News

And is this a ‘service’?

It is almost 3 years since we reported, in September 2018, on the much anticipated RICS Professional Statement re Service Charges in Commercial Property. Whilst directed to commercial and not residential property, one would have hoped that this important Professional Statement, which sets out mandatory requirements which must be followed by those administering service charges, would impact upon the residential property world. Sadly, it appears that in many cases, such hope is misplaced despite the fact that residential property has some statutory guidance and requirements.

In the Weekend FT paper for the w/e commencing 31 July, 2021, it is reported that “errors in service charges leave residents fuming”. It goes further: “Many believe mistakes are at best the result of ineptitude. Others wonder if sometimes there might be a simpler explanation: fraud.” This is a serious charge.

The FT investigation took evidence from residents across the country and revealed widespread errors in how residential service charges are calculated and passed on. “Errors are often exposed and rectified only after residents lobby for information, comb through receipts and chase refunds.” However, it should not be left to the residents, rarely qualified to investigate the charges made, to calculate the service charges. Sadly, leaving aside the anguish caused to overcharged residents, the legal routes for tackling unjust charges made by property management professionals, are complicated, particularly in the case of replacing the managing agents through a legal ‘right to manage’ and are always expensive.

So, in the absence of any consequences for those making the errors, residents are left alone to investigate the charges claimed. Residents in one luxury central London development say they have identified more than £2M of potential service charge errors over a five-year period. It is reported that the landlords recognized that “historic service charge errors by the estate’s managing agents were identified” and new managing agents are to conduct a full review. But it should not be this way. Covered by the RICS Professional Statement or not, the professionals calculating the service charges should always have an eye on the standards set by their professional body.

If you wish to hear more about service charges, why not contact Hatherleigh Training?


Free of things, people and interests?

It is amazingly 10 years since we reported (in July 2011) on the Court of Appeal case of NYK Logistics (UK) Limited v Ibrend Estates BV [2011] EWCA Civ 683 in which Lord Justice Rimer said that at the moment ‘vacant possession’ is to be given, “the property is empty of people and that the purchaser is able to assume and enjoy immediate and exclusive possession, occupation and control of it. It must also be empty of chattels” although this latter obligation is only breached if the chattels “subsequently prevent or interfere with the enjoyment of the right of possession or a substantial part of the property.”

This July, the Court of Appeal was again faced with a break clause exercisable by the tenant. It was conditional upon, inter alia, the tenant giving vacant possession of ‘the Premises’ to the landlord on the relevant break date. Mindful of the obligation re the premises must be empty of chattels, the tenant stripped out many items but included some which had formed part of the original base build specification. Hence they were landlord’s fixtures or even part of the building itself. The landlord claimed the tenant had not, therefore, given up vacant possession of ‘the Premises’ as described in the lease. The judge at first instance agreed. The tenant appealed.

The question asked of the Court of Appeal was whether or not the removal of the landlord’s fixtures meant the tenant failed to give up ‘the Premises’ to the landlord. Counsel for the tenant said the break clause was not concerned with the physical state of the Premises “but with whether the landlord is recovering it free of things, people and interests” (thus effectively paraphrasing Nugee J in Goldman Sachs International v Procession House Trustee Ltd [2018] EWHC 1523 (Ch)). The Court of Appeal agreed pointing out that the landlord could pursue the tenant for compensation for the damage done to the building under the covenants in the lease. It held, therefore, that the break clause had been successfully operated.

If you wish to hear more about break clauses, why not contact Hatherleigh Training?


Can courts amend a bad bargain?

We reported in June 2015 on the Supreme Court case of Arnold v Britton and others [2015] UKSC 36. The Court held that even though the result of service charge provisions in a lease led to what appeared to be an unfair demand, “it is the result of the bargain made: and the court cannot properly under the guise of a process of interpretation, introduce new and other terms to mend a bad bargain”.

However, in the case of Monsolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961, Mr Justice Fancourt found it was clear that a drafting mistake had been made in the setting out of the formula to be used in the rent review clause in the lease. He declared that the rent produced by use of the formula was ‘irrational and arbitrary, or illogical and arbitrary’ and held that “a reasonable and informed objective observer seeking to understand the meaning of the Lease would conclude that the Formula must be a drafting mistake because it made no sense.'” He therefore proposed to introduce a new formula into the lease. The landlord appealed.

