L was not the original tenant. The leases were assigned to L in 1986 and the licence to assign added a right, that was not in the original leases, for L to break the leases in 2010 – but that right was only personal to L. L subsequently assigned the leases to an associated company, which later ceased to be associated with L and went into administration, unable to pay the rents.

When it had taken on the leases, L had given the landlord a standard obligation to observe the tenant’s obligations throughout the terms of the leases, so now its assignee had gone bust, L was back in the frame.

In 2009 L wanted to operate the break clause to get out of this mess, and together with the assignee asked the landlord if the leases could be assigned back to L to enable it then to operate its break clause (which could not be operated by the administrators of the assignee because it was personal to L).

So here are the questions that came before the court – and the answers it gave.

1.    Is a landlord entitled to refuse consent to an assignment back to a tenant when that tenant has a personal break option?

Yes – it is a reasonable ground for refusing consent (even when you take into account the answer to question 3 below).

2.    Can a former tenant who was granted a personal break right exercise that right after it has assigned the lease to someone else?

No – the break right can only be exercised when the tenant is in possession, unless there is a clear contractual provision to the contrary (which there wasn’t in this case). After an appeal, the court said it made no difference that the break right had been included in a licence to assign rather than in the original lease.

3.    If the lease were assigned back to the tenant who was granted the personal break right, would its right to break be revived?

No. A personal right to break cannot be revived by reassignment as it would create great uncertainty for the landlord. In this case the administrators had reassigned the lease without landlord’s consent, but it didn’t help them.

This is yet another example of the importance of break clauses and how vital it is to structure deals very carefully.

If you are going to enter into such an onerous lease or leases, and the pain is sweetened by the offer of a personal break clause, remember that your liability may extend beyond a future assignment of the lease (in a new lease probably under an authorised guarantee agreement), which means if your assignee goes bust, you are back on the hook.

So if you have a personal break right, rather than assigning your lease, think about subletting the premises instead.

That way, your personal break right is preserved (and you can agree in the sublease to limit the circumstances in which it will be exercised so as not to disturb your subtenant whilst it is solvent).

You can even give the same break right to your subtenant (just make sure it corresponds with your own break right in such a way that you can end your lease if the subtenant ends the sublease).

Otherwise...well, I’ll give the last word to Lord Justice Sedley in Linpac:

“The result is [L] remain liable until 2070 for an annual rack rent on premises which they neither occupy nor have any use for.”

And here’s a link to my other posts on break clauses if you want to read more.

Down the Drain – Private Sewers to be Taken Over

A quiet revolution appears to be taking place in the subterranean world of private sewers.

The government has decided that the automatic transfer of private sewers and lateral drains connected to the public sewerage system in England & Wales to the statutory water and sewerage companies will go ahead on 1 October 2011, with pumping stations to follow progressively up to 1 October 2016.

For drains, this is basically the part of the pipe running from the boundary of the property to the public sewer.

If, as a property owner, you want to retain control over these assets, you need to think carefully about how they will be affected and get ready to submit an appeal.

This briefing note from Clifford Chance provides helpful guidance.

This will lead to a big change of responsibility for sewerage services and lead to the transfer of thousands of sewers and drains, and eventually approximately 33,000 pumping stations.

What’s surprising about this is the timing – it all seems a bit hasty, to say the least.

The regulations dealing with this have been laid before parliament, but are not expected to come into force until 1 July 2011. In order to meet the October deadline, the water and sewerage companies will need to serve notices of the proposed transfer during July, giving the sewer owners only 2 months to appeal against their assets being included in the transfer.

So, during the period when many property owners might be digging sandcastles and water channels in the Mediterranean sand, they are going to have to get to grips with analysing the extent of their assets that might be affected by the transfer, see if it’s going to cause a problem and, if necessary, lodge an appeal.

As Clifford Chance points out, this might not be easy as the notices will not come with a plan; will be served on customers (who might not be the actual owner); and with complex sites, ownership might be difficult to establish.

Drainage assets will only be transferred if they are outside the site’s “curtilage”. That part of the sewer that is within your site’s “curtilage” and which serves only your property will be unaffected and will remain your responsibility. Sewers and drains leading to cesspits and watercourses will also not be included in the transfer. There are other exceptions, which are detailed in the legislation.

“Curtilage” is not defined in the legislation – the government decided, following consultation, that it was too difficult to define – so the courts will be left to settle any disputes. There are no comprehensive records of where private sewers are located (or what condition they are in).

Defra accepts that with complex sites this might be a tricky issue to resolve, but has not yet provided a solution. Clifford Chance understands that draft guidance might be available by the end of June – which again makes things challenging from a timing perspective.

Here is a link to the government’s response to the consultation, issued in March 2011.