The Court of Appeal agreed the lease contained a clear drafting error. Indeed, “it is about as plain a case of such a mistake as one could find”. Lord Justice Nugee said that “what one is looking for are not just results that are unduly favourable to one side, but arbitrary and irrational ones that are nonsensical and lead to the conclusion that they cannot have been intended”.

Having found there was a clear error which needed to be rectified, LJ Nugee turned to what wording should replace that struck out. Two proposals had been put before the judge at first instance. He had chosen ‘Correction B’ and as LJ Nugee found that it mattered not which correction was adopted, he saw no reason to disturb Fancourt J’s decision. Lord Justices Males and Baker agreed and the landlord’s appeal was dismissed.

If you wish to hear more about correcting obvious mistakes, why not contact Hatherleigh Training?


The UK Retail Sector

Even before the disruption caused by the Coronavirus Pandemic, the UK’s retail sector had its difficulties. To quote from the House of Commons’ Briefing Paper entitled ‘Retail Sector in the UK’ and dated 25 May 2021 (‘the Briefing Paper’), “The retail sector is going through a prolonged period of upheaval. Factors such as changing consumer behaviour, increased internet shopping and challenging economic conditions are changing the way retailers operate and engage with their customers.”

We looked at the question of company voluntary arrangements (‘CVAs’) in September 2019 as the case concerning the voted for rent reductions for the failing Debenhams stores hit the legal headlines. It is not just the retailers themselves who are facing difficult times but their landlords, too. To quote again from the Briefing Paper “In 2020, 54 retail companies with multiple stores ceased trading, affecting 5,214 stores and 109,407 jobs according to the Centre for Retail Research”. This reportedly has led to 15% of retail premises standing empty in the second half of 2020.

The Pandemic gave rise to different difficulties. Even in the essential stores allowed to open, mostly food stores, social distancing and coronavirus security measures gave rise to increased costs (some of which were met by government support measures). For non-essential retailers, purchases from stores were brought to a halt and many will find that the consequential on-line purchases will continue to take over in the future. The Briefing Paper states “Non-store sales increased rapidly at the onset of the pandemic and have remained high ever since: as of April 2021, non-store sales were 53% above pre-pandemic levels.”

Other factors, too, are affecting the retail sector. Disposable income “has barely grown” reports the Briefing Paper. “Between 1955 and 2007, the average annual growth in real disposable household income per head was 2.6% a year. Between 2008 and 2011 disposable income fell to 0.2%. Between 2012 and 2020 growth in income recovered but at a slower rate (1.4% average annual growth).” Additionally, retailers themselves are offering alternative services to shopping in-store e.g. ‘click and collect’ and “The growth of online retail following the pandemic is forcing retailers to reconsider the value and purpose of their physical stores even further”. The Briefing Paper offers no solutions but certainly gives rise to food for thought.


Who pays?

The Fire Safety Act, 2021 received Royal Assent and became law on 29th April, 2021 (‘the Act’). It was passed as a direct consequence of the awful events at Grenfell Tower in June 2017 which led to the death of 72 people. A fire had broken out in a flat on the fourth floor of the building following the malfunctioning of a fridge/freezer and rapidly spread up the exterior of the building. An Inquiry, set up later in 2017, established that cladding on the building failed to comply with building regulations enabling the fire to spread. A ‘stay put’ policy, common in high rise buildings, led to residents being trapped in their flats and those that attempted to escape were trapped in the one smoke filled narrow common staircase. The fire brigade, too, encountered difficulties from a lack of mains water pressure and the late arrival of high ladders.

Dame Judith Hackitt chaired a separate inquiry reviewing building and fire regulations. She published an initial report in December 2017 with a final Part 1 report in May 2018. Dame Hackitt described the building regulatory system as ‘not fit for purpose’ and recommended changes. The government of the day instigated investiations into the use of cladding materials and hundreds of high rise buildings were identified as requiring remediation works. A government fund was established but as it became more and more apparent that many more buildings required cladding to be removed, it was clear the fund was inadequate. The question arose as to who was to pay for remedial works not covered by the fund. It became apparent that in some instances, flat owners would be called upon to meet the costs of the required works through no fault of their own.

Before the passing of the Act, members of both Houses of Parliament put forward amendments to the Bill to protect leasehold owners from having to bear the cost of the required remedial works. Despite assurances from the Ministry of Housing, Communities and Local Government in a press release dated 10th February 2021 that “Hundreds of thousands of leaseholders will be protected from the cost of replacing unsafe cladding on their homes”, the proposed amendments to the Bill were refused. However, the government has announced its intention to introduce a new tax which “will be introduced for the UK residential property development sector. This will raise at least £2 billion over a decade to help pay for cladding remediation costs.” Time will tell.


Residential Leasehold Practices

In December 2017 we looked at the then government’s proposals as they related to what it described as ‘unfair and abusive’ leasehold practices. Since then, we have had the Law Commissioners’ Report on Leasehold Home Ownership (July 2020) and more recently, a Governmental press release declaring that it will be made easier and cheaper for long leasehold owners to purchase an extended lease (January 2021). The proposals “mean both house and flat leaseholders will now be able to extend their lease to a new standard 990 years with a ground rent at zero”.

The right to a new lease is particularly important to leasehold owners of flats (where the freehold needs to be purchased by the leasehold owners joining together) but the new lease is presently only available for an additional 90 years. The proposed 990 years was originally put forward by the Law Commission and has been adopted by the Government.

The Government has previously committed to new leases having a ground rent of zero but in the January press release, the Ministry of Housing, Communities and Local Government makes a further commitment to the elderly who will be unlikely to apply to extend their leases. It is stated that zero ground rents “will also now apply to retirement leasehold properties (homes built specifically for older people), so purchasers of these homes have the same rights as other homeowners and are protected from uncertain and rip-off practices”.

The Government has also stated in its press release that the contentious ‘marriage value’ will be abolished and calculation rates for the purchase price will be set out making them fairer, cheaper and more transparent.

The Government has stated that it intends to bring forward the proposed zero ground rent in the next upcoming Parliamentary session as part 1 of a 2 part legislative programme. Other Law Commission recommendations (including commonhold) will be legislated upon in due course.

Legislative change of course takes time and we will have to wait to see if and when these proposals are finally adopted.


Dilapidations and VAT

A landlord’s claim against its tenant for failure to comply with covenants to repair is, generally speaking, a claim in damages. VAT, being a tax on goods and services, did not apply. It was only if the landlord itself did the works the tenant had failed to do that the question of VAT arose and even then was not always applicable.

However, following decisions of the European Court, the UK Revenue and Customs, in its briefing paper 12 (2020), decalred that early termination fees and compensation payments were to be subject to VAT even if the payments were described as ‘damages’. The briefing paper was so widely drawn that it would cover a payment made by a tenant to its landlord at the end of its lease for dilapidations. Worse – the VAT payment would be due retrospectively. Uproar arose and the Revenue, having taken Counsel’s advice, stated the payment of VAT would only be due from some future date (i.e. there would be no retrospective payments due). That future date was originally to be 1 February 2021 but this is now subject to Revenue confirmation which is awaited.

The Revenue has stated it will issue revised guidance for businesses and a new brief will be issued in due course. In the meantime, landlords claiming damages for dilapidations will need to consider whether to raise the issue of VAT with its defaulting tenants and many landlords are now reserving the right, in any settlement agreement, to claim VAT on the amount of damages agreed with its tenant if the Revenue gives a backdated date for payment.

Claims for damages for dilapidations have always been contentious and this additional payment can only add to the aggravation between landlords and tenants.

We will continue to look for any implementation date issued by Revenue and Customs so watch this space!


Stay due to Coronavirus

2020 was the strangest of years leaving us all rather shell shocked. However, news of the log awaited vaccines lifted our spirits for a short time until the arrival of a new variant of the virus. 2021 has plunged us again into a lockdown in England with similar steps being taken in Scotland, Wales and Northern Ireland. What does all this mean to us in the property world?

In March, April and May 2020 we set out some of the restrictions placed on landlords and morgagees preventing, temporarily, eviction proceedings being commenced. With some exceptions (e.g. for trespassers and squatters), a property possession order could not be sought or enforced during the period from 27 March to 20 September, 2020. From then until, presently 28 March 2021 Part 55 of the Civil Procedure Rules (cpr) and, in particular, its Practice Direction 55C have been amended to introduce an ‘interim period’ during which proceedings can only be commenced if a ‘reactivation notice’ has first been served (details are within the cpr). This applies to both commercial and residential property in England.