If you think you might be affected, have a look at the Clifford Chance list of recommendations – the gist of which is to assess your drainage situation now; make sure the water company has your details for serving the notice; and if in doubt, lodge an appeal.

Appeals will be to OFWAT and must be made within 2 months of the notice. The grounds for appeal are expected to be (1) that the proposed transfer does not satisfy the relevant criteria and (2) that adoption of the assets would be "seriously detrimental" to the owner.

You might have negotiated drainage easements with so-called "lift and shift" provisions, which might allow you to move the drains in connection with future development. If those provisions are not going to be preserved by the transfer, I wonder whether that will be an accepted basis for appeal?

Defra says the costs of transfer will be met by an increase in the sewerage element of bills across the nine sewerage companies currently estimated to be around 6 pence to 27 pence a week.

A lot about this remains unclear – the guidelines to be published by Defra will be key to helping property owners and their advisors decide what, if anything, they need to do.

The upside is that if the transfer goes ahead, you are no longer responsible for the upkeep of the drain – responsibility will pass to the water company.

But if you do want to keep control of these assets, don’t let them get flushed away by accident.

What is a Building Lease? Why is it treated differently?

“Building leases” have, for a long time, been treated differently from other leases when it comes to how much control a landlord has over assignment and subletting.

What is a “building lease”?

It's a lease granted for more than 40 years where the consideration for its grant is or includes:-

·         constructing a new building; or

·         making substantial improvements, additions or alterations to an existing building.

What rules apply will depend on when the lease was granted – was it before or after 1 January 1996? I’ll call pre-1996 leases “old” leases and the later ones “new” leases.

Old leases

If your building lease permits you to assign or sublet, but only after getting your landlord’s consent then, despite what the lease says, if you want to assign your lease or sublet before the last 7 years of the term the law says you do not need to get your landlord’s consent to do so. You just need to give your landlord notice of the transaction within 6 months of it being made. In the last 7 years, you would need consent.

However, if the lease bans you from assigning or subletting altogether, then you can’t do it.

New leases

Assignment and subletting are now treated separately and differently from each other.

Assignment of a new building lease is treated in the same way as any other lease, regardless of how long the term has to run and the identity of the landlord.  If the lease says you have to get your landlord’s consent to assignment, you must obtain it in the normal way. The lease may also impose assignment tests, like the ones I mention in this earlier post.

But, if you want to sublet, then the old rules still apply – so despite what the lease says, unless there is a total ban on subletting, you don’t need to get your landlord’s consent until the last 7 years of the term. You just need to give the landlord notice within 6 months.

These special rules for old and new leases don’t just apply to dealings with the lease, but also to dealings with subleases out of the lease. Also, charging and parting with possession in other ways, are treated the same way as subletting.

Exceptions

But, there are exceptions.

The special rules do not apply where the landlord is:-

·         a government department; or

·         a local or public authority; or

·         a statutory or public utility company.

Why?

What's the rationale for any of this? Are many people even aware that building leases are treated differently?

Incredibly, although the law on building leases, before the 1996 changes, dates back to 1927, there's only been one case on the matter before the courts.

The relevant law is specifically sub-section (1)(b) of section 19 of the Landlord and Tenant Act 1927.

One prominent law firm, Eversheds (in an article by Bruce Dear and Elizabeth Chapple in the Estates Gazette on 12 March 2011 (£)), has been calling for the abolition of the law – after all, when it was disapplied to assignments in 1996 no-one seemed to care, so why do we still have special rules for subletting of building leases?

The rules themselves beg all sorts of questions.

·         When is it relevant? What does “in consideration” mean – when a tenant carries out the work, or reimburses the landlord the whole cost of doing so?

·         Why are government departments etc excluded? How do you define them anyway – for example what are quangos and other non-departmental bodies? A tricky one when public functions are increasingly delivered by private organisations.

·         Who is the relevant landlord? The one who granted the lease in the first place or whoever is the landlord from time to time? So if the original landlord was a government department, which later sells to a private company, does that alter the tenant’s freedom of action?

I agree with Eversheds. Either people don’t know about the law, or it’s unnecessary.

Time to abolish this law and let freedom of contract prevail.

Update 6/3/13 -  A strident way to finish a post! I was clearly in a campaigning, or complaining, mood at the time. This post is nearly two years old now, but is still attracting a lot of hits on this blog. I've not seen anything in the intervening time on this subject, nor have I had to deal with a building lease myself in that time. 

I'm not surprised this hasn't been at the top of the reform agenda though - there are more than enough more pressing things for people to worry about (to strike another note of stridency).

However, if anyone has any interesting comments to make on the subject of building leases, I'd be delighted, as ever, to hear from them.