In relation to privately rented residential property in England, after 29 August 2020 until at least 31 March 2021, a landlord must give a tenant at least six months’ notice requiring possession of the property or seeking a possession order under the Housing Act, 1988. If the tenant remains in possession after expiry of the notice, a landlord must issue court proceedings and obtain a possession order and subsequently, a warrant for possession which can be enforced by court bailiffs. Warrants cannot be so enforced prior to 21 February 2021.

In relation to all proceedings, courts will take into consideration the impact of the Covid-19 pandemic on the parties when considering applications for time extensions, adjournments and relief from sanctions (Practice Direction 51ZA to Part 51 of the cpr).

Throughout the pandemic, landlords and tenants should communicate with each other and reach agreements wherever possible.


Developer in ‘cynical breach’

The Upper Tribunal (Lands Chamber) has the power to discharge or modify a restrictive covenant affecting land (s84 Law of Property Act, 1925). Surprisingly, neither the old House of Lords nor the current Supreme Court has ever been requested to consider this section until now (Alexander Devine Children’s Cancer Trust v Housing Solutions [2020] UKSC 45).

A restrictive covenant, preventing development of a piece of open land, was held in favour of the Trust, which owned neighbouring land. It would enable terminally ill children to benefit from the privacy offered by the open land. A developer, Millgate, obtained the land and despite opposition from the Trust built 13 units of affordable housing in breach of the covenant. It made an application to the Upper Tribunal to have lifted the covenant. Millgate’s application succeeded although the Upper Tribunal ordered Millgate to pay £150,000 to the Trust. The decision was overturned by the Court of Appeal. Millgate, having sold the housing to Housing Solutions, appealed.

The Supreme Court looked at the proceedings below and considered “the central issue on this appeal which is the relevance of Millgate’s cynical breach”. The Court held that whilst the Upper Tribunal could discharge or modify a covenant which impeded a use contrary to the public interest and where money would adequately compensate for loss (s84(1A)), this should be narrowly interpreted. However, Millgate’s cynical breach is not relevant in determining s84(1A) but is “a highly relevant consideration when it comes to the discretionary stage of the decision”. Whilst an appellant court should not interfere with a lower court in exercising its discretion, it can interfere if in so doing, the lower court makes an error law. The Upper Tribunal did make an error in ignoring Millgate’s cynical breach.

The Supreme Court held the Court of Appeal was correct in overturning the Upper Tribunal’s decision and dismissed the appeal. In so doing, it made it clear that nothing said is determinative on how the courts would treat an application by the Trust to enforce the covenant and the decision will strengthen the Trust’s hands in relation to any financial settlement of the case.

Our view is that whilst the courts may not order demolition of the housing units, developers should not believe they can simply ‘buy out’ a restrictive covenant by paying a party damages.


Business Rates Review – What Again?

We considered a government review of business rates in our newsletter of April 2015. Views were sort at that stage from all interested parties. However, a further call for evidence was made by the Treasury in July 2020 after the terms of reference for a fundamental review were published in the 2020 Budget. Consultation closed at the end of October 2020. The government is to produce its conclusions in the spring of 2021. They are awaited with interest.

The present system has a long history. It is based on the letting value of a property occupied for business purposes multiplied by a rates multiplier in England and Wales and by a poundage rate in Scotland. Reviews of the letting value are conducted, generally speaking, on a five year review pattern. The next review was to be conducted in 2022 but was to be brought forward to 2021 until the coronavirus disaster occurred. The review will now be conducted in 2023 but will be based on 2021 valuations. Liability for the tax falls on the occupier with the owner responsible for empty properties.

In its 2020 publication, the Treasury reports that “Previous reviews have reflected a consensus that business rates have distinct strengths as a tax.” However, the government recognises that concerns remain about the level of rates levied, the wider functioning of the system and its impact on businesses. The present review will, therefore, be wide ranging and will explore the pros and cons of alternatives to the business rates.

One area of concern is the number of reliefs available. To quote from the Government’s review issued by HM Treasury “Several stakeholders, including the Treasury Select Committee, have suggested that the number of business rates reliefs available is evidence that the system is ‘broken’.” Whilst the Government has said it does not agree with this assessment, it is aware of concerns about the complexity of reliefs. Concerns, too, have been expressed about how the rates multiplier or poundage is set. Should this be based on a geographical basis or perhaps the property type with differing multipliers for retail, offices and warehouses? Again, we await the government’s conclusions: watch this space although with Covid-19 and Brexit, the government has a lot on its plate at present.


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